Generational Challenges for Family Businesses
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Family businesses are critical for the success of the global economy. They account for the overwhelming majority of current businesses, new business formations, and employment growth. . However, few family businesses survive multiple generations of ownership and/or management. The “father of modern economics”, Adam Smith, first observed that separating ownership from control of a business would lead to conflict, and lost value. This is supported by academic studies and family business consultants’ observations that family businesses do outperform non owner-managed firms. However, recent research shows that lone-founder businesses (those with no other family members as major shareowners or managers) are responsible for all of this superior performance. This is not surprising, as all businesses face the relentless pressures of competition; but the dynamics of family involvement adds additional complexity to business leadership, organization and management The successes and failures of family businesses show up as either remarkable legacies or sad cases of business and even family dissolution.
The good news is that researchers have identified “best practices” of those families that have successfully sustained growth during ownership by 2nd and 3rd gen family owners. Some 30% of founders successfully negotiate the transition and their heirs continue to drive performance sufficient for multiple owners and their families.
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How can owner-managers successfully deal with the complexity family/business relationships and inter-generational transfer of leadership and wealth? Over the past 25 years, research by Lansberg, Ward, Davis, Gersick, and others has defined a useful framework to characterize the dynamics of family business. Commonly referred to as “The 3-Circle Model”, this framework describes three fundamental elements of a Family Business System: Family, Ownership (governance), and the Business itself. Analyzing the dynamic relationships within and among the three elements highlights the unique issues which the Family Business System confronts. Managers of family businesses and family business consultants routinely use the Model to identify and address issues created by these complex, related elements.
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Family Business Systems are supported by specialist estate lawyers, tax attorneys, accountants, private bankers, psychologists, psychiatrists and management consultants. Specialist’s skills can guide decisions on ownership trusts, partnership buy/sell agreements, succession planning, organization development, family counseling, corporate finance, wealth management, or business strategy. The 3 circle model helps specialists fit the pieces together.
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