The idea of the family enterprise is practically an article of faith when it comes to American business.
But how much of a reality is it? And do family businesses generally survive from one generation to the next?
To begin with, let’s make clear that there are many family-owned businesses in the United States. In fact, consulting organization Family Enterprise USA estimates the figure at around 5.5 million entities.
But the average life span of a family business is fewer than 25 years, meaning that only a distinct minority of them remain in the family over time.
The stats are stark. Here’s how they break down by generations:
- Business passed to the 2nd generation: ~40% of family owned entities
- Business passed to the 3rd generation: ~13%
- Business passed to the 4th generation: ~3%
When asked for their opinion, about half of the owners of family businesses stated that they would like to see the business stay in the family when the next generation comes along.
And for larger family businesses (those that employ 20 or more workers), nearly three-fourths would like this to happen.
But wishes and expectations aren’t the same … because only ~23% of these same respondents actually think that a transition to the next generation of family members is “likely” to happen.
At my company, we have some clients – perhaps 15% of our customer base — that are into their 2nd or 3rd generation as family-owned entities. But in my view, it’s highly doubtful that the next generation of family members will end up in charge at most of them.
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As somebody who ran a family-owned business for 20 years, I can tell you how fraught with danger they are.
But of course, few micro and small businesses show real staying power, family-owned or not. Most are undercapitalized. Many operate in fickle niches. And many tend to lean (often excessively) of the visions and energy of a single founder. That can make it hard to pass the baton.
But family enterprises come with an added ingredient for dysfunction, because families relate to each other emotionally, not rationally. So when it comes time for a changing of the guard, there’s more than balance sheets to take into account.
And of course, with inheritance taxes going up, some families just can’t afford to pay the IRS and keep the doors open. A sale or liquidation becomes the only option.
There are people out there who specialize in helping families through generational transitions. In fact, I have a good friend who does just that. But suffice it to say, it’s always a good idea to do some remote planning.
Our survey work shows that the average age of all small businesses with sales between $100K to $10 mil is 25.7 years, so this group is right in line.
There is a bigger looming issue for all these businesses. Twenty-nine percent of the owners are already 65+ in age and the number grows every year. There are too few young entrepreneurs that either have the stomach or the financial capacity to own their own business. The latter has been highly influenced by student debt.
This is a problem that receives little if any coverage.