The Family Business Survival Guide A 5-Step process to beat the Family Business Curse

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Disclaimer: This article is for general information only and is not meant to address specific client cir-

cumstances.

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How to beat the Family Business curse using a 5-step for-

mula

Sample this: 70% of Family Businesses fail or get sold in the first

generation. Close to 99% of Family Businesses fail or get sold in the

second generation. And only 3% of Family Businesses survive in

the third generation and get passed on the the fourth.

The Brazilian saying goes “Pai rico, Filho nobre, Neto pobre”, which

translates to “Rich Dad, Noble Son, Poor Grandson”. Or the Chinese

one which goes “Fu bu guo san dai” which roughly translates to

“Wealth does not pass Three Generations”.

We don’t hear too much about Family Businesses failing. That’s be-

cause by the time they fail they are already out of the public discourse.

The media focuses on businesses which are doing well, not on busi-

nesses which are on the path to failure. The exception to this is where

the family is feuding, which gets wide, unwanted publicity.

Don’t let the lack of publicity fool you - The Family Business curse

hits even large and well-run businesses.

These statistics are both sad and alarming. An entrepreneur's blood,

sweat and tears go into building a successful business. Less time with

family and not being able to follow their other passions are two of the

many sacrifices made. It seems appropriate that the business should

survive much beyond the founder. That members of future generations

get the opportunity to grow the business further. Unfortunately, it

doesn’t work that way.

So why do Family Businesses fail? Our experience points to four

key reasons

“Pai rico, Filho

nobre, Neto pobre”

(Rich Dad, Noble

Son, Poor Grandson)

“Fu bu guo san dai”

(Wealth does not

pass Three

Generations)

Cadbury was founded in 1824 by

John Cadbury. The family was

involved in management till his

great-grandson Dominic Cadbury

resigned as Chairman in 2000. At

the time of the sale of Cadbury to

Kraft in 2010, the family owned

less than 5 percent equity. In the

1990s and 2000s the growth of

Cadbury significantly declined,

and the stock value plummeted.

One of the founders great-great-

grandsons, James Cadbury re-

cently started a chocolate-by-

post start-up, ‘Love Cocoa’.

James cannot use the Cadbury

name in his branding and has

started the business using his

savings. The separation of the

family from the business is com-

plete.

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Reason # 1: Expanding families, low growth

Often, the rate of growth of a family is higher than that of the business.

As time goes, there simply are not enough roles for the family members

to fill. This creates tensions at the workplace and at home. Oftentimes,

creation of an unneeded role within the business is the solution found.

This is postponing conflict. In the medium to long term the same issue

crops up. New positions put an unnecessary financial strain on the

business. It also creates issues in the chain of command and leads to

communication issues. This functional dysfunction impairs the medi-

um to long-term business viability.

“There is always a place for you in the business” is the mindset which

is the usual cause of this issue. Family members are unclear on the dif-

ference between ownership and management. And might be unaware

or indifferent to the need to develop the skills or capabilities required to

manage the business.

Reason # 2: Absence of meritocracy

Related to the first point, a meritocracy based organization is important.

This does not prevent the involvement of family members. It only

means that there is a strong basis for evaluating merit. Yet, it’s difficult

to practice meritocracy in a family business. Replicating the hierar-

chical structure of the family in the business is typical. It is also the

simplest solution. But it results in significant tensions. For example, a

younger sibling may dislike playing second fiddle to an older sibling

only due to age. A non-meritocratic system will not have a process for

matching merit to roles.

Guard against a sense of entitlement among the children. The next gen-

eration in a family business always grows up in a cushier environment.

This is fine, if there is some differentiation between ‘wants’ and

‘needs’. Shielding children from struggles and suffering diminishes

“Sometimes, a little extra ef-

fort is precisely what prepares

us to face the next obstacle.

Anyone who refuses to make

that effort, or gets the wrong

sort of help, is left unprepared

to fight the next battle and

never manages to fly off to

their destiny.”

-Paulo Coelho

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their ability to succeed. Guarding against the sense of entitlement

makes it much easier to put in place a meritocracy.

