In the last blog entry I wrote about the importance of entrepreneurship in multi-generational family enterprises. This entry continues the subject of entrepreneurship in family firms identifying critical signs that the spirit of entrepreneurship must be reborn in the family enterprise, and exploring how the potential for entrepreneurship can be recognized.

In the beginning was the entrepreneur and the entrepreneur founded a business. And the business took off, acquired a market share and grew. Members of the founder’s family, son, daughters, cousins–came into the business and took on key roles. The founder’s family had families of their own and their children became next-generation owners and managers. The family continued to grow, a third generation was poised to take their places within the business. Time has passed, the world has changed, and now the family and the business is faced with some crucial questions.

• Is the original business model still viable? Is it flexible enough to allow for the changing mindset and work styles of upcoming generations?
• Are the family’s business values and vision sufficient to take their ventures forward into generations to come?
• Are the original set of business products and services in step with the demands of today’s marketplace?
• Are there sufficient opportunities within the business for the growing number of family members?

If the answer to any of these questions is “no,” it is time for the return of entrepreneurship.

Through entrepreneurship the family business can transform into an entity with much more potential and outreach–a “business family.” Through entrepreneurship the knowledge, connections, assets of the original business as well as the family can be leveraged to begin new ventures, spark innovation, re-work organizational structures, institute whole new business models, update products or services offered by the original business, and create entirely new streams of wealth–thus providing a wider range of opportunities for the family going forward.

Although there is no absolute set of characteristics that define an entrepreneurial nature, [i]here are a few suggested traits that may be considered necessary and thus should be encouraged as a business family plans for its future:

• The ability to learn from others – entrepreneurs tend to be good at networking. They benefit from being members of peer groups such as a family-business mastermind group where they can learn best practice ideas from others.
• Self confidence – a belief in their own abilities and ideas.
• Being innovative/inventive – being able to generate ideas, either for new products/services or new ways of applying them.
• Self motivation and determination – the drive to keep going and see things through.
• Showing initiative – it is necessary to have not only the ideas for the business, but also the detailed plans to achieve objectives (both thinking and doing).
• Analytical abilities – capable of researching and evaluating each aspect of the business, from development, through finance, production, to marketing and sales.
• The ability to make decisions and to take (considered) risks.
• A focus on results that ensures products are sold for a profit.

Families that watch for these traits in their family members will benefit from extending their resources to enterprising members of upcoming generations.

Among North American businesses a surprising figure of almost 80% are family owned and run. However less than 60% of these survive into the second generation of the founding family, and a mere 12% survive under the control of the family’s third generation members.

A general pattern in family business can be stated in this way: The founder and the first generation start the business, determining its original focus and setup.

The 2nd generation moves into the existing business structure and function as management. Changes and innovations are less rapid than those that were needed to start the business. Professor Matt Allen of the Entrepreneurship Division at Babson College points out that family businesses are characterized by efforts on the part of ownership to balance financial performance with maintenance of family control and benefits for future generations. This balancing act, though crucial, is nonetheless detrimental to focusing on planning the next steps.

By the 3rd generation the world is vastly different than it was two generations ago, but the business has become tradition bound. Inevitably new technologies are being born, older ones lose their value in the marketplace or disappear altogether. The founder’s original business model is no longer viable or has become too narrow. The family itself has grown to the extent that the business cannot offer opportunities for all interested family members to play an active part. Conflicts arise among family members with regard to best practices and ideas as to where to take the business going forward.

Beyond this point the business either changes or does not survive into the next generation. An entrepreneurial mindset must be brought back. Critically, this must be larger than just passing the existing business to succeeding generations. A capacity toward innovation and the creation of new streams of wealth must be nurtured and supported.

Professor Allen notes that because family businesses focus on maintaining ownership across multiple generations, they possess unique resources that give them strategic advantages in entrepreneurial endeavors. Since top leadership positions are often filled by family members, the organization holds onto important knowledge and social connections throughout transitions in leadership. Thus family businesses have diverse networks that can be accessed in pursuit of entrepreneurial opportunities.

At this point a shift occurs from being a family business to becoming a business family, what some call an “enterprising family.” The experience, knowledge and assets gained from running the original business is used to help the next generations of family members to develop their own enterprises thus allowing expansion and the ability to sustain growing family participation.

To continue successfully, an enterprising family must perform a delicate balancing act. The needs of the younger generations must be balanced with those of the elders. Prudent and thoughtful management of assets must balance with the intricacies of family ties. And it must divide assets, resources, and leadership positions in the family and in the business ventures fairly among all family members.

