Beating the Odds through a Different Approach
Here are some interesting statistics for you:[1]
- 80% of businesses, worldwide, are family-owned.
- Family-owned businesses account for more than 60% of total U.S. employment and generate more than 70% of all new jobs
- Approximately 64% of annual U.S. GDP is created by family owned businesses. That’s approximately $5 Trillion annually!
Since it’s the huge, multi-national corporations that make the front page of the newspapers, we often forget just how much the U.S. economy relies on family-owned businesses.
Now for the scary part:
- Only 30% of family-owned businesses successfully transition to the second generation
- 12% survive to the third generation
This is a problem of gigantic proportion. Why do so many family-owned businesses fail? Succession planners, family attorneys and insurance companies will likely tell you that inadequate estate planning and failure to purchase insurance products to fund an eventual “buy-out” of the previous generation are key reasons. This could be true to a certain extent. (By the way, we love succession planners, attorneys and insurance professionals). But, the staggering failure rate of family-owned businesses goes deeper than simply having an air-tight estate plan, tax mitigation strategies and/or having your insurance portfolio in order.
There are dynamics at work within most family businesses that stack the odds against successful transition. Every business is unique and has its own distinct dynamic. But with rare exception, the financial structure, the operational habits and the business culture of family-owned companies create a long-shot for successful transition to subsequent generations.
An often overlooked opportunity for facilitating generational transition within a family-owned business is the introduction of a private equity partner into the mix. Bringing a private equity group alongside a family-owned business at the critical moment of generational transition can dramatically improve a company’s chances of long-term survival.
First, we probably need address some of the myth’s that exist about private equity groups. The media has so often vilified groups like Bane Capital and Blackstone that many owners of smaller companies shy away from what they perceive to be the “sharks” in the private equity world. So let’s dispel some myth’s:
A private equity partner is not perfect for everyone in every situation. But this is an alternative that should be given strong consideration for the company facing generational transition. The introduction of a private equity partner affords the senior/retiring generation the security of a liquidity event as retirement approaches. The founder can move toward retire securely with a lump sum payout at the time of the deal, rather than a long-term payout funded through the cash flow of the company.
For the next generation, a private equity partner brings so much: financial capital to fund aggressive growth initiatives, intellectual capital to explore and execute in new markets, world-class advice and input on key decisions…the list goes on and on. A private equity partner can often be the key to enabling a business to survive a difficult transition and thrive as the next generation leads the company forward.
[1]Statistics presented in this post are derived from multiple sources for the years 2013 and 2014. Sources include research and articles provided by Harvard Business Review, kpmgfamilybusiness.com and family business institute.com