How to make it to the third generation

Family businesses go from shirtsleeves to shirtsleeves in three generations, so they say. In actuality over 65 percent of all family businesses fail from one generation to the next, regardless of the generation. However, when they fail in the third it is much more visible as the company has been around longer.

So what can be done to get not just from the first generation to the second, the second to the third, and keep on going? Let’s look at a few ways.

  • Stick to your guns when it comes to comes to letting your kids work in the business. There are two elements required to be successful in business — interest and capability. Let your kids work in the summers and even come full-time if it looks like it makes sense.

    But one family business killer is allowing a child a job where they are not contributing, or promoting them when they are not really capable. If they are truly not working out, don’t let them continue.

  • Guard against entitlement. The next generation many times grows up seeing a little wealth around them from the business, and some power. The next generation can develop an attitude that because my dad is in charge and has some money, I am also inherently good at the business and deserve respect. Worse, the founder decides they don’t want their kids to suffer like they did, and an easy path is laid out for them.

    Further, they don’t start at the bottom but are given a cushy job to slide into. Tell your kids they get what they earn, and they must work their way up like everyone else.

  • Instill communication. The No. 1 one reason family businesses fail is that they are not having good, open and regular communication about the issues and questions that come about by being in business with your family.

    Without it misunderstandings occur, lack of trust can seep in and animosity can take root. Meeting regularly without fail to discuss whatever family issues are on people’s mind with stave off intractable issues in the future.

  • Divide up roles and responsibilities. All family members have a view of thinking they are sort of responsible for the entire business.

    But if everyone is doing everything, the no one is doing anything. And there is no accountability. Clear areas of responsibility should be defined for each family member such they can be accountable to that work. This also means you need to stay out of other people’s areas. It will also make the business flow smoother overall.

  • Professionalize the business. There are many elements to this, but I’ll list a few. Hire good outside people for some key positions. Have good financial statements and review them as a team in detail once a month. Define and measure how performance is measured and have a compensation and promotion plan. Have a buy/sell agreement so that if people leave or die the consequences are already agreed and understood.

    Finally, have a board of advisers or directors. All businesses benefit by having an external qualified neutral body periodically look at the business and provide input on how to best go forward. That does not mean you must take the advice, but we all need for someone around to tell us what we may not want to hear.

Getting a family business to the next generation is difficult, doing in for multiple generations even more so. But if you realize that you need to put forth some effort to run the business according to best practices, there is no reason you can’t have a thriving business and a harmonious family.

Henry Hutcheson is president of Family Business USA (www.familybusinessusa.com) and specializes in helping family and privately held businesses successfully manage transition, maintain harmony, and improve operations. He is a popular speaker at professional, university and corporate-sponsored events, and is author of “Dirty Little Secrets of Family Business.”