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Pitfalls of transferring a family business to offspring
Although some family-run businesses started by one generation continue to thrive when transferred to the next generation, this is rarely the case. In 1987, John Ward conducted one of the most in-depth studies on how well family businesses do once parents pass them on to the next generation. His study revealed:
* About a third of family businesses survive when transferred to the second generation.
* Just 13% of family businesses are still in operation by the third generation.
* By the fourth generation, only 3% are still in existence.
"These are very sobering statistics," says Ron Segura, president of Segura Associates, whose US firm helps larger cleaning contractors market their services, improve business operations, and transition businesses from one generation to the next.
According to Ron, some of the key reasons for this are:
* Parents never leave: Even though the parents have turned over the business to their sons or daughters, they stay on, making decisions and influencing them how to run things. This becomes an obstacle that can compromise the entire transfer.
* No transfer timeline: A timeline should exist, in writing, detailing when the offspring will take over the business entirely and parents are to be removed from daily business operations.
* No new technologies: While the next generation may see the benefits of bringing in new technologies into business operations, because the parents may be against this, it never happens.
* Emotions: Invariably, emotional issues come up whenever a business is being sold or transferred. But this is amplified when the transfer is made to family members. Often, bringing in an attorney or lawyer, who will likely be needed to formalise the transfer, can help all parties overcome these emotional tribulations and suggest what is best for all involved.
"While these are the pitfalls, there are also ways to ensure a successful transfer of a family-run business," adds Ron. "Communication, patience, and focusing on what's best for the business, make it happen."
Ed: I was surprised at the high incidences of failure cited here and would love to know whether this is simply a US trait, or whether it's endemic of family businesses around the globe. What are your thoughts and experiences on this and is the success rate higher, lower or about the same...
29th September 2016