“Not only is family enterprise the dominant form of business in Canada, it may, contrary to assumption, be the most functional, effective and beneficial to the economy. It can be argued that the family enterpise demonstrates higher levels of trust, greater loyalty (both within the business and to customers), increased community involvement, a more long-term perspective, and the motivation that comes from having wealth and reputation tied up in the business.” -Ian Smith, Practice Leader, Grant Thornton LLP
It is an oft-quoted statistic that fewer than 30% of family businesses survive to the second generation and just 10% continue on to the third generation (a “generation” is defined as 25 years). Surprisingly enough, although this sounds dire, once you “crunch the numbers” this is actually much better than the average survival rate of a small to medium sized business (i.e. less than 100 employees). In fact, according to Statistics Canada, 96% of small businesses survive the first year, 85% the second year and 70% make it to 5 years in business. That’s a 30% business failure rate in just one-fifth of one generation.
How do family businesses compare to larger, more stable companies? In 1996, the Dow Jones Industrial Average ( DJIA) celebrated its 100th anniversary. The 30 companies on the DJIA typically represent the largest, best capitalized companies in the US. Yet, only one company originally included on the DJIA in 1896 remains on the list today.
If you assume 25 years is the equivalent of one generation, then the 100 years of the DJIA represents four generations. As stated above, we “know” that about 30% of family businesses survive to the second generation and 10% of those survive to be handed to the third generation. So, with 30 companies on the DJIA, we would predict that one company would still be around one hundred years later:
As you can see in the diagram above, our prediction is correct. The one company that was on the 1896 Dow Jones Industrial Average was still on it in 1996: General Electric, a company generally considered to be one of the best managed and capitalized companies in the world. So, the so-called “survival” rates of the companies comprising the DJIA and the “survival” rates of family businesses in general, turns out to be approximately the same.
Family businesses have a unique set of advantages and disadvantages. They are typically comprised of a tight-knit managerial circle, strong family values, flexible employees, loyal customers, and a long-term view of profitability, resulting in a very resilient business overall.
While family businesses have these unique advantages they also must tackle many of the same problems as non-family enterprises. The key to survival is to recognize the potential disadvantages of the family business, clarify these challenges, and develop strategies to manage them. Some of the unique challenges for a family-run business typically include:
•managing interpersonal family dynamics (jealousy, competition, entitlement);
•establishing fairness between family members involved in ownership versus family members involved in the management of the business;
•ensuring credibility/ability of family members as employees or management;
•managing conflicting personal goals versus corporate goals
•dealing with the passing of control through generations; and
•attracting key non-family employees.
So what are you waiting for? Start your planning now to ensure that you leave a legacy for your family for generations to come…