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October 22, 2004
Second Generation not as Successful in Family Businesses
This study from Wharton reports on the challenge of intergenerational succession in family businesses.
"Despite the lack of independent directors on their boards and voting power for minority shareholders, family-run companies are still the better bet for all stakeholders as long as the founder of the firm is involved as chief executive officer or chairman. If the descendent of a founder runs the company, value is lost."
Other studies show that third generation transfers are even more tenuous.
Posted October 22, 2004 06:33 AM
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What I have watched play out in families would seem to apply to business as well. I have watched a trend that very successful parents often produce more lackadaisical children. In my family there are two very successful family businesses. The first is an engineering firm in Austin. The children desire very strongly to take over the business, but have done little to deserve it. Yes they have gone to college and have moderate grades, but they themselves are continuously falling into desperately hard financial times with the entrepreneur father having to bail them out or watch them bankrupt. I would propose the “safety net” that has always been there for the kids rather hinders them in growth. They are more careless and are typically over-spenders. This same type of management would be translated to the business upon takeover I’m sure. Without that same safety net that they have learned to rely on, the business is sure to fail. The third generation would only have this as a roll model and be that much worse off I’m sure. The father felt that way and has agreed to sell his business upon his death, in spite of his children’s strong objections. The proceeds are to be almost completely given to charity, with the kids only getting a fraction. I’m not sure if this is completely true or just a threat to his kinds as a last ditch effort to teach them responsibility. I tend to believe that they really just won’t receive anything and rightfully so. The other family business’ children have turned out much the same. I don’t fault the parents because I’m really not sure how that could be avoided.
Posted by: Daniel B. Rose at October 23, 2004 12:23 PM
I think Daniel is correct. I also believe that business responsibility has to be taught much in the same way you teach financial responsibility. If you never teach your child to live within his / her means (i.e., give them a fixed allowance that must be used for normal expenses), you can't expect him / her to be financially responsible when he / she becomes an adult. The child needs to see the parent paying the bills. At a certain age, it is even appropriate for the child to see the parents financial statements.
Likewise, teaching responsibility to the second generation is a daunting task. You have to treat the child like any other employee of the company...including firing them if it becomes necessary.
The other part of the equation is passion. If the child simply doesn't share the parent's passion for the business, he or she will probably not be willing to spend the majority of his or her time running the business.
You cannot force the responsibility, nor can you transfer the passion through osmosis. As such, selling the business is sometimes the best way to save the business and preserve the family's wealth.
Posted by: Heather.Brannon at October 28, 2004 09:07 PM
Many children think of work as where you go to get your check, not actually working for the check. I actually have experienced this personally. As with the first post, there are a couple of businesses in the family. My cousins' mothers owned a rock company and they got whatever they wanted without doing anything in return. These cousins are now struggling in the real world. They have found that work is much harder than it once seemed and they definitely couldn't have run the business, so the parents decided to sell the business and give the kids money! Right, that taught them a lesson! In contrast, my brothers have been working, illegally, since the age of eleven. They understand the family business and are getting close to being able to run the business. I feel like preparation is key in this scenario and until they are ready, my father says, "sell the business if anything happens to me" "Lock the doors that day" It is all to easy to ruin a business and spoiled brat kids aren't great prospects.
Posted by: Mary Beth Groce at November 4, 2004 03:06 PM
at Belmont University in Nashville, Tennessee. He consults with a variety of businesses on start-up and growth related issues, and with larger corporations on re-establishing entrepreneurial cultures within their organizations. Dr. Cornwall's current research interests include entrepreneurial finance and entrepreneurial ethics. He has authored or co-authored four books.
