Family Business: Are Your Kids Ready?

by Leo Pound on December 9, 2014

How do you know if your children and other family members are ready to takeover the family-owned business? Only about 30% of family businesses survive into the second generation. What about the third generation? That chance of success drops to a shocking 12%. You have worked hard to build your business and your reputation.

 There are many things to consider. Among them; relationships, emotions, ability and passion.

I am sure most of us have read some of Peter F. Drucker’s management books. He has interesting thoughts about family members working in the family business.

“The first rule is that family members do not work in the business unless they are at least as able as any non-family employee, and work at least as hard. The second rule is equally simple: No matter how many family members are in the company’s management, and how effective they are, one top job is always filled by an outsider who is not a member of the family. Rule three is that family-managed businesses, except perhaps for the very smallest ones, increasingly need to staff key positions with non-family professionals.

Even the family-managed business that faithfully observes the preceding three rules tends to get into trouble — and often breaks up — over management succession. Then what the business needs and what the family wants tend to collide. There is only one solution: Entrust the succession decision to an outsider who is neither part of the family nor part of the business.”

If you are you ready to exit from your family-owned business, before you start planning your vacations and tee times, there are six things you need to consider.

Six Things to Consider

Initiative: Do family members consistently show initiative? Are they looking for ways to do business better? If you are not sure, sit back and listen. When they come to you with a problem, ask them how they would approach and solve. Let them take the lead, knowing that you are there for guidance.

Learning: You can’t buy experience. Just as with any other position, it is important for family members to actively learn the business. This does not happen by quickly promoting someone just because they share some DNA. Give them the time to learn, ask questions, make decisions and grow into a position of leadership.

Passion: You were passionate when you started or took over your business. Do future generations exhibit that same passion? Do they look for ways to innovate? Do they enjoy reaching out to existing and potential clients?

Leadership: Do they relate well with employees? Do team members view them as leaders, not just someone that his gifted because they share a last name?

Growth: Do family members learn from their mistakes? Are they willing to accept criticism, seeing it as potential for professional growth?

Understanding: Do they know their own strengths and weaknesses? Are they willing to accept help from experts and mentors? A key to running any business is knowing that you can not do it all. There are times when you need to accept help from outside sources or other team members.

I have worked with many family-owned businesses. Sadly, most of the time I am called in as a turnaround consultant by their bank when the company is in distress. Often it is a case of family members and friends holding positions that they are not ready to manage. They are often overpaid for the job description. And sometimes there is a very blurred line between company funds and the families’ expenses. It can be challenging to work within the family dynamic. But with some guidance, it is also rewarding to see the business focused and headed in the right direction.

I am fortunate to be involved with a family-owned business, Nixon Medical, for eight years. I am currently serving as Audit Committee Chair and on the Compensation and Nominating Committees. This is a company that is getting it right. The founder and owner, Murray has taken the time to teach his sons all about the business. They were only promoted when ready. They were always held accountable. It was not an automatic promotion just because they are family members. The three sons had to earn their positions within the company. Murray patiently watched and nurtured his sons. He was their mentor and let them grow into their leadership positions. Recently, Murray decided to retire from the business. He had a plan in place to gradually transfer control to his sons, because they were ready.

Working with family members can be challenging. But, it can also be a rewarding experience when it is done correctly. What advice would you give to family-owned businesses?

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Leo Pound

As Pound Consulting Inc.’s founder and principal, Leo Pound is responsible for day-to-day operations, as well as building partnerships, maintaining relationships and providing value to all clients. Born and raised in Philadelphia, Leo has spent most of his career helping companies around the world.  He has worked with many multi-national companies – including ones based or operating in China, Australia, Canada, England, Germany, Japan and more. He has in- depth knowledge of operational and strategic planning, M&A, forecasting and budgeting and cost containment. Leo is a hands-on professional who is sensitive to the pressures and challenges facing a troubled or rapidly growing company and their management team.

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