The Secret of Family Business Succession

As the executive director of the Fairleigh Dickinson University (FDU) Rothman Institute, a family business consultant, host of the Family Business World TV show and a FDU professor teaching “Family Business Management” and researching family businesses, I have more insight than most on the reasons why some family businesses succeed and others fail. One of the most interesting things I have learned is that there is a secret to increasing the probability that a family business succeeds from one generation to another.

The research suggests that 85% of new family businesses fail before transitioning to the next generation. Approximately 30% of those businesses make it to the second generation. Only 13% of these businesses make it to the third generation and tragically only 4% make it to the fourth generation. An even smaller percentage make it to the fifth generation and beyond. It is therefore an extraordinary accomplishment for a family business to make it to the third generation. When I meet a family business that has made it to the third generation, I go out of my way to celebrate them and tell them how amazing it is that they have defied the odds. I also ask them about their secrets of success.

Many people ask me why some businesses make it to the third generation while most of the family businesses don’t even make it to the second generation. I always thought that the reason was simply based on the viability of the business model and the demand for the company’s products. I was convinced that the well managed companies were passed to the next generation and the poorly managed companies failed. However, I discovered that most well-managed companies don’t stay in the family because the next generation was not adequately prepared to take over the business. These well-managed family businesses are therefore sold and are no longer part of the family.

On my TV Show Family Business World (www.FamilyBusinessWorld.com) I have interviewed the leaders of family businesses in virtually every industry. I was surprised to discover that every business that survived two, three, four or five generations did the same thing when introducing the next generation to the business. They made sure that the incoming generation did menial labor for the first few years that they worked in the business. Every next generation CEO of the family businesses that I interviewed started out sweeping the floors, taking out trash, doing boring paperwork or serving as a gopher for their mom or dad. In most cases, they were paid less than the nonfamily employees. They each hated it when they first started in the business.

What surprised me the most is that when the next generation is forced to do menial labor they view the family business as an asset to be treasured and kept in the family. Instead of turning them off to the business, the menial labor surprisingly made them value the business much more than the next generation leaders that started out in executive positions. This may seem like common sense to some people. However, most family businesses start the next generation out as senior leaders because they are too “important” to sweep the floors. This unfortunately gives them a sense of entitlement that makes them undervalue the business and take it for granted. These individuals feel that owning the business is a birthright and take the opportunity to carry on a family legacy for granted. The business therefore rarely makes it to the next generation.

The secret of successful family business succession is a surprisingly simple concept but often very hard to implement. The owners of a family business often want to “protect” their children from the menial work that their parents forced them to do. However, that menial work is exactly what made the transition from one generation to the other successful. My advice to family businesses owners is to get the broom and dustpan out and have your children and grandchildren start sweeping the floors. Your succession planning will be much easier if you do that!