How Often—and How—Do Family Businesses Survive Transition? — Chicago Business Attorney Blog — November 9, 2022

How Do Family Businesses Survive Transition?

The Cornell University Smith Family Business Initiative says that more than three-quarters (77%) of small businesses rest on significant family involvement. Family Enterprise USA has counted 5.5 million family businesses in the U.S., finding that they contribute 57% of the U.S. GDP, employ 63% of workers and create 78% of all new jobs. And not all are small businesses: Businessweek.com has reported that 35% of Fortune 500 companies are family-controlled.

But the statistics on how often family businesses don’t sustain themselves over time—whether due to squabbling or for other reasons—paint a stark picture. According to Business Week, 40% of family-owned businesses reach the second generation, 13% get to a third and just 3% are passed down to a fourth generation or beyond.  And familybusinesscenter.com calculates the average life span as 24 years.

Succession planning remains an issue, according to Cornell’s research. Nearly one-third (30.5%) of owners say they never plan to retire, and about the same amount (29.2%) say retirement is at least a decade-plus away, despite having a median age of 51; on top of this, nearly one-third (31.4%) have no estate plan in place other than a will.

The University of Connecticut Family Business Program calculated that the founder’s death (47.7%) preceded family business failures, while 29.8% unraveled after the unexpected death of the owner; in only about one-sixth (16.4%) of cases did business failure result in an orderly transition.

So it’s probably no wonder that a PricewaterhouseCoopers Family Business Survey found that nearly one-third (32%) of family business owners said they were nervous about how well their business might transfer to the next generation—and 9% foresaw family conflict arising during the process.

However, a Harvard Business Review article published in 2021 cast doubt on the “three-generations theory” as promulgated in Business Week. Asserting that some might be misled by the HBO show Succession, the article’s writers say data show that family businesses on average last longer than other types of companies, with the average publicly traded company lasting only 18 years on the S&P 500, according to an analysis conducted a decade ago.

“The three-generation myth is so pervasive that it can become a self-fulfilling prophecy for family businesses who believe the odds of long-term success are stacked against them,” the article says. “Certainly, some families go from rags to riches and back again, but on average, they do not. Those who climb to the top of the wealth ladder tend to stay there for a long time.”

That’s because family-owned businesses can think longer-term rather than focusing obsessively on quarterly earnings, putting themselves in stronger stead to endure downturns by focusing on resiliency—rather than galloping growth, the authors say.

Another Harvard Business Review article titled “Avoid the Traps That Can Destroy Family Businesses” lists three pitfalls along with their solutions:

• Guaranteeing children a place in the business, i.e., “there’s always a place for you here.” Guard against this becoming an issue by insisting on proper screening and training.”
• Not growing enough to find a place for everyone who wants to be there. Guard against this by both managing family entry and scaling for growth.
• Keeping family members in silos—such as finance, operations or marketing—according to bloodline. Guard against this by appointing nonfamily mentors for younger family members to provide objective performance evaluation and critical advice—while guaranteeing they will not face retribution for doing so.

For more on how to access legal help in transitioning your family business, please click here.