I recently read two amazing articles on family businesses, and more specifically family business succession planning. Both provided amazing statistics that I felt that I had to share since I know quite a few of my readers are business owners. The take away from both stories that it is simply irresponsible if you have a successful business and don’t at least think about using a buy-sell to plan for the future. A buy-sell agreement or arrangement explains what would occur if a member/owner becomes disabled, decides to retire, decides to sell or the ultimate dies.
The first article comes from my favorite magazine, Trust and Estates Magazine. T&E has next to no ads, the articles are written by practicing attorneys/cpas/financial professionals and discusses real world financial and estate planning techniques and cases (rather than telling me which mutual fund is hot). Problem is that it costs $35 an issue! Luckily, the bossmen want to keep me “edumacted” so they pay for it!
In the March 2011 issue David Thane Leibell wrote an article titled, “Succession Planning” (Subscription required) in which he discusses what goes into Family Business Planning beyond just the money aspect. It was the introduction of the article that really caught my attention. Mr. Leibell provided some amazing statistics that are actually hard to believe (I added the paragraphs for readability purposes),
Approximately 90 percent of U.S. businesses are family firms, ranging in size from small “mom-n-pop” businesses to the likes of Walmart, Ford, Mars and Marriott.
There are more than 17 million family businesses in the United States, representing 64 percent of gross domestic product and employing 62 percent of the U.S. work force.
Thirty-five percent of the businesses that make up the S&P 500 are family controlled.
Family businesses are also more successful than non-family businesses, with an annual return on assets that’s 6.65 percent higher than the annual return on assets of non-family firms.
Unfortunately, only a little more than 30 percent of family businesses survive into the second generation, even though 80 percent would like to keep the business in the family. By the third generation, only 12 percent of family businesses will still be viable, shrinking to 3 percent at the fourth generation and beyond.
I could only think of two businesses on the S&P that are family operated (specifically, Wal-Mart and Home Depot) know any others off hand?
The second article, from RegisteredRep Magazine, titled “Succession Not Succeeding For Family Business” written by Jerry Gleeson. The article provided similar statistics,
A recent PricewaterhouseCoopers survey of more than 1,600 family-owned or managed businesses around the world found that 27 percent expect to change hands in the next five years.
But 47 percent of the companies had no succession plans in place; 34 percent of companies based in North America expect to bypass their families altogether for succession, according to the report…
Even getting a family business to the third generation can be a trial; only 15 p
ercent of family-owned companies last past the second generation, a U.S. Trust, Bank of America Private Wealth Management study says.
Do you own a business? Ever do any succession planning?
I would be curious about the statistics of family-owned businesses where the owners also work a full-time job for someone else. I have found that many first-generation business owners have to do this in order to get the business off the ground and still be able to afford to live! Family owned businesses are very rewarding, but they also require a lot of hard work to get established.
Awesome article and way to use your company perk to stay edumacated. 🙂
I don’t have a family business and don’t come from one, but perhaps future generations want to carve out their own identity. Very extreme opposites, super strong family businesses, Walmart, Home Depot, and the ones that fade after one generation. Not much in between…
One of my MBA classes was about employee ownership, and ESOP was discussed for this type of situation. Sometimes the best succession is to sell to the employees themselves.
In my professional life, I currently have a vendor that is experiencing a succession crises, and it sucks as a customer. It is a distributor, and the father bought the distributor license decades ago. However, none of his children want to take over the business. He can no longer run day-to-day functions, and his managers are essentially fighting for control but screwing each other, and the customers in the process.
In our line of business, when we run an evaluation on a supplier with a single proprietor, we specifically look at succession planning if the owner is close to retirement age, and consider the second-generation curse as a real evaluation factor.