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Jim Was Never Allowed To Fail...Or Succeed

Updated: May 28


Jim leaves Wharton Business School with an MBA. He begins his career in the warehouse of the family business. For the next two decades, he sees areas where the business can be improved. But his father continually rebuffs all of Jim's ideas for needed innovation. Rejection of Jim's ideas continues to his father's death bead. Even then, his father calls a board meeting to declare dividends and reject all capital expenditures for needed innovation. Jim is never allowed to gain the valuable experience of success and failure trying any of his ideas. He feels unneeded, and the company suffers without his enthusiasm and ideas. Jim's story could have been different. After working in the industry to develop experience valuable to the company, he should have been allowed to try his ideas. Even failure would have been beneficial for him and the business. Why? Because historically, it is with the third generation of family leadership that family-owned companies flourish. With that third generation, sales multiply, profits soar, jobs compound, and investment in the community is greatest. When this happens, the local economy ignites as the company becomes a significant purchaser of local goods. But, this rarely happens as only 40% of family-owned businesses make it to second-generation enterprises.

  • Only 13% make it successfully to a third-generation business.

  • Only 3% are successful as fourth-generation businesses or beyond (Businessweek.com).

The failure rate is so high because of the unique challenges brought to the business because of family. Lesson: Most family-owned businesses never grow into second-generation enterprises. Planning for the season when they won't be around, entrepreneurs should allow for new generations of leadership to test their wings for the future continually. Nowhere is this more true than in the family business. A business's impact on a community starts with its employees when it provides opportunities to grow their value and compensation. Planning for these growth opportunities, especially in a family-owned business, is essential for growth over generations. Lesson: Having a business that involves family brings with it a unique set of problems. One of the first problems to be solved in family business succession planning is to:

  • Determine the purpose of the business beyond profitability

  • Determine who will lead in your absence

  • Determine who will own the company

  • What is the business purpose?

What is the agreed purpose of the business beyond making a profit? For a business to exist merely to make money is limiting. Long-term success requires profitability for a purpose. This should involve generating a profit to bless the community and advance that purpose. The CEO is in a unique place to champion this purpose beyond being profitable. Merely making a profit does not inspire the long-term buy-in necessary for successful succession. The CEO will be able to inspire buy-in and ownership. Succession planning must involve clarifying this profitability for a purpose. Who will lead the company? The tricky question must be asked, "Who is the best qualified?" The best qualified candidate may be family, or they may not be family. Potential leaders qualify themselves by their performance and achievement. The business should have a system of accountability that ensures equitable performance measurement for all employees. Family pedigree should not be a factor in this selection. Require family members interested in leading the company to work outside the business for three years, developing an asset or gift that the business needs. No one gets to be in leadership just because they are family. Family-owned businesses are notorious for overpaying and underpaying family members. The formula mentioned above for working outside the company before hiring allows the marketplace to determine their compensation. Who will own the company? Often, in the attempt to show no preference, family members get equal ownership in a business. This happens in the misguided view that what is equal is fair. What is equal is not always fair. There is a marked difference in the perspective of family members who work in the business and family members who don't. Often two competing agendas are at work. The family members who work in the business tend to prioritize reinvesting the profits for growth. The family members who do not work in the business but are owners might prioritize dividends and payouts. These competing agendas can create friction among the family and cripple the business. One solution is to only allow family members working in the business to own stock. Family members not working in the company can receive other assets of comparable value. Ready to get started in succession planning? I would love to hear about your struggles and successes. Would you help me write about succession planning? Connect with me and let me know your thoughts, struggles, and successes. I want to answer your questions and fan your fire into a flame. Email me at harryt@cultivatingimpact.biz or connect with me on LinkedIn. To help, I have created a free resource for you, "The Seven Pitfalls To Avoid In Succession Planning." You can get it today for free: CLICK HERE TO DOWNLOAD. Harry T. Jones P.S. Get "The Seven Pitfalls To Avoid In Succession Planning," CLICK HERE.


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