Are Family-Owned Businesses on the Way Out?

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America’s mom-and-pop shops are key drivers of the U.S. economy. Many grow from kitchen counter enterprises to brick-and-mortar behemoths. But more than a quarter don’t have a board of directors and nearly half haven’t prepared contingency plans to cover the loss of a leader.

This lack of succession planning threatens the long-term success and competitiveness of family firms, according to the findings of a recent Deloitte survey, Perspectives on Family-Owned Businesses; Governance and Succession Planning.

“Family-owned businesses are a huge component of the U.S. economy, and their attention to good governance practices can have an impact on success and failure,” says Tom McGee, national managing partner of Deloitte Growth Enterprise Services, Deloitte LLP. “Tapping into the insights and experiences of an engaged, diverse, and independent board can yield significant operational advantages in the long run. Given that these companies are considered engines of job creation, a sharper focus on governance is important to their longevity, and to the success of our economy as a whole.”

McGee says that it’s not enough simply to have a board of directors lending objective advice and consistency of vision over a family business’s lifetime. The composition of that board is important, as well. “Members of the board must reflect the changing demographics of the world we live in,” he says. “They should be expected to bring rich and varied expertise and backgrounds to the role, and also be held accountable for their success in guiding the company’s growth and future.”

Perhaps the biggest threat to the generational success of a family firm is the failure to plan ahead for the transition of the business to heirs or buyers. According to the Deloitte survey, close to half (49%) of respondents say they only review succession plans when a change in management requires it.

“Many family-owned businesses struggle to maintain their family-owned status past the second generation,” adds McGee. “And while succession planning can be an uncomfortable topic for owners, especially founders, it is critical to the success of an enterprise. By creating a stronger governance and succession strategy, a family-owned business is much more likely to preserve the founder’s long-term vision for generations to come.”

222 owners and executives of mostly mid-sized, family-owned businesses were surveyed. Approximately 70% of the respondents represented companies with revenues of $100 million or more, while 25% were with companies generating revenues of $500 million or more.

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