family owned business navigating the waters

Succession in Family Owned Businesses

Family-owned businesses continue to dominate our economy, but they also continue to struggle with issues of succession.  A survey by a reputable business mentoring firm highlights both the importance of family businesses to the economy and the importance of planning for the succession of family firms.  SCORE, a nationwide non-profit organization that provides business mentoring, produced a comprehensive survey to assess the role of family-owned businesses on our national economy and published an infographic with the results (infographic available at the end of this post). SCORE defines a family-owned business as a business operated by two or more family members, with majority ownership held within the family.

According to the survey:

Family-owned businesses are dominant:
  • Family-owned businesses are the single biggest job creator in our economy. Family-owned businesses employ 60 percent of the U.S. workforce and are responsible for 78 percent of all new jobs created in the United States.
  • Family-owned businesses are responsible for 64 percent of the nation’s GDP.
  • Family-owned businesses are larger than you think. Walmart, Ford Motor Company, Cargill and Koch Industries are family-owned businesses, and also happen to be Fortune 500 companies.  The widely held impression of family-owned businesses as being “mom and pop” shops is clearly wrong.
  • Despite their dominance in the economy, family-owned businesses are the minority of small businesses in the United States.  Of the 28.8 million small businesses in the United States, only 19 percent are family-owned.
Family-owned businesses continue to struggle with issues of succession:
  • Only 30 percent of family-owned businesses successfully pass from the first generation to the second generation.  This is an astonishing 70 percent failure rate for family-centric succession.
  • Only 12 percent of family-owned businesses successfully pass from the second generation to the third generation.  Continuity in maintaining a family-owned business is clearly difficult to accomplish.
  • Family-owned businesses are not adequately proactive in planning to transition to the next generation.  47 percent of current family business owners expect to retire in the next five years but do not have a succession plan in place.

Lawyers that advise family-owned businesses are familiar with these issues.  Family-owned businesses are quite obviously successful at fostering an environment that promotes hard work and encourages long-term thinking, two attributes which account for the disproportionate success of family-owned businesses when compared to the majority of other small businesses. To keep these attributes alive, however, both the family and the business have to navigate the issues of succession, which prove to be a challenge generation after generation.

Savvy lawyers can help their family business clients be more proactive in encouraging planning for succession.  This includes helping such businesses establish supervisory or advisory boards; 94 percent of successful family-owned businesses are controlled by outside boards, and benefit from having outside advice and oversight.  Additionally, a succession plan needs to help future generations gain the relevant business and management skills.  Only 40 percent of family owned businesses have younger members of the family on their boards or corporate committees. This kind of exposure to high level decision making in the business can help nurture the skills needed to continue the growth and success of the business.

If you are responsible for a family-owned business, you should seek the advise of a lawyer familiar with closely held companies and knowledgeable about strategic business planning issues.  Doing so will help ensure the continued success of your company. You can see the SCORE infographic here.

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