Reason # 3: Communication failure

My experience is that founders have very strong views on what works

for their business, and what does not. Many times their views are dia-

metrically opposite from their children’s views. And there could be sig-

nificant differences between each child’s views. A natural solution is to

communicate with each other to resolve the differences. Yet, in family

businesses this communication rarely happens. The key reason is the

emotions involved in having such discussions. Conflict at office could

lead to conflict at home.

Inter-generational conflict in Family Businesses is hardly a new trend.

Harry Levinson in 1971 talked about it in his fascinating Harvard Busi-

ness Review article “Conflicts that plague Family Businesses". He

A man spent hours watching a butterfly struggling to emerge from its cocoon. It managed to make a

small hole, but its body was too large to get through it. After a long struggle, it appeared to be exhausted

and remained absolutely still.

The man decided to help the butterfly and, with a pair of scissors, he cut open the cocoon, thus releas-

ing the butterfly. However, the butterfly’s body was very small and wrinkled and its wings were all

crumpled.

The man continued to watch, hoping that, at any moment, the butterfly would open its wings and fly

away. Nothing happened; in fact, the butterfly spent the rest of its brief

life dragging around its shrunken body and shrivelled wings, incapable

of flight.

What the man – out of kindness and his eagerness to help – had failed

to understand was that the tight cocoon and the efforts that the butterfly

had to make in order to squeeze out of that tiny hole were Nature’s way

of training the butterfly and of strengthening its wings.

Sometimes, a little extra effort is precisely what prepares us to face the

next obstacle. Anyone who refuses to make that effort, or gets the wrong sort of help, is left unpre-

pared to fight the next battle and never manages to fly off to their destiny.

The lesson of the butterfly - Paulo Coelho

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takes a close look at conflict within the family especially between the

Father-Son and Brother-Brother.

Founders might do well to listen to Peter Drucker

"The final test of greatness in a CEO is how well he chooses a succes-

sor and whether he can step aside and let his successor run the compa-

ny"

Reason # 4: Founder attachment to leading

The founder has an attachment to the business like no one else has or

will have. It’s his/her baby and the founder is very possessive of it.

Their identity is tied to their business. The strong attachment was the

reason for strong business growth. Yet, beyond a point, the attachment

stymies the growth of the organization. Critically, it prevents the

grooming of a successor. It also increases the dependence of the busi-

ness on the founder.

Many founders are stuck in a quandary. On one hand they want to get

out of the repetitive aspects of the business. On the other, they think

that no one else can take care of the business as well as they do. And

they are not sure what life is going to be like after they let go of control

of the business.

Can we do anything to beat the curse? My magic 5-step formula

towards ensuring the legacy of the founder lives on

Step 1: Deciding on ownership

Three options are available. One- giving away for philanthropic pur-

poses. Two-selling to a third party and Three-keeping it within the

family. Various combinations of these options are possible. This is one

of the first decisions a founder should take. Many of the other actions to

"The final test of greatness in

a CEO is how well he chooses

a successor and whether he

can step aside and let his suc-

cessor run the company"

- Peter Drucker

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beat the curse are dependent on this. The founder needs to decide on the

level of involvement of other family members in this decision.

It does not end there though. Most families decide on retaining all or

some part of the ownership of the business. And often, ownership is

equally shared between children. Such a model, can lead to disputes

between family members involved in the running of the business and

those who are ‘pure owners’. Another model is the nested model. Here,

some assets held by the entire family and some by different branches of

the family. This is a good model for Family Businesses from the 3rd

generation onwards. It can also work for stable 2nd generation business-

es. The potential for family disputes could reduce with the nested mod-

el.

The role of the Family in ownership and running of the business needs

to be well thought through. The Three Circle Model of the Family

Business system sug-

gested by Professors

Renato Tagiuri and

John A Davis at the

Harvard Business

School can be helpful.

It provides a good

starting point for de-

ciding on who fits

into each of the 4

family interest

groups. The interac-

tions within and be-

tween the 7 interest

groups can also be

decided.