Family-owned businesses are born from many different beginnings. But it stands to reason that the circumstances that inspired the founder are not likely to be what keeps the business going in succeeding generations. What then is the foundation for a truly viable multigenerational family business? What elements will keep harmony and balance in the family, and the business afloat though economic changes, evolving demands of the marketplace, the differing expectations and work styles of upcoming generations? Three ingredients are essential: Values, Vision and Mission. Again and again in my work with family businesses, I find that these ingredients are either missing, or presented in a way that is confused. I cannot see any distinction between them. For example one company stated that their vision is to be number one in the industry, and their mission is “to maximize our effectiveness in the marketplace.” Also the company has made a common mistake of focusing their statements inward. Consequently they do not speak to me as a customer, nor do they engage or inspire their employees and other stakeholders in a meaningful way.

Values

All people, businesses and organizations operate on a system of values. Some are more core or fundamental than others, some change with time as often happens when people witness the birth of their first child. Core values actively influence the way a business behaves and form the basis of a company’s Vision and Mission. Examples of company values can be commitment to environmental sustainability; commitment to innovation and excellence.

Vision

The Vision shines a light on the long-term purpose of a company or organization and is based on the values it espouses. A good vision statement focuses outwardly and speaks in terms of benefit to the audience. For example Teach for America states its vision as: One day, all children in this nation will have the opportunity to attain an excellent education.

Mission

A Mission is about something to be accomplished. One way to recognize the difference between a vision and a mission statement is that a vision is something you see and a mission is based on action.Bristol-Myers Squibb states its mission as: To discover, develop and deliver innovative medicines that help patients prevail over serious diseases.

A client who has a retail store initially stated his vision to be “to expand, opening another store in an adjacent community.” This is a goal, and a good goal. But it doesn’t inspire, nor is it something he might want to hang on the wall behind the cash register for all his customers to read.

The client’s store is located in an ethnic neighborhood. As we explored further I learned that the client saw his store as a source of strength and support to help build the community in that neighborhood. His view of a strong and supportive community became his vision statement. His mission then became to make his store into a place where the culture of this community would be supported and nurtured. With his value for a vigorous ethnic community, vision of what that looks like, and mission to make his vision a reality, this client has his path clearly defined.

This ideally is a formula for empowering and sustaining multi-generational families and family businesses of all types from successor to successor for generations to come.

It’s pretty much common knowledge that products as well as businesses and, in fact, entire industries have life cycles that require adjusting if they are to survive over time.

Individuals, families, family businesses and their ownership also experience life cycles. Many of these have significant impact on the family as well as the business. Some of the milestones, for example, include a child becoming an adult, marriage, children helping out in the business, senior family members retiring or becoming incapacitated, divorce, remarriage, and so on.

In addition to milestone events, there are differences in leadership approaches and styles within family businesses. First generation family businesses are typically characterized as having an entrepreneurial spirit headed by a sole founder. Typical, also, second generations are characterized by a sibling partnership and third generations by a cousins’ consortium.

This blending of family members and styles is magnified with each new generation. For example, I happened to watch an episode of Undercover Boss several weeks ago. This particular installment featured White Castle, a family business now in its 92nd year. I didn’t have time to count, but there were easily 25 to 30 people sitting around the boardroom table, all family members.

Given the fact that most entrepreneurs seem to have –– and perhaps it’s a prerequisite for entrepreneurial success –– an authoritarian leadership style, it stands to reason that a major source of conflict comes from differences in leadership styles of first and second generations. It’s definitely not uncommon for this to occur in family businesses, and it’s not a bad thing.

My experience is that the second generation may naturally have or require a more collaborative leadership style – contrary to the founder’s style – to accommodate the increase in stakeholders.

By the third and fourth generation, the family begins to separate into branches. That’s what the boardroom table at White Castle looked like –– almost several separate businesses under the same umbrella.

And as far as White Castle is concerned, I couldn’t begin to predict not only the differences in work style, but also the divisions that have occurred between those that work in the business and those that do not.

The challenges increase when a focus on growing the business overlooks the needs of family members, as equity family members and future leaders in the business.

The good news is that life cycles are typically always survivable. Recently, for example, I had a conversation with a young man –– married with no children –– whose introductory statement was that his dad had fired him twice. It was obvious that differences in the leadership needs of the business, as well as different leadership styles of father and son, contributed to the problem.

