Family businesses make up 80% of all U.S. businesses, and yet only 30% of these businesses successfully survive a transition to the next generation. Dwight Drake, Closely Held Enterprises 335 (2013). One key question that many family businesses face is whether the company will survive the transition to the next generation. Here are five signs that your family business is ready for the transition.
1. The business has established management and protocols.
Established businesses with formal processes and managers with clearly established roles are more likely to succeed following the transition to the next generation. A clean corporate structure, up-to-date minute books and independent corporate leaders are further indicators that the company is ready. If the business has an established infrastructure, it is likely less dependent on the departing generation and will make for an easier transition.
2. High barriers to entry mitigate competition.
There are a number of potential reasons that it may be difficult to open a particular type of business. High start-up costs may make entry prohibitively expensive, the industry may be highly technical or the nature of the business may make it dependent on a limited number of specialized professionals. Such barriers to entry reduce potential competition that could diminish the success of the business for the next generation.
3. The company’s business is derived from a strategic market position.
If the company’s business is dependent on the departing generation’s relationships, it may be difficult to transition these relationships to the next generation. Businesses whose success comes from a strategic market niche rather than individual relationships stand a better chance for a successful transition. If your business is highly dependent on personal relationships, shifting your strategy towards strategic market opportunities while working to transition these relationships to the next generation can bolster success.
4. The business is flexible.
Companies with larger margins and greater flexibility in their operations are in a better position to transition than companies with little ability to change. Rather than being locked in, lean operations and the ability to respond to market changes sets up the next generation for success. The reality is that the millennial generation does business differently, and a new management team likely has ideas on how to shake up the business. However, if the business is not sufficiently agile to change, this can lead to disappointment.
5. The business does not depend on technology.
High-tech businesses face additional pressure to always be on the cutting edge. In such businesses, success often depends on key personnel. If the departing generation is made up of the visionaries that have made the company what it is, the next generation may be at a loss to keep up.
Every family business has a unique situation, and your team of advisors can assist you in evaluating and creating a plan to successfully transition your family business to the next generation.
Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.