How often – and how – do family businesses survive change? – Chicago Business Attorney Blog – November 9, 2022

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How do family businesses survive change?

Cornell University’s Smith Family Business Initiative says more than three-quarters (77%) of small businesses rely on significant family involvement. Family Enterprise USA counted 5.5 million family businesses in the US and found that they contribute 57% of US 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 statistics on how often family businesses don’t hold up over time – whether due to arguments or other reasons – paint a bleak picture. Corresponding work week40% of family businesses reach the second generation, 13% the third and only 3% the fourth generation or beyond. And familybusinesscenter.com calculates the average lifespan as 24 years.

Succession planning remains an issue, according to Cornell’s research. Almost a third (30.5%) of owners say they never plan to retire, and about the same number (29.2%) say retirement is at least a decade or more away , despite having an average age of 51; Additionally, nearly a third (31.4%) have no estate plan other than a will.

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

So it’s probably no wonder that a PricewaterhouseCoopers survey of family businesses found that nearly a third (32%) of family business owners said they were nervous about how well their business might be passed on to the next generation – and 9 % expected that family conflicts would occur during the process.

However, a Harvard Business Review Article published in 2021 cast doubt on the “three generation theory” as promulgated in work week. Claiming that some may be misled by the HBO show successorThe article’s authors say that data shows that family businesses last, on average, longer than other types of businesses, with the average public company lasting just 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 states. “Certainly some families go from rags to riches and back again, but on average they don’t. Those who climb to the top of the wealth ladder tend to stay there for a long time.”

That’s because family businesses can think longer-term instead of obsessively focusing on quarterly earnings, and arm themselves more against downturns by focusing on resilience — rather than galloping growth, the authors say.

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

  • Guarantee children a place in the company, ie “there is always a place for you”. Protect yourself from 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. Protect against this by both managing family entry and scaling for growth.
  • Silos family members — like finance, operations, or marketing — based on bloodline. Protect yourself from this by appointing non-family mentors for younger family members to provide objective performance evaluation and critical advice – while ensuring they will not be penalized for it.

Click here to learn more about accessing legal aid in transforming your family business.

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