They make significant contributions to local communities, are resilient through multiple business cycles, and have shown to be better employers than their non-family run peers.
But family businesses are also surprisingly fragile. Historically, only one-third survived one generation past the founder, and this rate has recently dropped to one-fifth. What is the cause for this when the underlying businesses are such a powerful economic engine?
Most family businesses lack formal succession plan
An eye-opening finding is that 61% of families do not have a formal succession plan in place, despite “managing succession” being a core mid-term objective for nearly half of family businesses. As investors in family- and founder-owned businesses, this finding resonates with our anecdotal experience.
Too often, we see examples of the current generation simply hoping that their passion for the business carries across to the next one.
Status of family business succession plan. Image: The North America Family Business Report 2023, Brightstar Capital Partners and Campden Wealth
Core objectives of family business for the next 3-5 years. Image: The North America Family Business Report 2023, Brightstar Capital Partners and Campden Wealth
What can be done? In our experience, families increase their chances of success in transition by adopting three practices that also work well in other domains.
Family businesses might delay the creation of a formal plan because they fear it will surface latent tensions between various family members. While this might be the correct diagnosis, it is the wrong cure – the tensions are usually even harder to address at a later stage.
For obvious reasons, succession is a question of ‘when’, not ‘if’. Treating succession differently and not having a plan often leads to more (and avoidable) disruption when the transition becomes necessary.
2. Involve the next generation
Every leader knows that people are more bought in when they feel that their voices matter. The next generation in families is no different, yet often founders feel that their potential successors are ‘not quite ready’ and still have a lot to learn before they can take over.
That might be true, but our survey shows that the next generation is overwhelmingly committed to protecting and sustaining the family business, which should be music to the older generation’s ears.
Next generation priorities when joining the family business. Image: The North America Family Business Report 2023, Brightstar Capital Partners and Campden Wealth
Also, the next generation has a lot to offer in the area of digital transformation and technology, which is increasingly important to the competitive strength of any business. Recognizing this can be a win-win, increasing the interest of potential successors in the business while at the same time allowing them to strengthen its capabilities.
When we talk to companies as potential investors, we are always interested in the role of the next generation – and are willing to integrate them in strong management teams where they can build the skills necessary to eventually run the business.
Across several dimensions, active involvement of the next generation seems to be a clear recipe to both strengthen the business and increase the chances for a successful handover.
3. Bring in a variety of stakeholders
What is true for the next generation can also be true for a wider universe of stakeholders – getting their input can strengthen the business, offer new perspectives and frequently increase clarity on succession options.
Where there is conflict, advisors can play a helpful role in facilitating constructive dialogue that surfaces positive solutions. Potential investors can help with formulating a vision for the business and its growth – and often augment the management team where the next generation still has experience gaps.
Members of the community and philanthropic interests can also help sharpen the impact the business might have and how it aligns with the family’s desired legacy.
Meanwhile, members of the workforce, particularly those whose parents have also worked in the company – more than 70% of family businesses have such ‘multi-generational’ employees – can complement the views of the business owners on history and perceived legacy, and in the process inspire the next generation of owners.
Power of family business communities
The World Economic Forum has demonstrated the power of multi-stakeholder dialogue for over 50 years.
Its family business community can offer useful insights and connections, particularly on the topic of legacy and impact. A diverse set of viewpoints, engaged in constructive dialogue, facilitates better decisions and improves outcomes.
In our work as investors at Brightstar Capital Partners, we observe that businesses that follow the three practices described in this article often navigate succession better than their peers who don’t.
And to me this is important beyond the obvious economic benefits. Given the inherent qualities and contributions of family businesses, every successful leadership transition that prevents ‘self-inflicted wounds’ will be a step towards a more powerful and resilient economy.
North America Family Business Report 2023 - Discover the Risks Facing Family Businesses