Why Family Businesses Fail: Heir Issues

By Jim Moody

Everyone is aware that the vast majority of family businesses don’t make it past the third generation. Sometimes that’s for the best: A family has an opportunity to sell the business and feather the nest for generations to come. But more often, companies fail the handoff to the next generation. They usually fit one of four scenarios—two of them fixable, and two of them doomed to tragedy.

The first two are because either there is no heir in the family or else everyone in the next generation has followed a different dream that fills their soul. In those cases, there’s plenty of time to plan. The obvious options are to get the business ready for sale or bring in non-family management.

The third scenario that leads to failure—and I see it frequently—is that the current boss simply plans to run the business until they drop dead in the yard.

The fourth is the saddest of all. That’s when the heir(s) simply don’t have the skillset or emotional intelligence to be successful in running the business but are given the job anyway.

I know a very robust company run by a man who was universally admired by his peers. If ever there were a lumberman’s lumberman, it was this fellow. He mentored many in the industry. His numbers were the envy of everyone. There was steady growth, and rarely was there a misstep. But the 2nd generation...well, they were not exactly a chip off the old block.

The dad seemed to know this. He did not entrust them with meaningful work. They never developed any initiative to learn anything on their own. Dad’s succession plan was to die and let nature take its course. Eventually, he became incapacitated, and the 2nd generation took over management. The business quickly deteriorated to the point that they were drawing on family assets to keep the doors open (and maintain their salaries). Dad died, and they became the owners. Today, despite inflation and the rise in lumber sales post-covid, this business sells about 1/15th of what it did in the early 2000s.

Handing off to multiple heirs also can lead to disaster if mom and dad try to avoid conflict among siblings by transitioning the business equally to each child. While I do know of examples where this worked, the preponderance of evidence is that this hog-ties a business so that it never really moves forward. It’s far better to make the difficult call and position one as a majority owner.

All of these situations are challenging. And yet they rarely happen in an instant. The situations are known (even if they are not acknowledged—we are all really good at putting our heads in the sand sometimes) for years or even decades. There is time to fix the problems if you plan ahead.

Consider, for example, a situation where an heir is present and capable but feels they are there only out of a sense of obligation. He or she had other dreams, but there was either overt or subtle pressure to come back and “do your duty” for the family. Can handing over the company to such a person work? Yes. Is it better to let the 2nd generation follow their dreams? Yes. Do they sometimes follow their dreams, get it out of their system, and come home as a prodigal child to become successful in the family business? Yes. But that takes time.

While there is no one right solution for everyone, there IS a solution for everything. But frequently it requires walking across a figurative fire pit to get there. Figuring all of this out at least five years (seven to ten is better) before generational succession is to take place is critical. It takes time to get people ready emotionally and intellectually.

You don’t get a mulligan on generational succession. Either you do it well and set the family and business up for success going forward, or you plant the seeds of the demise of the business and the fracturing of the family.

So often, these decisions are as much about emotion as they are about business. They are difficult to navigate when our emotions cloud our vision and push us to avoid conflict. And it is true that letting it all sort out after you are dead is a strategy that lets you avoid conflict. But, in your heart of hearts, you don’t want that for your business or for the people you love most.

We‘ve found that a neutral third party who can come in to ask good questions and help assess the situation can be an invaluable resource for the owner. Is the 2nd generation capable? Do they really want to be here? Is one better suited to lead the business at the top? What’s the role of the other individuals in the business? And what do you do about heirs who aren’t active in the business and never will be?

If you see yourself in any of these scenarios, we’d love to help you sort things out and create a succession plan that sets you, your business, and your family up for success for years to come.

Evolve Strategically,

Jim Moody