All family businesses that have effectively navigated generational handovers have faced similar challenges.
One way of analyzing these challenges is through the lens of different generations, since the obstacles encountered by first-generation companies differ significantly from those faced by second, third or subsequent generations.
Statistics according to the business life cycle
According to data from the U.S. Bureau of Labor Statistics, approximately 20% of small businesses fail within their first year, 50% close within five years and 70% never make it to the 10-year mark.
While precise figures are hard to come by, historical trends suggest that fewer than 0.5% of startups manage to grow into sustainable businesses that last 30 years or more.
Clearly, the most critical challenges arise during the foundational stage of a business. These are often more related to the company’s strategic direction than to its family dynamics.
Not all businesses, however, will end up being family-run enterprises. Over the course of 30 years, founders will determine whether they have successfully communicated their vision, goals and concerns to their family members.
It is also entirely legitimate for entrepreneurs, at the peak of their careers, to monetize the value they have created and shift their focus to managing family wealth.I
If the objective, however, is to turn the business into a family-owned company, it becomes not only desirable but essential to establish professional management systems and a strong governance structure.
With these foundations in place, the business will be better equipped to address the next major hurdle: generational succession.
Leadership succession: 4 main actors
Four actors intervene in generational handovers:
1 – The successor (or successors). While we typically talk about “the successor” in singular, it is important to distinguish between the individual successor and the potential plural forms (successors) to approach the process effectively.
Specifically which areas are affected? The company’s ownership, governance, management or leadership? Or perhaps a combination thereof? Understanding which areas are impacted is crucial.
2 – The company. The firm should have managerial models and methods in place to ease the transition to the new leader. Ideally, the successor should have a background in business administration from a top-tier institution, ensuring they are up-to-date on the latest and most advanced approaches to management.
3 – The owner family. It would be naive to assume that, once a new head of the company is appointed, the rest of the family will simply accept the change and carry on as usual.
A decision of this magnitude affects everyone, and it’s crucial to have everyone on board since it might take time for people to adjust and assimilate the new leadership.
4 – The predecessor. What role will the outgoing leader play? Will they know how to step back? Or prefer to stay involved in some capacity?
These are just a few of the key considerations for first-generation businesses. In my next post, we’ll explore the common challenges companies face as they move from the second generation to third and beyond.
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