Three circle model of the Family Business

© Taguiri and Davis 1982

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Step 2: Preparing the next generation

A typical family business does not grow fast enough to employ every

family member. Criteria need to be set for selecting family members

who join the business. This may include educational qualifications. It

may also include successful experience of working in a different com-

pany / companies. You need to move from “There is always a place for

you here” to “people with demonstrated capabilities and skills have a

place here”.

Family members need to be taken into existing roles in the business.

And these roles need to have clear roles and responsibilities. Once they

join the business, these family members need grooming. A common

grooming process involves working across functions and roles in the

organization. This helps the family member become familiar with the

business. It also helps the founder understand the strengths and weak-

The Mitchell family's Rules

The five-year rule

“Our sons had to work five

years elsewhere after fin-

ishing college. “

No guarantees

“a family member was not

entitled to a job simply

because their name was

Mitchell. They needed to

be qualified, possessing

both the skills and the pas-

sion to grow within their

area of responsibility.”

1. The five-year rule “Our sons had to work five years elsewhere

after finishing college. This rule was not popu-

lar with our father, who was still very much

with us. He worried that we were sending his

grandsons “out to pasture” and that we might

lose some of the great talent and passion for

the business that his grandsons had already

demonstrated.

While Bill and I recognized that risk, we felt

they had to gain experience, self-confidence

and an understanding of what a real job is

about in the real world. They needed to know

what it meant to be hired, transferred to a dif-

ferent city, promoted, pushed, and pulled by

someone other than their father or uncle. If

they decided on becoming an astronaut or a

podiatrist instead, we would support it whole-

heartedly.”

2. No guarantees

“The second rule was that a family member

was not entitled to a job simply because their

name was Mitchell. They needed to be quali-

fied, possessing both the skills and the passion

to grow within their area of responsibility. Our

sons ended up choosing different areas: one

picked finance and administration, another

sales and merchandising, another marketing,

and several managing newly acquired stores.

And now, after 20 years, our sons and nephews

hold leadership positions within our company.

Two of them are co-presidents and will soon

become co-CEOs.”

Source: Jack Mitchell quoted in Fortune maga-

zine

The Mitchell family runs a $100 million + speciality clothing store business in the USA. They have

two firm rules for the next generation

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nesses of the individual. The strengths are good indicators of the areas

of the business most suitable for the member to join. Do not ignore the

weaknesses! Like any other employee, encourage the family member to

work on their weaknesses.

It’s important to guard against the ‘halo effect’. It is easy to view neu-

tral or ambiguous performance of the next-gen family member in a pos-

itive light. An external advisor could help in bringing objectivity into

the performance appraisal. An external advisor could also help in

coaching the family member in working on weak areas. Communica-

tion is the key during this step. Considering the personal relationship,

it’s quite easy for family members to feel offended.

Step 1 Reality check

A realistic assessment of where a business stands today, key drivers of success and an understanding

of what the future might look like. A traditional SWOT analysis backed by appropriate research and

internal brainstorming helps.

Step 2 :Articulate vision and objectives

The vision needs to be clear and with ownership across the top management. Moreover, it needs to be

developed in the context of the discovered reality. Key objectives for the business are also devel-

oped.

Step 3 Make choices

Put your ‘strategic hat’ on! Understand the paths available for winning and generate a set of strategic

possibilities for your business. The business makes choices based on a) the conditions required to

make each possibility a success and whether these conditions are realistically surmountable and b)

the alignment with the business vision.

This step should result in a coherent integrated strategy. A strategy which guides the business on

‘what, where, how and to which customers to sell to’.

Step 4 Plan Actions

Take off your ‘strategic hat’ and put your ‘planning hat’ on! Here the business understands the re-

sources required to make the selected strategy happen. Further the business sets out an action plan

for the near term (around 1 year). The action plan also sets indicators to measure success.

The 4-step Strategic Planning exercise

4-step Strategic Planning

1. Reality check

2. Articulate vision and

objectives

3. Make choices

4. Plan Actions

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Step 3: Professionalizing

Professionalization does not only mean inducting professionals into

your business. Professionalization means that the business becomes per-

son-independent. That means having a Strategic Plan for your business.

