Are family-owned small companies a dying breed? Maybe not yet — but if today's business owners don't start planning for the future, the quintessential American family business could go extinct much sooner than you think.
U.S. Census Bureau data indicate that family businesses constitute about 90 percent of North American enterprises and more than half of total U.S. employment. However, according to small business insurer Hiscox's 2014 "DNA of an Entrepreneur" report, just 5 percent of U.S. small business owners plan to keep their company in the family when they exit. Among those who plan to exit within the next year, the majority (68 percent) said they would do so by closing their businesses completely.
These statistics, while troubling for current family business employees, aren't entirely surprising: A recent survey by PricewaterhouseCoopers (PwC) found that "sticky baton syndrome" — the reluctance of small business owners to hand the company over to the next generation — affects 40 percent of family business leaders, and 73 percent have no documented succession plan in place.
Henry Hutcheson, president of consulting firm Family Business USA and author of "Dirty Little Secrets of Family Business" (Indie Books International, 2014), believes that the current generation of family business owners are nervous about their potential younger successors' lack of knowledge and experience, as well as the new ideas and changes the next generation may want to bring to the company. However, the biggest factor driving "sticky baton syndrome" is the psychological and emotional connections current leaders feel to their business, he said.
"It becomes their identity after so many years at the helm," Hutcheson told Business News Daily. "They do not know how to step back." [Is It Time to Take the 'Family' Out of Family Business?]
This stable management structure means that customers can rely on a consistent product or service and develop great long-term relationships with family businesses, said Bridget Weston Pollack, vice president of marketing and communications at business mentorship organization SCORE. The problem, however, is that the same leader — and, therefore, the same way of thinking — for so long can get a small business stuck in a rut.
"In this case, [a business] needs an injection of creative ideas to draw in new customers," Pollack said. "This is an excellent opportunity to seek an outside, objective perspective to drum up new ideas and see where improvements can be made."
"Family businesses tend to be insular," Hutcheson added. "One of the most effective ways [to combat this] is to have nonfamily, nonemployee folks as a part of an advisory board that meets regularly — a group of professionals who you can use to move the business forward and bring in ... some straight talk about modernizing the business."
Change can be intimidating for a family business, but modernizing your company gives you the best chance of survival in an ever-changing business world. This means not only making room for input from the next generation and other outside advisers, but making sure your business is using up-to-date technologies in its operations. The PwC survey found that nearly half of family businesses said the need for new technology will be a substantial challenge for them in the next five years, so it pays to start investing in modern tech tools now.
"Social media and technology have to be in the forefront, and if you are of a certain age, this may not be second nature to you," said Patricia Becker, owner of Seven and a Half Sisters Quilting and More and a Kansas winner of the SCORE American Small Business Championship. "The fast-paced environment we live in makes this an absolute necessity. You have to reach out to experts in these fields and solicit their advice and assistance."
Becker said that one of the biggest challenges of being a family business owner today is having to deal with bad business situations and make difficult decisions that directly affect the people you love and care about.
"Even though everyone involved is committed to making the business successful, they each have their own life and family to balance with the business priorities," she said.
This is especially true when you're creating a succession plan. Hutcheson noted that the two main objectives of a family business — keeping the business going and supporting one another — aren't always going to coincide. Today's leaders have to make sure that their family staff can be mature enough to accept this complicated dynamic when the business's needs don't align with what they personally want.
"Honestly evaluate the strengths and abilities of each family member involved in the business, and make sure their prescribed roles align with these attributes," Pollack added. "Fitting square pegs into round holes will make for a stressful business and home environment, and hurt the business in the long run. The more truthful everyone can be about their expectations and skills, the better."
Although you may not plan to exit your business anytime soon, you will eventually have to decide what will happen to it when you retire. If you are planning to hand off the company, have a candid discussion with your family about the transition, and when you've reached an agreement about who's going to take on which roles, make a plan and write it all down.
"Think through all the possibilities," Becker said. "Get all the possible issues on the table, make certain that the good and bad possibilities are addressed, and seek a lot of advice from people you admire and respect for their business acumen."
Finally, if you haven't done so already, start training the next generation by involving these people in as many aspects of the business as you can so they're fully prepared when the time comes.
"The current generation needs to give the next generation challenging projects and be accepting of mistakes," Hutcheson said. "Rotate them through departments with managers who are not Mom or Dad. Create an environment where other employees are not afraid to communicate weaknesses in the next generation."