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Only a Third of Family Businesses Reach Second Generation

NEW YORK — Although family-owned businesses have their own special day in the form of National Mom and Pop Business Owners Day on March 29, that doesn't guarantee they'll make it to the next generation, according to the Small Business Administration.

Family businesses make up 90 percent of all business enterprises in North America and 62 percent of U.S. employment, but only one-third of these businesses make it to the second generation; 12 percent to the third generation; and 3 percent to the fourth generation and beyond.

To ensure these businesses are maintained properly, Baruch College professor Elisa Balabram determined five key tips to run a successful family-owned business:

1. Focus on communication. 

Family members involved with the business should practice transparency, build trust, determine and agree on family and business values, and understand the members’ goals and aspirations within and outside the family business. Weekly business meetings are helpful, but time should be allowed for family issues during which business discussions are not allowed. Professional mediators can help mend relationships and trust if there are further difficulties.

2. Understand and define roles. 

It is common for family members to occupy multiple positions without a defined job title, which can create conflict without a clear leadership role or common understanding of who is responsible for specific tasks. Structure can improve overall professionalism and accountability.

3. Write a family constitution. 

Increasing the number of family members involved in this process will give people a sense of ownership. Items to include are: mission and vision statements; values; employment policy; sample of pre-nuptial agreements; strategies to develop the next generation; ownership policy; family bank and/or family venture capital funds; dividends and benefits policy; liquidity policy; who can be elected to the board of directors or join the advisory board; succession planning strategies; rules about the family council; and information regarding the shareholder meetings.

4. Hire employees that are not family members. 

Adding independent directors to the board can attract talent that family members may not possess. Non-family employees can share their expertise and serve as unbiased supervisors and mentors to the next generation. Additionally, having independent directors adds a sense of professionalism, and they can assist with the company's strategic and succession planning.

5. Empower the next generation. 

Current owners of family businesses should:

  • Set rules regarding opportunities available to family members;
  • Give the next generation a chance to work part-time, pay them market value and hold them accountable to perform their jobs well;
  • Encourage them to pursue their education and career dreams;
  • Allow them to work elsewhere to gain experience and new perspectives; and
  • Give them the freedom to choose their own career path and decide if they want to join the company full-time or not.

Finally, Balabram advises that when next-generation family members do choose to join the business, the current generation should be sure to mentor and empower them so that they are ready to take on a leadership role when the time comes.

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