Family businesses are popular, yet extremely challenging. You see it time and time again, a parent creates a successful business from the ground up, but it doesn’t get a chance to live for too long. According to Harvard Business Review, some 70% of family businesses fail or are sold before the second generation has the opportunity to take over. Of the 70% of the businesses that failed, 60% failed due to communication and trust issues, 25% failed due to lack of preparation for the next generation, and 15% failed due to lack of financial and legal acumen. According to the same study, the third generation, it’s 85% of businesses fail.
Lakelet Capital sees a number of reasons why family businesses do not end up succeeding:
- Lack of formal succession plan;
- Family is too emotionally involved in the company, therefore the valuations and expectations for transactions are not always reasonable or based upon sound economic principles;
- Power struggles between family members can cause friction. Owners often have difficulty giving up what they’ve worked so hard to build while the second generation struggles with being supervised by their parents at work;
- The family members consider the business a right instead of a privilege and often lack the proper skill sets to properly run the business; and
- The founder is at the end of his or her career, which means there is too much emphasis placed on short-term successes rather than a focus on implementing a long-term plan or strategy.
Lakelet recently worked with a Canadian operation that had significant problems after the founder and CEO suddenly passed away. Unfortunately, a proper succession plan was absent and as were appropriate plans for the next generation to take over. To make matters worse, the owner willed his two sons, who were not speaking to each other, 50% of the company each. This business scenario hits all the aforementioned problems.
It is very difficult to face problems concerning family businesses, but action can be taken by each individual to reconcile these problems instead of stewing in anger, guilt or frustration. Often times, bringing in a third-party can help resolve these issues in a professional manner. By bringing on a neutral third-party, the emotions can be taken out of the equations so that possible solutions and alternatives can become clearer.
If you own a family business and have questions regarding an executable succession or strategic growth plan, contact the experienced team at Lakelet Capital.