How to keep a business going, generation after generation.

How many businesses successfully make the leap from the first generation to the second? Is it

A. 7%

B. 30%

C. 50%

D. 61%

The answer is B. Less than 1/3 of businesses survive the transition to the next generation. And if you think that number is low, consider this:

  • Only 12% make it to the 3rd generation,
  • And a paltry 4% make it to the 4th generation.

So, the next time you see a store with a sign that says something like, “Family Owned since 1927!” take a moment to admire the entrepreneurial prowess of that clearly remarkable family, because it is rare indeed.

Why is that?

As it turns out, there are a host of factors that combine to impede the natural process that a business has to grow, move forward, and carry on. After the initial entrepreneur, the next generation(s) can face competing personal agendas, different skills, sibling rivalries, money issues and much more.

I have certainly seen this personally, as my sweet pop left his carpet business to his four sons, but none of us wanted to own a carpet store; we all had our own dreams and plans. Despite my dad’s well-thought-out master plan, my brothers and I eventually sold the business to the general manager. I am sure that is something dad never anticipated.

So how can you keep a family business alive, generation after generation? Research has shown that family businesses that last multiple generations do the same few things right. Successful generational family businesses tend to follow this success recipe:

1. Business and personal are kept separate, to the extent possible:

I have worked with, coached, and indeed have been involved with more than a few family-run businesses. Some are great and others are not. What is the difference?

For starters, the best family-run businesses strive to keep business about business, and work to keep the personal out of it to the extent possible. Of course, it’s not 100% possible, but the people within a great family businesses always have clearly defined roles and functions at work, knowing that one’s role at work is not the same as their role at home.

Respect for the various functions one has within the family structures is key.

2. They share their family history:

One of the biggest challenges to the continued success of a multi-generational business is that is that the reasons and motivations that cause someone to start a business are simply not present as time goes by. The drive, passion, intensity, needs, and incentives that drove the entrepreneur cannot be easily duplicated later on and as a result, subsequent generations often lack the zeal that was needed to launch the venture.

That is where the family’s “entrepreneurial legacy” (As the Wall Street Journal put it) comes in. By sharing the oral history of the family’s efforts and challenges, later generations can feel connected to the past and use that as motivation to keep the dream alive.

3. They mine talent:

A big family will have different people with different skills. Great multi-generational family businesses tap into each generation’s abilities and skills. And this in turn solves another common problem these types of businesses face: Multi-generational businesses can fall into a rut and do the same thing the same way, year after year, decade after decade.

The business gets stale. The people get stale.

But the best multi-generational businesses prevent this by using new blood to their advantage. In many cases, the older generation cedes some control, giving the youngsters the room to innovate and try new things.

4. The kids get involved early.

Most entrepreneurial families (multi-generational and others alike) work to involve the kids in the business from an early age. This gives them both a sense of ownership, as well as an early vision for what might be.

5. They encourage the kids to get a broad education:

Great entrepreneurial generational families want the next generation to get a good, broad education before entering the business, knowing this can only help move the business forward.

6. There is one owner, and only one.

This may be the biggest issue generational businesses face. Say the initial entrepreneur leaves the business to his two kids, and then those two leave it to their two kids. By the third generation, there are four owners, each owning only 25%. Dilution is a huge problem.

Many family businesses that last for several generations solve this problem by putting only one person in charge at a time. Imagine the issues that would result if, in the example above, all four of the second-generation owners were equal in terms of day-to-day operations. It is a recipe for disaster. The solution is to put one person in charge.

So yes, passing your business on to your kids can be done, but it must be done right to be done successfully.

Do you have questions about the best way to plan your estate? My friends at New York Life are experts at estate and legacy planning and can help.

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