It's always interesting to hear business leaders talk about employees as if they’re all members of "one big family” — because the reality is that distinct leadership challenges emerge when they actually are. Take leadership transitions at family-owned businesses (FOBs) as a case in point.
For starters, leaders at FOBs typically enjoy far longer tenures than their counterparts at public companies: It’s the difference between a quarter of a century — or longer — at the former, and four-to-six years at the latter. As a result, leadership transitions at FOBs often put the organization at a crossroads. Specifically, that is, FOBs will need to pursue one of two paths:
- sell the business to a strategic buyer or private equity (PE) firm
- keep the legacy alive and opt for external talent
For FOBs at such a crossroads today, clearly, unique challenges lie ahead. But there are also strategic resources they can turn to for help navigating them. In this article, we’ll show you how forward-thinking companies can effectively strike a balance between change and continuity — and safeguard their survival into the next generation and beyond.
high level: leadership in transition
FOBs continue to be vital engines of economic growth, both in the U.S. and abroad. In fact, their importance is nearly impossible to overstate. Consider the following two stats, for example.
- FOBs represent an estimated 80 percent of all businesses worldwide.
- Within the U.S., these businesses account for 62 percent of employment overall, as well as 78 percent of net-new jobs.
Of course, given the sheer magnitude of those figures, we aren't just talking about mom-and-pop shops. Instead, think Walmart, Comcast, Nordstrom, BMW, Ikea, Zara, Lego, Samsung — the list goes on. Scratch the surface of the Fortune 500 and you'll find that over a third are family owned. And interestingly, among S&P 500 companies, FOBs average nearly seven percent greater ROI than their non-family-owned counterparts.
Yet, despite these impressive figures, the future for most FOBs right now is anything but certain. For even as "the majority of family business owners would like to see their business transferred to the next generation," the empirical data tells a somewhat different story:
- A full 70 percent of FOBs won't survive into the second generation.
- Only 12 percent of FOBs survive into the third generation.
- Just three percent of FOBs survive into the fourth generation.
Compounding the challenge of survival, leadership transitions — never an entirely smooth process, whether the context is business or politics — loom on the horizon for many FOBs. The underlying causes are partly demographic, partly economic.
Demographically, baby boomers, the cohort accounting for the majority of leaders at FOBs today, are aging. And even with "delayed retirement" an increasingly widespread phenomenon, the day will inevitably come — retirement can’t be postponed indefinitely.
Economically, meanwhile, FOBs are being hammered by the same challenges that threaten businesses today in general: innovation, disruption, the unprecedented pace of technological change and more.
deep dive: inadequate succession planning comes with big risks
Imminent leadership transitions, in the context of a volatile business climate, are creating special challenges for FOBs. Key questions include:
- How can you maintain company culture throughout the transition?
- What’s the right level of involvement for each stakeholder across multiple generations?
- What steps should you take to ensure that newcomers to the executive suite will work effectively with family members to achieve long-term goals?
The answers are seldom easy.
In part, that’s because many heirs and would-be successors not only face a business environment that's rapidly changing, but one that's already significantly different from the one into which the family business was born. In other words, outgoing and incoming leaders at FOBs might not exactly see eye to eye. It may not be too much of a stretch to say that they're straddling two different worlds — which makes robust succession planning more important than ever.
Multiple studies on this topic support such a conclusion. A succinct summary: "Chief among the main factors preventing successful intra-family succession is lack of succession planning."
That "lack" is actively playing out on the ground at FOBs right now. For example, 64 percent of successors say they transitioned into their leadership roles without formal succession plans in place. And equally problematic for FOBs across the board, an astonishing eight in 10 say they don't currently have succession plans in place. Unless that changes, unfortunately, the road ahead will likely prove rocky for many FOBs as a direct result.
After all, for FOBs, more so than for other businesses, change is never easy. And the fact that most FOBs are exceptionally good at holding onto talent — averaging around 9 percent turnover annually, compared to 11 percent at non-family-owned firms — suggests that effectively spearheading the kind of enterprise transformation needed in the years ahead will likely find some entrenched opposition. In that sense, paradoxically, FOBs' effective retention efforts may ultimately prove to be a double-edge sword.
What's clear, for now, is that the next generation of leaders will be arriving soon, and they're open to change. For example, one survey of successors at FOBs found that, while retaining "independence in ownership" was a top priority, nearly half also said they were open to working with external investors in the future. And how that future shapes up is exactly what's at stake today.
As we have seen, many traditional business best practices — from change management to leadership planning, recruiting and more — often cease to apply in the context of FOBs. And in light of that complexity, FOBs facing leadership transitions would be wise to seek out strategic partners like Tatum for support.
At Tatum, we have a long history of success partnering with FOBs during and after complex leadership transitions. And with our proven expertise in executive search, we can help your organization source and hire C-suite leaders who not only have key technical competencies, but also the soft skills and personalities that will make for a strong cultural fit — and power the long-term success of your company.
We also frequently partner with private equity firms during the post-acquisition phase, providing robust executive search and interim executive solutions. So whatever your future business plans might be, we can help you anchor them.
Get in touch with one of the talent experts at Tatum today to learn more.