A business is typically considered family-owned when two or more family members are involved in its operation and the majority of ownership or control is held within the family. At the other end of the spectrum are Fortune 500 companies that are family-owned and have thousands of employees.
The success of family-owned businesses and their contribution and importance to the US economy cannot be understated. Likely the earliest type of business organization, these companies employ 60% of the US workforce, create 78% of all new jobs, and generate 64% of America’s Gross Domestic Product (GDP).*
Family businesses are characterized by an intertwining of private and work life – which can often be the foundation for their success – while simultaneously creating unique challenges. In addition, there are aspects to consider and benefits that can be attained when the owner has the ability to transfer to a family member or other insider upon his or her exit.
We asked members of our Exit Planning Peer Advisory Board – many of whom run family businesses – to share some of the benefits and challenges of doing so, based on their own experiences.
Benefits of Working in a Family Business
- Sharing business responsibilities with someone in whom you have complete trust, who has the same interest in the business succeeding, and never questioning each other’s motives.
- Having one vision and a plan for making that vision a reality, to which we are committed as a family.
- We consider it a blessing to spend so much time together by working with each other on a daily basis.
- It’s great to have someone you can easily and openly talk with and bounce ideas off of.
- Family members are more forgiving than most other coworkers.
- We maintain a greater level of flexibility and control over the business and its direction.
Challenges that Come with Family Businesses
- Some issues that arise can put a strain on relationships.
- Work arguments can turn into “at-home” arguments.
- We sometimes feel that we never leave work.
- It’s challenging when family members are not on the same page about things like priorities, goals, and responsibilities.
- Responsibilities can sometimes be difficult to officially differentiate from job descriptions.
- Addressing mistakes made by a family member or issues with how they do their job can become sensitive situations – caring, honest communication always needs to be kept up front.
Longevity of Family Businesses
Some family businesses stay in the hands of the same family for decades. Only 13% of family businesses remain in the family for more than 60 years. The likelihood of survival seems to decrease as ownership passes to the next generation. 30% of family businesses survive the transition from first to second generation ownership and only 12% survive the transition from second to third generation.*
Those that do survive, generation to generation, attribute their longevity to several practices:*
- Good governance with oversight and control in the hands of supervisory or advisory boards.
- A focus on the next generation by including younger family members on boards and committees to nurture their business and management skills.
- A customer and employee-oriented culture based on strong values.
Succession Challenges and Solutions
47% of family business owners who expect to retire in five years do not have a successor in place.* Preparing to exit any business takes many years of planning, building the value of the business and a sound structure, and having the key people in place to take the reins and keep the business going without missing a beat.
It can be even more challenging to exit a family business. The futures of many you care about will be affected by your exit, as will your family legacy. But there are clear benefits when ownership is transferred to an insider – typically a family member or a long-time trusted employee.
- You have a great deal of control over the exit/transfer process.
- You’re better able to define your exit terms and achieve the exit objectives you identify.
- Transferring ownership to insiders makes you the banker.
- It helps maintain the stability of your company by creating reassurance and motivation, rather than creating concern among staff and potential loss of key employees.
- When you remain a part of the process, it becomes seamless and reduces risk to your company and everyone involved.
If you plan to transfer to an insider, there’s a lot to consider when identifying the family member(s) or key employee(s) to whom you’ll entrust your company. I’d welcome the opportunity to help you assess the key points that need to apply to your successor. Contact me to schedule a complimentary consultation.
To compound the effectiveness of your exit plan and process, consider joining our Exit Planning Peer Advisory Board and benefit from sharing the journey with other family business owners. Get in touch to learn more or to be a guest at our next meeting.
*Statistics included in this article were researched and compiled by SCORE, the nation’s largest network of volunteer, expert business mentors.