Why Only 10% of Businesses are Passed Down to the Next Generation

Guest Blog Post By:

Rob Slee, Author of Time Really Is Money

I grew up in a family that owned and operated businesses. My dad was a serial entrepreneur, with all of the good and bad that such a title bestows. Behaving as a functioning family is tough enough; throwing a business into the mix is just asking for trouble.

Dad wanted my older brother and me to stay in the family businesses, and eventually buy him out. Back then, passing the business to the next generation was a major tenet of the American dream. I think that part of the dream is now under attack.

In the 1980’s, the Family Firm Institute did a study showing that about 30% of all family-owned businesses survived into the second generation; about 12% made it to the third generation; and only 3% survived through the fourth generation and beyond.

I checked a couple of dozen websites of business succession advisors, and each quoted the FFI statistics as if they applied today. I don’t think they do. In fact, at least for the middle market, I’d be shocked if more than 10% of family businesses are now transferring to the second generation.

We’ve looked behind the curtain of hundreds of family businesses over the last few years. And in at least 90% of the companies, neither generation wanted any part of a transfer. Here’s a summary of what we heard and saw:

Parents

– Don’t really understand the global economy…just see risk of ownership going forward
– Don’t totally trust their kids to own/operate the business going forward
– Can’t get their minds around how to fairly treat siblings who are not involved in the biz
– Don’t want to leverage the company to do a transfer
– Still often view/treat their kids as 6 year-olds

Kids

– Are making $150,000+ a year and getting home in time to have dinner with their kids
– Figure that when the business is sold they will eventually get the cash anyway
– Don’t fully trust the global economy
– Don’t really want to leverage the company to do a transfer
– Often view/treat their parents as authoritarian and out-of-touch with reality

An entire industry exists to promote and assist in family transfers. But it’s as if most of these helpers have never lived in a family unit. Their mantra is: “If only the family would plan for the transfer, everything would work out.” I call bull$#@%. With all the dysfunction that exists in families, it’s amazing to me that family businesses can even stay in business, let alone plan for a transfer. My advice to the industry: first bring in the psychologists…

This situation reminds me of the ESOP industry. For about 40 years, an army of ESOP advisors have touted the heavenly benefits of doing an ESOP. According to them, ESOPs darn near cure cancer. Yet, after all of this time, less than 12,000 ESOPs exist (out of 300,000 middle market companies and millions of smaller firms). It’s always seemed to me that ESOP advisors are mainly selling their own motives, without considering why the market is 99% deaf to their value proposition.

Of course, most biz owners are self-selected control freaks, and this affliction causes them to procrastinate before making any transfer decision. Here’s my favorite example. An 85-year-old man sought my firm’s help to effect a transfer. The man was distraught because “Junior” had recently been offered the chance to buy the family business but had declined the opportunity. The elderly owner castigated the younger generation for their flimsy work ethic and lack of vision. I later discovered that Junior was 62 years old! Junior told me he had worked in the business for more than 30 years and had offered to buy the business more than 10 years before, but the “old man” wouldn’t even discuss it. The most revealing aspect to this story is that it occurs every day on Main Street.

If only the old man had planned better.

Comment directly to Rob at: rob@timereallyismoney.com