Family Business in Transition

As in the case of John and Mary Jones, whose three children will inherit the business, the succeeding generation of owners and managers won’t have an easy time coordinating the respective roles of owner and manager. The need for communication between sibling partners is infinitely greater than the need for communication in the case of a sole owner.

About one-third of the companies surveyed have a chief executive who is older than 60, and the average age is 54. About 11 percent are younger than 41, and just 11 percent are older than 71, according to MassMutual. In all, about 88 percent of survey respondents believe the same family or families will control their businesses in five years, but succession statistics undermine this belief.

Consider that while 30 percent of family-owned businesses survive into the second generation, 12 percent are still viable into the third generation, and only about 3 percent of all family businesses operate into the fourth generation or beyond. The statistics say there is a disconnect between the optimistic belief of today’s family business owners and the reality of the massive failure of family companies to survive through the generations.

Interestingly, Canadian family business owners assume that a family member will be the successor in only about 64 percent of cases.

Estate Planning

Nevertheless, the state of estate planning among family business owners is probably better than ever. Based on the MassMutual survey, 67.⁵ percent report a good understanding of the amount of estate tax due upon death. Having said that, other than preparing a will, almost 20 percent of family business owners have no estate planning. Additionally, while two-thirds of significant shareholders in family companies know of the senior generation’s share transfer intentions, awareness surprisingly dropped from 76 percent six years earlier.

Even worse, more than one in three respondents have no knowledge of the senior generation’s transfer plans. Senior generation family business members struggle mightily with how to fairly divide up their life’s work product. In John and Mary’s case, their issue is how to treat Steve, Jody and Robert equitably when they have such different strengths and ambitions.

A 2006 PriceWaterhouseCoopers survey found that 53 percent of the chief executives of the fastest growing U.S. private companies don’t address the disposition of their business in their estate plans at all. In addition, just 22 percent of the owners surveyed have revised the plan in the past five years.

Business Scenario

Steve joined JZ Jones Construction after completing a couple of years of college. He was a marginal student and couldn’t wait to sink his teeth into the operations of the family company. He has proven to be an energetic and capable manager and has handled most assignments in the family business successfully.

Middle child Jody was a straight-A student and went to work for General Electric for six years after her college internship. She was a successful manager, received several promotions and uniformly outstanding employee reviews. She was on a fast track before she decided to return to her family’s hometown with her husband Eric. At 31, she’s been employed in the family company for three years but has spent a great deal of that time away from the business due to two troubled pregnancies.