3 ways to improve family business succession and benefit the wider economy

Family businesses are the backbone of many economies, accounting for 64% of gross domestic product (GDP) and 78% of new job creation in the US alone.

They make significant contributions to local communities, are resilient through multiple business cycles, and have shown to be better employers than their non-family run peers.

But family businesses are also surprisingly fragile. Historically, only one-third survived one generation past the founder, and this rate has recently dropped to one-fifth. What is the cause for this when the underlying businesses are such a powerful economic engine?

The likely answer involves human nature rather than economic fundamentals, and in particular the dynamics around succession between family generations. Campden Wealth conducted the comprehensive The North America Family Business Report 2023, in partnership with Brightstar Capital Partners, to examine the issue.

An eye-opening finding is that 61% of families do not have a formal succession plan in place, despite “managing succession” being a core mid-term objective for nearly half of family businesses. As investors in family- and founder-owned businesses, this finding resonates with our anecdotal experience.

Too often, we see examples of the current generation simply hoping that their passion for the business carries across to the next one.

We know that formal plans make a difference in managing big transitions and change. Research on financial advisors has shown that formal plans can add 15% in extra wealth for retirement and that more than half of value creation by financial advisors comes from behavioural impact via coaching on goals and plans.

No company would attempt a big change management project without a plan. As investors, we prioritize value-creation plans when we buy a company. At a planetary level, we have seen the power of formal plans in the Montreal Protocol that saved the ozone layer from depletion.

Family businesses might delay the creation of a formal plan because they fear it will surface latent tensions between various family members. While this might be the correct diagnosis, it is the wrong cure – the tensions are usually even harder to address at a later stage.

For obvious reasons, succession is a question of ‘when’, not ‘if’. Treating succession differently and not having a plan often leads to more (and avoidable) disruption when the transition becomes necessary.

Every leader knows that people are more bought in when they feel that their voices matter. The next generation in families is no different, yet often founders feel that their potential successors are ‘not quite ready’ and still have a lot to learn before they can take over.

That might be true, but our survey shows that the next generation is overwhelmingly committed to protecting and sustaining the family business, which should be music to the older generation’s ears.

When we talk to companies as potential investors, we are always interested in the role of the next generation – and are willing to integrate them in strong management teams where they can build the skills necessary to eventually run the business.

Across several dimensions, active involvement of the next generation seems to be a clear recipe to both strengthen the business and increase the chances for a successful handover.

What is true for the next generation can also be true for a wider universe of stakeholders – getting their input can strengthen the business, offer new perspectives and frequently increase clarity on succession options.

Where there is conflict, advisors can play a helpful role in facilitating constructive dialogue that surfaces positive solutions. Potential investors can help with formulating a vision for the business and its growth – and often augment the management team where the next generation still has experience gaps.

Members of the community and philanthropic interests can also help sharpen the impact the business might have and how it aligns with the family’s desired legacy.

Meanwhile, members of the workforce, particularly those whose parents have also worked in the company – more than 70% of family businesses have such ‘multi-generational’ employees – can complement the views of the business owners on history and perceived legacy, and in the process inspire the next generation of owners.

The World Economic Forum has demonstrated the power of multi-stakeholder dialogue for over 50 years.

Its family business community can offer useful insights and connections, particularly on the topic of legacy and impact. A diverse set of viewpoints, engaged in constructive dialogue, facilitates better decisions and improves outcomes.

In our work as investors at Brightstar Capital Partners, we observe that businesses that follow the three practices described in this article often navigate succession better than their peers who don’t.

And to me this is important beyond the obvious economic benefits. Given the inherent qualities and contributions of family businesses, every successful leadership transition that prevents ‘self-inflicted wounds’ will be a step towards a more powerful and resilient economy.