Managing Your Business

It's All Relative: Bringing the Next Generation into the Family Business

America has a great history of growth through capitalism and family businesses that have been passed down from one generation to the next—Ford Motor Co, Mars, Wal-Mart, and Anheuser-Busch are just a few well-known and very successful family-owned companies. The idea of a successful family business that grows with each new generation of family coming into the fold is as much a fantasy for many business owners as it is an American tradition.

Perhaps you are beginning what you hope will become a family business, or maybe you are part of a family business and are wondering how you should pass the torch to your successor. Here are some questions to consider:

  • What role is your family expected to play in the business?

  • Do you envision a new leader of the pack or support at middle management?

  • Is family only found in executive leadership,at the top or in the grass-roots level?

Tradition is important, both with family and with business, and it makes sense that business owners want to maintain and further the established heritage of their company by bringing in the next generation to take up the mantle of the family business.

You may find that sometimes the transition is smooth and the empire becomes better for it. But other times, those best-laid plans either need more planning or just need to be scrapped.

The Big Question

Before you figure out how to usher in the next generation to the family business, the main question you should ask yourself is, “Should you?” Recent studies have shown that an alarming number of family business close or are sold before the new generation makes it to the helm (over 70%). Given the statistics of the success/failure rate of small businesses in general (50% fail within five years), family businesses may be more prone to fall because of a few reasons:

  • Nepotism and emotions prevent proper business practices

  • Arguments/feuds among family members

  • Not ready/properly equipped for the role of managing a business

Many business owners find themselves in stressful situations because they allow emotions to override their judgments concerning family members—most often not firing a family member who is not performing/creating problems in the office simply because that person is a relative.

For example, an LA-based oil and gas company recently fell victim to massive upheaval that partially resulted from consistent arguments between the founding partners: (1) Partner A’s insistence on keeping his brother employed as an executive vice president and (2) his extravagant spending. The brother was ill-equipped for his role and made numerous costly mistakes, but Partner A would not remove him from the position. The co-founder, Partner B, eventually left the company to begin a new venture. Three years later, the company suffered financially to the point that it was acquired by another business. After the acquisition, most of the executives (including Partner A and brother) were fired.  

As was the case with the LA company, the contributing factors for a family business’s demise include more than one factor—Partner A’s nepotism eventually cost him his business, his money, and his reputation in that industry.

Tips for Introducing Family into the Business

If you believe that bringing the next generation into your family business will have a positive impact on your company, there are some things to consider from business owners who have successfully navigated this transition:

1. Make sure that your prospective replacement actually wants to work for the family business. It may seem like a good idea to you, but your successor may have other interests and aspirations. Forcing a role onto your family member may lead to problems and disputes that will have a negative impact on your business.

2. Find a role in the business that is the right fit. As a business owner, you would not hire a plumber to be your IT Tech—the same should be true for family members and not trying to place them in positions that they are not skilled and trained to do.

3. Allow family to work outside of the business first so that they can develop their interests and passions.

4. Do not hold your family more or less accountable for their role in the family business. Many small business owners make the mistake of either being too hard or too lenient with their family members in the company. Family should not be held to a higher standard than other employees because, outside of being your son or daughter or sibling, they are still just an employee. By the same token, be careful about not making family members accountable for their own actions and being too lax than with other non-related employees.

Proper Family Business Transition: Palo Alto Software

When the founder of Palo Alto Software (PAS) decided to step down, his replacement was chosen on the merits of who would be the best fit for the role—it happened to be his daughter Sabrina. She had already been working for the company in another facet that suited her skillset and experience. The newly appointed PAS CEO also worked for other software companies and built a successful career (including starting her own company) before she returned to the family business. The time outside of PAS allowed her to accrue experience that was beneficial to her father’s company. She became an asset instead of a hindrance.

Continuing Tradition in the Business

As a final note, keep personal relationships out of the office. What happens at work stays at work, and what happens at home stays at home. Family feuds within the business often occur because of personal differences that have nothing to do with the business itself; however, because family members cannot separate personal from professional, the company suffers.

As is the case with hundreds of successful family businesses in the U.S, the dream of passing the torch of the family business to the next generation is possible and can strengthen the company—as long as the focus remains on improving the business and keeping the tradition alive. 

Related links:

Business and Entrepreneurship

Originally published on October 26, 2022, and last edited on October 26, 2022.

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