The pandemic had one positive effect on family businesses: More of them developed formal business succession plans. That’s according to PwC’s10th Global Family Business Survey. The report says that 30 percent of the family firms it polled now have a formal plan in place, up from just 15 percent in the 2018 survey.
Perhaps it shouldn’t be all that surprising that so many family-owned small businesses lack a formal plan. Creating a succession plan requires having difficult discussions around emotionally fraught family dynamics:
Should your son or daughter be groomed to take over the helm, or should it be a non-family member?
Should you just sell and split the proceeds?
What if the company you founded and devoted your life to building goes in a different direction once you retire?
Despite widely quoted statistics that say that only 30 percent of family businesses successfully transition to the second generation and only 13 percent survive through the third generation, aHarvard Business Review report says that is not true.
Running a family business is no walk in the park. The family dinners or holiday gatherings could be mistaken for board room meetings, with topics of conversation jumping between family matters and minute business topics.
Discussions get further complicated when it comes time for a transition of ownership as the first generation of family businesses starts to look towards retirement and relinquishing control of day-to-day activities. Who will step in to lead the company?
A number of family business succession issues arise, from siblings quarreling about how to divide up the business and inheritance to instability within the organization as employees wonder what their future holds.
Yet, so many family owned businesses don’t have a solid succession plan.
When you peel back the layers, the emotions and history of a family are always at the center.
Ed Pendergast, a board executive who has sat on eight family boards and advised many more family businesses, often sees one or more family members feel that they are not being treated fairly by other family members. Whether it’s viewed as a grudge or just selective memory, these power dynamics among the next generation in line can cause headaches for the business.
But surprisingly, Pendergast doesn’t view the second generation as the biggest challenge: “It’s actually the third generation with the hardest road ahead,” he says. “The first generation runs the business and passes it on to the second generation. And then by the time the second is trying to figure out who to pass it on to, family member A has three kids, family member B has two, and family member C has none. Who’s going to be in the business? It becomes much more complex the more people are involved.”
The numbers show just how difficult this transition is. Approximately 12% of family-owned businesses are passed down successfully to a third generation and only 3% to a fourth or beyond.
After two years of unrelenting decline and $6M in losses, the owners of Styrotek, a packaging manufacturer for table grapes decided they needed to bring in outside help to turn things around.
Styrotek was founded in 1973 by a group of grape growers who came together to produce boxes for their farming operations in the central valley of California. While manufacturing was not originally in the company DNA, the business got to the point of creating a consistent product and quickly grew along with the grape industry.
That was until 2014 when things started to go sideways. “The company was somewhat in disarray,” Chris Caratan, one of the owner’s of Styrotek said. “Our management team at the time was not working up to par and there were some surprises in year-end numbers.”
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