“Your Momma Don’t Dance and Your Daddy Don’t Rock and Roll”—Family Business Matters
Common wisdom says that family businesses have an extremely high failure rate when moving from the first to second to third generation, and that’s absolutely true. The numbers often cited state that 30 percent survive the second generation, and it decreases to midteens by the third and single digits by the fourth. What you don’t often hear mentioned is that any business, regardless of ownership or control, has a high failure rate as it moves from the 10- to 20- to 30-year horizon. Staying relevant and making the right choices are damn hard, and they’re not getting any easier!
I’ve worked with businesses that were public, private, nonprofit, family-controlled and controlled by professional investors. They all have similar challenges, but each has additional challenges and advantages based on its ownership/control structure.
Every business must identify a need to address in a profitable fashion and adapt to the changing environment or it’ll fail. It doesn’t matter who’s in control.
Family businesses, however, have some advantages over other capital structures and control mechanisms. They typically have an exceptionally strong emotional commitment to success. A “hired gun” can jump ship more easily than Bob from Bob’s Bait and Tackle Shop. Bob is probably pretty damn committed. He has perhaps personally guaranteed some bank loans, and the fact that he’s Bob Jr. means that Daddy is looking over his shoulder.
Bob may also be willing to invest with a long-term horizon. Although he might have to pay for little Billy’s braces, he doesn’t have a quarterly earnings target that he must hit so his board doesn’t beat him up. He’ll certainly want to ensure his legacy so will take a short-term hit to make sure the “Shop at Bob’s” neon light burns long after he’s sleeping with the worms he sells.
Bob can make decisions that align with his passion. That can pay off handsomely … and be deadly.
If he wants to involve his family in the business, the rewards can be wonderful, but the challenges are significant. I’ve observed some of the most dysfunctional business behavior because of family relationships.
When Bob brings his son Billy into the business, will he be willing to hold him accountable up to and including firing him if he isn’t a producer? Perhaps worse yet, will his business conversations with Billy destroy their personal relationship? Does Billy really want to run the bait shop, or is he a frustrated musician?
When Bob’s younger son, Eric, joins the business, does the transition plan do what’s right for the company and the customers, or does Bob try to be “fair” and establish a 50/50 control situation that I’ve so often seen create hardship?
I’ve seen wonderful family businesses run by the second and third generation that have success with their profit and loss statements and their family relationships. My observation is that they’re tremendously clear on expectations; reward only those who provide value; openly discuss challenges; and only include family members who are passionate about the business and can separate love of family from tough work decisions.
I’m fortunate to have a comfortable home office across the hall from my wife’s art studio. She doesn’t help me consult, and I don’t help her create art. In her case, that’s an extremely good thing!