It also means introducing streamlined and standardized processes and

systems into the organization. Set processes and systems make succes-

sion easier. The key processes, activities and tasks should have a 'who'

and 'how'.

Like any other business, an organization structure needs to be in place

in a Family Business. Documented designations and job descriptions

need to complement the organization structure. The job descriptions

detail the key accountabilities of each employee. An organization

structure should be dynamic. It also needs to respond to growth of the

business and new opportunities and challenges. That said, never

change the organization structure to accommodate a family member. It

can lead to a loss of morale for non-family-employees. It can even lead

to creation of parallel power structures within your organization.

Getting professionals into the business and introducing standardized

processes go together. Professionals prefer companies which have their

processes in place. Where assignment of responsibility for each task is

clear. And where performance is the basis of promotions and incen-

tives. At the least, basic systems and processes need to be in place be-

Be aware of your long serving employees when

bringing in new professionals. Long serving em-

ployees have sometimes been with the business

since inception. More often than not they have the

deep trust of the founder. In return for the loyalty

and trust, the employee gets regular promotions

and has a direct reporting relationship to the

founder. Even if the employee does not directly re-

port to the founder, there is significant direct inter-

action between the two. But, these employees may

not be the best suited to handle roles within an ex-

panded and more complex business. In this case,

promoting such employees can lead to lower mo-

rale. It can also significantly increase office poli-

tics. How do you deal with this? Objectively assess

the capabilities of the long-serving employees.

Sometimes, it makes sense to carve out special roles

for them. The special roles could leverage their

familiarity with the values and culture of the organ-

ization.

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fore hiring professionals. Or, make introducing processes a key role of

the key professional you are hiring.

Attracting professionals also means that the business adapts to employ-

ee expectations. The founder might have worked 24*7 while building

the company. And expect the employees to show similar zeal. But, em-

ployee expectations might be very different. Work-life balance is a crit-

ical aspect many employees expect. formal training and innovative

ways of rewards and recognition are also important aspects.

Professionalizing is not a simple process. Making processes are rela-

tively simple. Attracting the right talent is slightly more difficult. But

implementing the new processes and resisting the temptation to bypass

them is very difficult. The most difficult part of the process is reconcil-

ing the old processes and the new. Staying the course is important.

Discussion and agreement within the family is critical for professionali-

zation. On the strategic plan, everyone in the family does not necessari-

ly need to agree. That said, it is critical that disagreements and points of

view are articulated and discussed. In my experience, a

non-emotional, ego-free discussion resolves most differ-

ences. The only remaining divergence of views are on the

relative focus on the various parts of the existing and new

businesses. Here too, with the help of an independent third

party, it is possible to find common ground.

Step 4: Articulating values and vision

No one does or will understand and manage a business like

a founder does. All founder driven business have a vision

and a set of values within which to meet that vision. Most

times, it resides in the founder's head. These need articula-

tion since they act as a guiding light for the organization in

times to come. While values should be inviolable, the vi-

“ The Groups organizational structure is

decentralized, which fosters efficiency,

productivity, and creativity. This type of

organization is highly motivating and dy-

namic. It encourages individual initiative

and offers real responsibilities- sometimes

early on in one’s career., It requires highly

entrepreneurial executive teams in each

company. This entrepreneurial spirit re-

quires a healthy dose of common sense

from managers, as well as hard work,

pragmatism, efficiency, and the ability to

motivate people in the pursuit of ambitious

goals. One needs to share and enjoy this

entrepreneurial spirit to – one day- man-

age a subsidiary or company of the LVMH

group.”

-LVMH Group

Louis Vuiton

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sion and strategic plan needs flexibility. This will better allow the

organization to respond to external environment changes.

Studying the stated values of the top 100 family owned and top 100

non-family owned businesses had some interesting findings. Un-

surprisingly, the top 3 keywords in the values for both businesses

were the same- Integrity, Respect & Customers. However, family

businesses were inclined towards some values, as compared to non-

family businesses. These included the values of gen-

erosity, humility, communication, service, quality,

creativity and entrepreneurship.

