Thursday, June 23, 2016

Downfalls


Family businesses tend to have short life cycles.  According to an article in American Express’ Open Forum, only thirty percent of family-owned businesses make it to the second generation and only thirteen percent make it three generations. The likelihood of survival shrinks with each generation. 

I used to consult with a number of small businesses and ran into a huge number of examples involving second, third and fourth generation owners and managers who really had no clue how to guide their companies and quite often bled the businesses dry of money or just ran them into the ground.   Today, you get my opinion on this cycle. 

Here’s how it goes.  Dad or Mom open a business.  They work so very hard to get it off the ground, spend evenings and weekends doing the work.  If the business survives and grows, it eventually can pay off by providing a decent lifestyle.  Entrepreneurs become very attached to their businesses and develop a strong ownership tie.  The business grows and adapts.  It takes on a life of its own.

If that business succeeds, the owner eventually may hand it off to the next generation.  That generation has come to know the benefits that the business generated and if the children are smart and humble enough to handle success, they will continue to grow and manage the family business. 

Their children, though, would be raised in a much more privileged environment.  They would have all the fruits of success and most likely would not grasp the connection between the work in the family business and the benefits derived.

By the fourth generation, trust funds are available.  Those children will be happy to enjoy their inheritance and most are not inclined to work in the family business.  In fact, there is a sense of entitlement held by the majority of the children and this is where the business begins to suffer.  If the family is large, the trust funds can dwindle at an alarming rate.  Management becomes a lot less capable.  The company falters, slides and stands a greater chance of failure.  Each successive generation will drain the assets further until there really is no company left at all.

At some point, past the peak of success, the family will tout its greatness and talk about how much better they are than the rest of the competition.  A few may say, “We were once great and we need to get back to it again.”  Few will actually know what it would take to build or rebuild at that point.  There are answers, though.  One of the best solutions is to bring in new builders who can take a look from the outside.  They take the risks that entrepreneurs might take.  The company can grow again.

The problem with bringing in outsiders, though, is that the great family of descendants who have had ownership are not going to want anyone to take the company away.  It is impossible for inheritors and entrepreneurs to get along.  The inheritors depend on what is generated while the entrepreneurs want to use what is generated to create growth.  The values clash.  Usually the inheritors win and the company dies. 

The United States is going through this cycle right now.  The current ‘inheritors’ are fighting to keep everything from the hands of ‘outsiders’.  We want to stop immigration because it forces us to spread the wealth on which we depend.
The problem is, we need immigration.  The people who are willing to be entrepreneurs, who can bring new growth and who can help us to build are the very people we are trying to keep from entering our country.  It is foolish and will lead to stagnation and eventually the complete loss of our own country.  That is an underlying truth and will not change. 

No, I am not ‘going all liberal’.  I am, however, completely against closing our borders.  The fences that we build will do nothing more than keep us from working with the rest of the world.  No one outside will suffer any more than they do now.  Those of us inside will wind up cannibalizing our own inherited resources.


Done with my rant.  On to less relevancy and a little bit of entrepreneurship.  
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