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Family businesses need strategies for success(ion)

Rama Yelkur

Rama Yelkur

Family businesses are the economic engine of America and can range from a two-person “Mom and Pop” operation to a billion-dollar company that employs thousands. According to family business thought leader, Joseph Astrachan, 89 percent of businesses in the United States are family-controlled. These companies employ 60 percent of the country’s workforce, create 78 percent of all new jobs, and generate 64 percent of U.S. gross domestic product.

Researcher  John Ward points to alarming statistics about the survival of family firms: only 30 percent of family-owned businesses survive from the first to the second generation, only 12 percent from the second to the third generation, and only 47 percent of owners expecting to retire in the next five years have selected a successor.

Without a succession plan, many small businesses will be sold or even worse, closed. Additionally, the resulting family fracture can last for generations. The closure of family-owned businesses can negatively impact the community in which they are located, with consequences such as job losses, a shrinking tax base and loss of financial support for charitable organizations that keep a community healthy and vibrant. Imagine if the family-owned businesses that you frequent in Rochester closed their doors. How would that impact you?

As the baby boomers retire, one of the biggest needs of their businesses will be succession planning. In 2018, the St. John Fisher College School of Business Family Business Initiative conducted a survey of business owners and found that transition planning was among the top three needs identified by Upstate New York’s family businesses. While most owners are intending to hand down the business, they are not formally preparing the next generation. As expected, a large portion would not consider a successor who is not a family member; however, about a quarter of respondents are willing to consider a non-family member, which is an increasing trend nationally, and interestingly, another 33 percent indicate it is too early to say. Together, these statistics tell us that 57 percent of local businesses that are likely generating $1 million to $50 million in revenue and are relatively young and expanding may not have a suitable successor, and will undoubtedly pursue other options to preserve the longevity of the business.

The good news is that there are a number of strategies that allow for the orderly succession of businesses, including from a senior generation to the younger generation, current owners to employees, or an outright sale to a third party. It is abundantly clear that today’s business owners need to understand the financial, as well as non-financial, implications of each succession strategy so the legacy they’ve created—a vibrant business, job creation, and community support—can be sustained. It is not just business owners who need to be concerned with succession. Other stakeholders—such as the community in which the business operates, state and local governments, educational and religious institutions, and charitable organizations—all have a vested interest in their continued success.

One of the reasons why many business owners lack a succession plan is that they are too busy managing the day-to-day operations of their businesses! Business owners lack the time to focus on future-oriented activities, such as shared governance plans, exit strategies, valuation of their companies and next generation mentorship to ensure future business continuity.

To help solve this problem, on Tuesday, April 2, the School of Business will host a half-day conference exclusively for family businesses that will demystify the leadership transition process and discuss succession planning as well as valuation issues. The conference will bring business owners together to hear stories from families that have already successfully developed and implemented succession plans, focusing on the importance of effective family and business governance strategies. It will also provide insight from business valuation experts who can discuss strategies and the financial implication of various alternatives.

This conference is a continuation of Fisher’s Family Business Initiative to address the unique needs of family-owned businesses. We are launching peer network groups as a way to offer a confidential forum and educational programming that will be useful for the next leaders of our regional businesses.

Fisher’s goal is to serve as a community resource and share knowledge that business owners will find essential to ensuring that their businesses—and legacies—will continue for generations to come.

 Rama Yelkur is the dean of the School of Business at St. John Fisher College.

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