Family Business Succession to the Next Generation

Reasons why family businesses fail to make the intergenerational transition

We recently encountered a great summary of ways family businesses fail and the challenges of inter-generational transfer. Victoria Downing, writes for Remodelers Advantage, an online community supporting the professional and personal success of remodeling contractors.

This is a segment of the business community that frequently features family ownership and offspring that grows up in the business doing the work and seeing the parents run the business.

Victoria summarizes points from Wayne Rivers, The Eight Building Blocks for Creating a Sustainable Closely Held Company (2009), a publication of the Family Business Institute.

Here’s our take on Victoria’s list in our own words plus some additional insights.

    1. No Common Vision. “If you don’t know where you’re going, you’ll end up someplace else,” Yogi Berra. If there’s no shared vision of where the business is headed and not just current but future roles, when a fork in the road appears, family members are prone to take different paths.

      We frequently see family-owned businesses where the founding generation intends the business to go to the next generation, but something is lost in translation. That expectation isn’t communicated to the next generation. Fault can lie on the other side as well, with the younger generation failing to articulate their ambitions.

      A symptom of this is the rudderless son or daughter who wants a leadership role but has no way to express their ambition and are tired of being treated as a child. They frequently strike out on their own and the parent is shocked and disappointed. The parent always intended the business to go to the next generation, but failed to communicate that vision and cultivate a common mission. The result is the opposite of what both desired.
    2. The Leader’s failure to first manage self. The hardest person to manage is always yourself. “There is nothing quite so useless as doing with great efficiency something that should not be done at all,” Peter Drucker. A leader’s lack of focus on the things that matter to the long-term success of the business is poor self-management and poor time-management. Prioritize. Don’t just firefight. Firefighting diverts you to other people’s priorities rather than your own.

      A symptom of this dysfunction is the patriarch or matriarch of the business who is always the bottleneck for decisions. Inaction is a decision. It is a decision to accept the status quo, no matter how bad.

      The inability to delegate self-limits the business to the attention span and focus of the leader. Cultivating team members who can make proactive decisions is essential to success. It keeps quality people, including sons and daughters, engaged in the business.
    3. Inadequate preparation to manage and lead. Delegating decisions and then overruling is a related problem to lack of self-management. People learn from mistakes and being responsible for their mistakes. Leaders must coach on how to make decisions, not just what the decision should have been. Living under a micromanager is no one’s ambition.

      Criticizing results after the fact is often a symptom of failing to communicate expectations, procedures or principles before the fact. That’s more the fault of the leader than the team member, family or not.
    4. Fuzzy roles and poor accountability. Family business leaders often have the hidden assumption that family members should be able to read the leader’s mind. Or that having seen the results over a lifetime means the family member must know how those results were produced.

      Leaders have to get it out of their head and down onto paper. Do job descriptions. Do procedure manuals. If the leader was to get hit by the bus tomorrow, you want the secret sauce documented to assure ongoing business success.

      Accountability requires metrics, both projections and results. Do people know what’s expected? Do they know when they’ve delivered? Over-performed? Under-performed? Metrics matter. Set clear expectations and reward results.
    5. Conflict and Conflict Avoidance. Family businesses can fail from both too much conflict and too little conflict or conflict avoidance. Too much conflict normally results from failing to separate family and business roles. Conflict from either side of the fence can contaminate the other part of your life.

      But conflict avoidance is also poisonous. False harmony puts off dealing with hard questions.

      The solution to both too little and too much conflict is developing healthy conflict resolution skills. Conflict is often more about fears and other emotions than logic or facts. Uncertainty and indecision fuel fear. If you don’t talk about things they fester and get worse, not better.

      At the NIACC Pappajohn Center and its North Iowa SBDC we would add a couple more sources of failure:
    6. Missing Metrics. Not understanding the metrics or numbers that drive the business can also be fatal. This includes especially poor cash flow management and cost control. This is true of all businesses and not just family-owned businesses. Ironically, growing companies suffer failure from cash flow management too, not just companies starved for sales.

      Far too many businesses see the numbers as something to give to the tax accountant at the end of the year, rather than a daily or weekly management tool. You have to have accurate and timely financial numbers and review them on a regular basis. This requires a good accounting system tailored to your industry.

      For instance, in construction, job cost accounting is important to understand whether a particular project made or lost money and why. You can’t wait to the end of the project to discover it’s costing you money and not making you money. Wait till the end of the project, or end of the year, and it’s too late to make any mid-stream course corrections.
    7. Mistaking technical expertise for understanding the business. Knowing how to swing the hammer and build a house is not the same as knowing how to run a crew, coordinate with subs, or market to and follow through with customers. It doesn’t mean the carpenter knows the importance of timely billing, record-keeping, or regulatory compliance. Working in the business is not the same as knowing the entire business. The business is more than what the customer sees you do for them. It’s how you get the customers to begin with. It’s the supply chain and other key business relationships. It’s the back office accounting, billing and human resources operations, and more.

      Alexander Osterwalder’s lean business canvas describes nine building blocks that can describe any business model. It’s more often used by start-ups, but can provide equal insight for existing small and medium-size businesses (SMBs). The core product or service is only one of the nine building blocks. To run the business requires understanding and managing all the pieces.

      Working in the business is not the same as working on the business. Doing the technical service of the business is not the same as knowing the entire business.

      Big corporations have highly specialized departments and personnel. Small and medium-sized family-owned businesses more typically have leaders that wear multiple hats. Don’t ignore any of the necessary roles in preparing the next generation for ownership, management and leadership.

      The new pilot doesn’t open the flight manual for the first time after she’s already in the air, flying solo. Do you have a flight manual for your business that your student pilots can learn before they fly? Especially before they fly solo.

If you need assistance with succession planning – the answer to, “Who comes next?” in owning and managing your business – give us a call.
NIACC John Pappajohn Entrepreneurial Center
North Iowa SBDC