Twenty-five years ago, business analysts thought the traditional family business model would eventually become extinct. But here it is in 2016, and some of the largest brand names in America are still owned and operated by their original families: Walmart, BMW, Tyson, Samsung, Kohler, Christian Dior, Mars, Ford and Comcast. In fact, public and private family companies represent approximately 80 percent of firms throughout the world.1
Some benefits of family-owned business include the ability to show other family members the ropes of the business at a young age and an inherent trust among co-workers who are related. Employing family members may also lead to a workforce that’s more interested in running the business than on just turning a profit in order to appease shareholders. That values-based sense of customer service and loyalty to employees is part of why family businesses are often more stable and geared for long-term success.
Naturally, for a business to be successful long-term, business owners need to be conscientious in their succession planning. Too often, second-generation businesses fail because a family member with the wrong skill set, too little experience or uninterested lack of interest was put in charge in an effort to “keep it in the family.”
Worse yet, by one set of metrics, the survival rate for a third-generation business is only 10 percent.2 Businesses should consider two tracks for succession planning: (1) a long-term CEO or operational manager and, (2) an immediate — albeit temporary — plan for someone to step into a management role in an emergency situation.3
Speaking of emergencies, because a family business may be the only income source for multiple households within one family, it’s a good idea to have a business continuity plan in place. When you consider that 90 percent of small companies that experience a disaster end up closing their doors within two years, it could be a good idea to have a disaster preparedness plan and some form of business interruption insurance.4
Life insurance is another tool that can be used to facilitate business longevity and succession planning. When used with strategies such as an irrevocable life insurance trust, entity redemption agreement or buy-sell agreement, insurance planning can direct how to handle a business owner’s interests in the event of his or her death.5
An older family business may also be hampered by an outdated legal structure. It’s important to recognize that today’s court systems are predisposed to allow changes to previously irrevocable documents to accommodate new circumstances when consensus exists for change.6
Content prepared by Kara Stefan Communications.
1 Knowledge@Wharton. May 31, 2016. “Are Family Businesses the Best Model for Emerging Markets?” http://knowledge.wharton.upenn.edu/article/family-business-model-works-better-markets-others/. Accessed July 8, 2016.
2 Matthew Erskine. The Family Firm Institute. March 16, 2016. “Succession: Business success vs. ownership lifestyle.” https://ffipractitioner.org/2016/03/16/succession-business-success-vs-ownership-lifestyle/. Accessed July 8, 2016.
3 Christophe Bernard. KPMG. Feb. 23, 2016. “Steps to take for succession planning – for the CEO.” http://www.kpmgfamilybusiness.com/steps-to-take-for-succession-planning-for-the-ceo/. Accessed July 8, 2016.
4 Paul Vachon. Crain’s Detroit Business. July 3, 2016. “Disaster insurance experts: Business survival depends on preparedness, business continuity planning.” http://www.crainsdetroit.com/article/20160703/NEWS/160709988/disaster-insurance-experts-business-survival-depends-on-preparedness. Accessed July 8, 2016.
5Vernon W. Holleman. WealthManagement.com. Feb. 26, 2016. “Life Insurance’s Role in Family Business Planning.” http://wealthmanagement.com/insurance/life-insurance-s-role-family-business-planning. Accessed July 8, 2016.
6 Nick Di Loreto and Steve Salley. The Family Firm Institute. March 30, 2016. “Tempering the Power of Irrevocability: The influence of consensus in family enterprises.” https://ffipractitioner.org/2016/03/30/tempering-the-power-of-irrevocability-the-influence-of-consensus-in-family-enterprises/. Accessed July 8, 2016.
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