We helped the father and son to understand the unique qualities and benefits of each other’s leadership. And we helped them move beyond the conflict, develop a vision for the business and the family in the next generational, and to work collaboratively on the business as well as on a strategy for the family in the next generation.

We know Intuit for its great money management software, QuickBooks. As a great product it has a great company behind it, which is seen in their desire to understand their customers. They undertook a review of the status of family businesses in the United States. You might be interested in what they came up with:

1. According to the US Small Business Administration 90% of the 21 million small businesses in America are family owned.
2. The largest of family owned businesses in United States is Walmart with $408 billion in revenues and 2.1 million employees (2009.) (The smallest are mom and pop stores like the green markets ubiquitous on corners in New York City.)
3. Return on assets (ROA) is greater in family businesses, averaging 6.65% greater return than nonfamily firms.
4. Family businesses account for 64% of the USA’s gross domestic product (GDP) i.e. ± US $5 trillion.
5. 35% of Fortune 500 companies are family enterprises.
6. The typical American family firm donates US $50,000 annually to philanthropic causes, mostly to local, educational, and religious organizations.
7. The oldest US family business is Avedis Zildjan Company, Inc.(http://zildjian.com), started in 1623 in Norwell, Massachusetts.
8. Family-based companies are responsible for 60% of the nation’s employment and 78% of new jobs created.
9. Daughters are taking on larger roles in family businesses. Today nearly 60% of all family owned businesses have women in top management roles
10. Nearly 40% of family businesses in America will be passing the reigns to the next generation over the next 5 years; and approximately $10.4 trillion of net worth will be transferred in United States by year 2040, with $4.8 trillion in the next 20 years.
11. Yet, just 40% of family-owned businesses survive to the second generation, while only 13% survive to the third generation.

“What are the biggest mistakes family businesses make?” was a recent discussion on Family Business United, a Linked-In Group.

Family business advisors from the U.K. and United States participated. According to this discussion the major mistake in family businesses, as seen by the experts, is poor or inadequate communication about the business and the family in the business. Participants saw a lack of planning – succession planning as well as strategic planning for the business and the family into future generations as a significant concern. Open, honest and complete communication, however, was viewed as the foundation of effective planning and for sustainable family businesses. Poor communication as well as what’s not discussed is characterized by assumptions and misunderstandings, and can lead to significant other problems. A family may easily discuss business but may avoid difficult conversations of family dynamics. This can be a cause for trouble at the time of management and ownership transition.

The debate of the value of consultants has been swirling around, coincidentally, in many of my business communities recently.

One family business researcher from a large third-generation international business, with experience working with consultants, has a presentation entitled the “Good, The Bad, and the Complicated of Consultants.” Another individual in our Family Business Mastermind™ reports his brother opposition to consultants is that he does not want an MBA telling them how to run his business.

Consultants and business coaches can be good, bad & complicated. Every family business I know of, however, who are multi-generational use outside advisers. Each one of them plays an important and distinct role. The consultant analyses your situation and suggest actions to increase productivity, leadership, and increase opportunities for success. The coach believes the client is creative and resourceful and can solve many of their problems themselves – when they know what to do. The agenda for coaching comes from the client in a relationship that is a designed alliance. This is a perspective valuable to both the consultant and the coach.

New York Enterprise Report’s 2013 issue has the most useful business advice from 25 business founders (http://www.nyreport.com/node/83851).   Kent Hoffman from ShoreTel said: “Anyone who is striving to be the best in the world at something has a coach.” Business leaders who hire outside advisors to cover the areas that are not their core competencies are generally more successful than those who try to get through with “true grit.”

Everything works better with planning, and succession in a family business is no different. Survival of a multi-generational business depends on it. Illustrative of this: Mark was one of three cousins in a business whose patriarch delegated responsibilities and left for Florida (the business was in NY). The eldest was the nephew; Mark, a natural leader, was the oldest son, and the youngest son was caught in the middle of the family dynamics.

There had been no succession discussion or any leadership development up to that time. The patriarch was not involved in the day-to-day operations, but returned every 3-4 months to check-in. The business was loosing market share and profitability. Having no equity, the cousins were frustrated in their inability to affect change in the business. Tensions were high when the patriarch was there.

Successful succession (these words having the same prefix always intrigues me) in family business requires both intention and planning. The attached article, How Family-Run Businesses Should Choose Future Leaders, describes a strong foundation for having conversation about leadership succession in a family business.  While primarily addressing the business context, the conversations also applies to the vision of the family itself in future generations.