Best practices (and pitfalls to avoid) in second-generation businesses

Small businesses are significant contributors to the economy of nearly every country. In the US, small businesses are called “the backbone of America”, a description I wholeheartedly agree with. These family-owned and operated businesses create two-thirds of new jobs and employ close to 48% of the US total workforce. Family-owned and operated companies hold a special place in my heart. If small businesses fail, it directly impacts our nation, society and especially the family members of those they employ.

The odds are stacked against small, family-owned businesses. Consider these staggering facts:

• 90% of startups fail within the first year
• After five years, of the surviving 10%, an additional 50% fail
• 70% of businesses do not survive the transition from first to second generation 
• If your business has made it into the third generation, you’re among an elite 10% of successful companies. It is extremely difficult, based on the odds and realities of running a business, to remain relevant and competitive. 
• Only 3% of those remaining businesses transition from third to fourth generation

As these data illustrate, a company’s probability of success with multiple generational transfers is not high. It’s a feat that is astounding and extremely difficult.

My goal is to empower other second-generation businesses to thrive while maintaining healthy family relationships. 

The challenges of succession

Owning and running a generational family business can feel extremely complicated at times. Combining the family dinner table with the conference room table comes with a slew of issues, both rewarding and challenging.  

The following are my observations about mistakes family-run companies often make.

Wasting time when you could be growing the business 

The biggest mistake second-generation businesses make is wasting time on perceived personal injustices instead of doing what the business needs to grow. Such issues include:

1. Confusion over titles, roles and responsibilities 
2. Focusing on personal childhood issues: Who did Mom favor? Dad? Which child had it rougher? Who got a higher allowance at age 13? Who did the family dog love most? The list can be endless and juvenile, but it’s very real in a family-run company. 
3. Who works more or less? Who spends more or less? Who earns more or less? These are complex issues to solve but must be addressed.
4. Wanting a bigger slice of the proverbial pie―instead of building a larger pie

Not planning a proper transition 

Most first-generation business owners, especially in the US $1-5 million annual revenue range, don’t properly transition ownership to their children due to the complexities of family. In my experience, informality and the inability to anticipate future issues can lead to a financial and family disaster years later. 

Consider a small business with one parent as the single founder and stock owner. As the sole proprietor, the founder never had to deal with the following:

• The complexities of working with family members who are also business partners. 
• Quarterly or annual revenue sharing, and how to divide it fairly.
• Reporting up to a sibling or family member in charge. Imagine your brother or sister being your boss; it can be tricky.
• How to properly divide stock ownership and annual income based on performance and talent
• How to understand the complexities of birth order in a business environment. 

The business must come first to thrive

When planning to transition your company to the next generation, or when cleaning up the messy situation that was left to you, the bottom line is this:

To succeed from first, to second, to third generation you must evolve and grow. Don’t squander the unique asset that was transferred, sold or gifted to you.

For second-generation owners, this starts with putting egos and childhood baggage aside. Sharing ownership of your company, especially with siblings, can blur the lines between business and family. Establishing a system that clearly defines roles is a significant first step toward keeping family and business issues separate. There is a legal component called a Buy/Sell Operator Agreement but, equally important, there must be open and honest communication on how to treat one another and behave as business partners. It’s critical to address the intangible issues that legal paperwork cannot solve.

When defining roles within the company for the second generation, pay attention to who is good at what:

• Who is the visionary?
• Who’s a great salesperson?
• Who has a mind for operations or finance?

The skillset and passion of the founder don’t always get passed to their children―but do not necessarily have to for the company to continue to succeed.

By the time the second and third generations take over, the company is already well-established. These future generations need to know how to double or triple down on what is working and adapt along the way. Fortunately, second-generation owners don’t need to be exactly like the founder as long as they have passion and make smart decisions. Avoiding big financial mistakes is just as crucial as evolving over time. 

Second generation success―and struggles

As a second-generation co-owner of Telecloud, a unified communications provider, I am personally invested in the realities of family-owned businesses. As the youngest of three siblings, I’ve spent the last several years balancing the fine line between family relationships and business success. This juggling act took more time and effort than I could have expected before we transitioned ownership from my father, but we chose family first. The success of the business is paramount to treating one another fairly, professionally and with love, and is vitally important when things get heated.

I created my personal brand called “$econd  Generation” to share experiences, learn from one another, and help others thrive in order to beat the odds of failure and create amazing family businesses together. 

We are the backbone of America. Keep growing!

For more insights and inspiration from today’s leading entrepreneurs, check out EO on Inc. and more articles from the EO blog.