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Some valuable companies like Hermes prove that brand equity is preserved if the company remains under family control. Others prove that the family connection can help restore belief in a damaged brand – Toyota is an example of this after its unintended acceleration crisis in 2010.
But these cases are not typical.
For every family business that succeeds in transferring control from one generation to the next, there are likely to be several family businesses that fail due to mistakes in succession planning. One of the biggest mistakes made by all successful first generation founders, according to entrepreneur Kevin O’Leary, is that a family patriarch or matriarch believes that the right decision is to hand over the business to their children.
Given the number of family businesses in the US and around the world, this is a huge problem.
The majority of businesses in America are small and medium-sized private companies, and many were started by a single entrepreneur and have been very successful, but O’Leary says that when the business runs in the family, it’s not just about money, it’s relationships.
“I’ve seen this in my own portfolio … it’s heartbreaking to see people in the same family tear families apart,” O’Leary said at a CNBC event in August.
This division is most damaging in family succession and often results in the founder’s wealth dwindling over time.
“When companies are very successful, it is often because the founders, a mother or a father, have tremendous operational skills, but those execution skills may not be available in the next generation. That is why we see American wealth evaporate within four generations, “Leary said.
Leaders who study family businesses and people who grew up in them say that O’Leary’s warning about the unique dangers and emotionally charged nature of family business succession planning is true.
“Great business leaders have learned to create infrastructure,” said O’Leary, whether from within their own families or, if the better option, from professional ranks.
This does not mean that children are denied access to family wealth or a say in maintaining them, but they may lack the skills to build a business. The best founders, O’Leary said, know when it is advisable to make arrangements so that professional managers oversee the business while maintaining board seats for children.
A prominent example from the USA: Berkshire Hathaway. Warren Buffett has not chosen one of his own children to succeed him. Instead, he has brought his son Howard to the company’s board of directors for years and recently also his daughter Susan to the board, not for operational decisions but for “culture. Buffett’s son Peter is the director of the Susan Thompson Buffett Foundation, which manages Warren Buffett’s charitable giving and is named after his late wife.
“All of my three children are dedicated to cultivating the local culture,” Buffett said last week following the company’s latest earnings report to the Omaha World-Herald. “They have an unusual devotion for that.”
O’Leary says that for the most part he’s seen the same founders who say they are handing a business to a child, admitting that the child does not have the same skills that they did when they started the company Company had.
“That way, companies lose all of their value in a few generations,” he said. “It worked. It’s history. Execution skills are really hard to find.”