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.
