How Family Businesses Successfully Pass to the Next Generation

The survival stats about family businesses are alarming.

On average, only 30% of these companies will successfully continue into the second generation. Just 12% make it into generation number three, while merely 3% will pass on to family members in generations beyond that.

These are not stellar survival rates. They speak to the need for proper planning for succession. So how can a family-run company, like many beverage alcohol businesses, take the right steps towards maximizing their chances for positive generational turnover?

This was the topic of discussion during the Next Generation Group Luncheon at the NBWA’s 81st Annual Convention last September in San Diego. Speaking on the subject was Dr. Lee Hausner (pictured atop), senior managing director at First Foundation Advisors.

“Part of being ready for succession means that the more-senior generation must define what ‘ready’ actually means,” she said, “rather than just saying, ‘We’ll let you know when we’re ready’.”

It was an apt statement considering her audience. The room was packed by Millennial-aged wholesalers who hoped one day to successfully succeed their parents in family businesses. Many people already represented multi-generational companies. When Dr. Hausner polled the room, she found that a handful of attendees were from businesses three, four or even five generations old.

What has kept these companies running so long is overcoming challenges that face family businesses. Dr. Hausner outlined a number.

A common crippling factor is when family members receive high-level positions for which they are unqualified. Just because your nephew needs a job does not mean you should make him head of marketing. Nor should the pay be similar for all family members regardless of their role. Higher-level positions rightfully deserve better compensation. Otherwise, you risk resentment.

Dr. Hausner recalled how her son and his business partner had bought and grew a family company. This business was struggling at the time due to ruinous nepotism. Too many family members had been promoted above their levels of ability. First step the new owners took was to lay off all of the underperforming family. Business quickly improved.

Another major issue that drags down these companies is conflict. Separating personal from business becomes even trickier when you are blood-related to your coworkers, employees and bosses.

“Learning conflict resolution is very important in family businesses,” Dr. Hausner said, “because there will always be conflict. Which is not bad! What’s bad is unresolved conflict.”

Dr. Hausner told a story of how a father was forced to fire his own daughter due to her poor work. He was strict in this business decision. Later that night when she came home devastated, he was there to console his child for losing her job. An extreme example, yes. But it illustrated how these businesses require that family fill different roles when they are at work or home.

If Dr. Hausner drove home one point in particular for effective succession, it was for proactive planning. Repeatedly she stressed the need for physical documentation that laid out policies, goals and strategies for generational turnover.

Which can be tough to obtain. So many parents who are profitable in business can be hesitant to hand off their companies, which often they have built from scratch. These are their babies. Understandably they may want to hold on for as long as possible before retirement. And there’s the fear that the next generation may not run the company with the same level of success.

But change is inevitable. Dr. Hausner recommended that NBWA Next Generation Group members help assuage their parents’ fears by proving how Millennials are adept at modern business.

“I see older generations have much more respect now for the next generation because of social media,” she explained. “The older generation understands the need for digital-media marketing, which they know nothing about.”

Most of all, Dr. Hausner stressed to her listeners the need for documentation that outlines the path of succession. “When you hear about family businesses and the families that fall apart,” she said, “it’s because there was no estate planning.”

Kyle Swartz is editor of Beverage Wholesaler. Reach him at kswartz@epgmediallc.com or on Twitter @kswartzz or Instagram @cheers_magazine. Read his recent piece Does Cannabis Help Craft Beer Sales?

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