According to the Family Business Institute, only 30 percent of family businesses survive beyond the founder’s generation. From there the odds of survival only get worse: only 12 percent make it to the third generation, and a paltry 3 percent persevere into the fourth.
This is epitomized in American culture by the old proverb, “shirtsleeves to shirtsleeves in three generations.” In China, it’s known as “from peasant shoes to peasant shoes in three generations,” in Italy, as “from the stable to the stars and back again,” and in Scotland (perhaps most matter-of-factly), as “the father buys, the son builds, the grandchild sells, and his son begs.”
It’s a common cycle. The first generation builds the wealth. They bring a specific skill set to bear that grows the business. The second generation expands the wealth; these family members tend to become philanthropists and grow accustomed to their lifestyle. The third generation — so far removed from the skills it takes to run the business successfully — spends the wealth. And the fourth generation is back to square one.
It doesn’t have to be that way. There are a variety of things families can do to ensure they don’t live this proverb. Here are three best practices.
Have a plan
It’s easy to get caught up in the day-to-day concerns of your business and leave the transition planning to the 11th hour. But this is not the way to ensure the survival of a business. It’s important to develop a business transition plan and to do so early.
An effective plan will help owners determine the future disposition of their business, both when to sell and to whom, and ensure the business will provide for the future financial needs of their families. It includes financial planning, estate planning, ownership transition planning, leadership and management training, and strategic planning; it should consider all of the dynamics inherent in a family business. In addition, every generation should possess a wealth creation mentality; without this mentality, a family business is likely doomed to the “shirtsleeves to shirtsleeves” cycle.
Develop the next generation
Too many parents pass on the family business without passing on the knowledge and skills it took to create the business. There’s so much focus and attention paid to the assets of the business that the human element — preparing successors for leadership — is often lacking. Having a strong business balance sheet is irrelevant if the next generation isn’t equipped to run the business effectively. It’s important to invest the necessary time to ensure subsequent generations are sophisticated enough to do the job.
Continuously reinvent the business
Consider the buggy whip, a product that was in high demand back when it was necessary to prod horses along to travel from point A to point B. This technology became obsolete as soon as automobiles appeared in the late 19th century. Today, any line of business facing that kind of obsolescence — VCRs, typewriters, etc. — has come to be known as a “buggy whip.”
Don’t be a buggy whip. Conventional wisdom states that if you find that you’ve done the same thing the same way for five consecutive years, you’re likely going to fall behind. It’s important to allow your business to evolve with your customers’ needs. That kind of agility is what separates successful businesses from less successful ones.
Break the cycle
Your business is your livelihood — something you’ve been building for years. It’s important, then, to protect it and to ensure that subsequent generations understand just what they’re inheriting. John F. Kennedy once said, “To those whom much is given, much is expected.” Embracing this mentality can be the difference between becoming a successful fourth-generation business or perpetuating that doomed “shirtsleeves to shirtsleeves” family business cycle.