Some great examples of these values in action for

IKEA and Louis Vuitton (LVMH)

Here again, communication within the family is criti-

cal. Each family member involved in the business

needs to be fully bought into the values.

Step 5: Planning the transition

The transition refers to the transition of either/both of

ownership and management.

Plan the transition of the business to the next genera-

tion well in advance. Plan in advance when transition-

ing from a family business to a professional organisa-

tion. This means planning the transition at least 3-5

years before the change. Identifying talent, grooming

successors, creating shared values and vision need time and effort.

While this seems like a long time, consider the returns.

The time, effort and money invested in planning the transition over

5 years is well worth it. It can be make the difference between the

business flourishing for 15 years versus 100 years. Seems like a

good return!

“The stone wall is a powerful symbol, for

the grit and determination of the people of

Smaland, and it helps us at IKEA to re-

member our humble origins. The harsh

conditions that Smaland folk have tradi-

tionally had to struggle with – fields strewn

with boulders and thin soil providing mea-

gre yields for farmers- have forced the

people in this part of Sweden to live on

their wits. It has made them determined

and tenacious, but also humble. The suc-

cess of IKEA has been built upon enthusi-

asm, not on cost- consciousness, on a will-

ingness to lend a hand and take responsi-

bility, on humility before the tasks that lie

ahead and on simplicity in the way we

think and act”.

-IKEA

IKEA

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Conclusion

As in any other business, a Family Business needs to keep evolv-

ing. All businesses, whether family or non-family find sustained suc-

cess difficult. A study done by Chris Zook and James Allen and quoted

in their book Repeatability found that on average less than one in five

high performers in any given decade sustained their performance over

the next decade.

Ownership of holding by GM Rao, who held

nearly 100 per cent, was being settled in four

family trusts, with the husband, wife and Rao

holding equal voting rights in each.

Succeeding Rao would be anyone selected by

the husband and wife. If they could not agree

then the third trustee would be the oldest di-

rect descendant member of the family.

The second-generation husband and wife

would select their own successor trustees. The

three trustees of each trust would select the

voting trustee for the voting trust.

There was also a clearly defined process for

leadership succession: Raju, Kiran and S.B

were to a successor unanimously from

amongst themselves upon the announcement

of Rao’s pending retirement. If they could

reach no unanimous decision, then a family

appointment board consisting of two inde-

pendent directors and a facilitator (i.e dead-

lock facilitator) would interview all three and

make a final binding decision.

Further stipulations were that Rao would re-

tire by the age of 70 at the latest, with a suc-

cessor chosen three years before his actual

retirement date. Until that date, the successor

would be appointed deputy chairman or a

similar designation, with the leadership transi-

tion conducted in a phased manner.

The successor would serve for five years and

then offer himself for re-election. The future

family directors were to retire at 65 years of

age

To make his mantra of “keeping the family

together“ work in practice, Rao also included

several formal organisational structures in the

constitution. This included the family council,

the family business forum, the non-business

family forum and the founder’s business of-

fice.

The Constitution also provided a family code

of conduct to ensure effective family govern-

ance. The family agreed that the constitution

would undergo a formal review in every gen-

eration and once every 10 years. Constitution-

related proposals from at least two members

belonging to different units would go to the

family business forum for comments before

the proposals were submitted for approval by

The GMR succession plan

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Iv Advisors. All rights reserved.

We have seen the 5-step formula for a Family Business to increase its

odds of sustaining far into the future.

Are they easy to implement? Definitely not!

Can we make it easier? Definitely!

How do we make it easier?

Open and honest communication within the family

Open-mindedness. Denial is dangerous. We can’t address chal-

lenges in the external and internal environment without first ac-

knowledging them

Be brave. Change is scary. Don’t let the fear of change derail

the future of your Family Business

What next? Go beat the Family Business curse!

The 5-step Formula

1. Decide on ownership

2. Prepare the next generation

3. Professionalize

4. Articulate values and vision

5. Plan the transition