![son and father working together at a family business](https://blog.stewartleadership.com/hubfs/2024_Blog-Family-Business.webp)
Family-run businesses have always been a significant driver of the economy. As people came together in towns and settlements, families met market needs with hotels, banks, and craft products.
Today, family-owned businesses still drive economies across the globe. In the United States, family-owned businesses are responsible for 64% of GDP, employ 60% of the workforce, and generate 78% of new jobs. Of the almost 30 million small businesses in the US, 19% are family-owned.
However, family-owned businesses face their share of struggles as well. While 30% of family-owned businesses successfully transition from first- to second-generation ownership, only 12% transition to third-generation ownership. Perhaps most alarming, almost half of owners who expect to retire within five years do not have a successor.
People who start a family-owned business do so partly because they are passionate about building a long-term, generational legacy that provides a valuable product or service to the market. It’s hard to imagine an owner who spends decades building a business hoping to watch it close or transfer ownership outside of the family—yet that happens all too often.
Building a sustainable family business that remains dedicated to its founders' original values and goals is possible. Here are eight steps to help you build a sustainable family business.
Maintain Values & Trust
Founders have a unique opportunity to preserve family traditions, culture, and values through family-owned businesses. Spend some time defining shared values and then actively adhere to those values as family members join the business and make decisions. Identify what is truly important to the family—is it growth? Lifestyle? Wealth creation? Community? Faith? Job creation? The customer?
It’s also vital for founders to build a culture of trust and integrity from day one. Avoid any improprieties or even an appearance of impropriety. Speak candidly with family members and build a business culture of psychological safety where everyone can remain open and honest.
Remain Adaptive
Any organization can risk stagnation, but family-owned businesses must be especially vigilant about adapting to changes in customer demands, market trends, technology, and cultural norms. Companies that don’t adapt can risk poor employee recruitment and retention and reduced customer value-added.
This is not to say that families have to change their core values, but they must learn how to adapt those values if the world shifts around them to remain relevant and competitive. As part of an overall strategy of adaptation, continue to invest in growth initiatives, employee experience, training and development, and ongoing research and development.
Share Lessons Learned and Maintain Clear Boundaries
Growing a sustainable family business requires an intentional approach to writing the business story as the company grows. Look for appropriate times to share the lessons learned, obstacles overcome, failures, and successes with each generation. Building and leading a business isn’t easy, and second and third-generation family members should understand that business ownership requires sacrifice and perseverance.
That said, clarifying boundaries between family and business is equally important. While a successful family business may be woven into the family DNA, that doesn’t mean the family has to revolve around it every moment of every day. Create rules that clarify boundaries, such as “no business talk on holidays” or “vacations and business offsites should not overlap.”
Clarify Governance and Management
Establish clear rules and procedures for decision-making and dispute resolution from the earliest days of the business. Separate ownership and management responsibilities, clearly defining who is responsible for which decisions.
As the company grows, develop a board of directors (professional, advisory, or supervisory) that includes independent directors from outside the family for a more neutral viewpoint. Owners can create an “owner’s plan” to document expectations and express their long-term vision and goals—for instance, intergenerational wealth or charitable giving in the community.
Finally, conduct an annual evaluation of what the company owns, builds, and sells and ask if it still makes sense to control it. Is it time to divest properties? Does a legacy product line still make sense? This periodic evaluation can help the company catch market trends and stay competitive.
Recruit and Learn From the Outside
Just because the business is family-owned does not mean every employee must be a family member! Recruit from outside the family for both staff and leadership positions. Outside people will have skills and expertise that family members don’t have.
Don’t limit these outside perspectives to employees, though. It can also be helpful to periodically bring in professional management practices and outside expertise. An outside observer can bring a neutral viewpoint to the business and see gaps, undeveloped opportunities, and cultural challenges that insiders sometimes miss.
Finally, family members should be encouraged to work outside the business, at least temporarily. These outside opportunities can widen viewpoints and help younger generations develop new skills that they can eventually bring back to the family business.
Make Involvement Optional, Not Forced
Avoid strong-arming or pushing relatives into joining the family business. Allow them to enter the company with their skillsets and by their own will. Ask why they want to work for the organization and cultivate their passion for the company by encouraging new ideas. Make it clear how people enter and exit the business and what expectations are on both sides of the agreement.
As generations prepare to retire, allow a respected leader to emerge in the next generation, regardless of gender. Most of all, don’t force a specific person to take over the business simply because that child is the oldest or has worked in the business the longest. Take skills, passions, and willingness into account.
Actively Plan for Succession
Document how ownership and management of the business will transfer long before the succession process begins. Be clear on three things: who will succeed, how everyone will adhere to and follow through on the plan, and any emergency succession plans. Set up the succession plan early, before the first member of the second generation enters the business.
Remember that the family business is still a business; just because someone is a child or close family member doesn’t mean that person is ideal for leadership or management. Consider all the talent available, both within and outside the family, and invest in development early and evenly. Create standards and qualifications for leadership roles that apply across the board, not just to family members or outsiders.
Act In Good Faith and With Optimism
Approach conflict within the business from a perspective that communicates, “No matter what, we can work this out.” Don’t give up on each other, especially during hard conversations. Focus on building strong family bonds to resolve conflicts constructively.
Open, regular communication must be an essential part of the family business. Work toward open, transparent communication while upholding high standards and reputation for the brand, company, and employees. If communication problems arise, confront them immediately.
Family businesses present unique opportunities and unique challenges. At Stewart Leadership, we have some experience working with families and family-owned businesses. Whatever your particular needs, we have the expertise to help you build a sustainable company that delivers robust business and people results for this generation—and beyond.
SELF CHECK:
- Do we have a succession plan in place? If not, can we take one action right now to move toward that goal?
- Do we regularly rotate outside advisors onto our board? If not, is there one position ideal for an outside advisor?
- Does our family struggle to keep business and family separate? If so, is there one rule we could implement to help clarify boundaries?