So, Your Parents Gave You the Keys to the Company
Congratulations! Your parents just gave you the keys to the company and now you’re going to do what?
A whopping 40% to 60% of you are going to flat-line what your parents built, depending on who’s stats you believe, and only 10% of you will survive the third generation. Almost every second generation owner I encounter thinks it won’t happen to them. When I was trustee, over half my cases were companies in the hands of second generation operators. Every one of those companies were handed over in good condition and either lawn darted or deteriorated to the point of critical condition under their control.
Many of these companies were handed to offspring who had been enabled by their parents their entire lives and never held accountable as they grew up and thus were unqualified to do much of anything. They were kids that grew up, often ignored by busy parents and had everything handed to them without ever working hard in their lives. Surprise, surprise, when they suddenly have to really work!
It doesn’t take long before they stop minding the business and problems start to creep in, because solving complex and difficult issues would require skills and stamina they just don’t have. There is a somewhat nonsensical saying that if the first half of your life is hard the second half will be easy and if your first half was easy the second will be hard. The idea is that when you are challenged, you develop skills.
Some of these offspring think they are working hard when they show up and don’t know how to do the heavy lifting that is necessary to keep the company afloat. I knew one second generation CEO, “2Gen” as I call them, who did nothing all day but look at employee expense reports because that was the job his father gave him without teaching him to do anything else. By the time I got involved it was like a satellite burning up in the atmosphere with no ability to get that thing back into orbit. What remained was salvage, however the expense reports were in good order.
The biggest single disadvantage that a 2Gen operator has, regardless of talent, is that the credibility bar, because they are offspring, is much higher. It’s assumed that talent didn’t get you in your role and you are there only by birthright. You could be the best company leader to ever walk the planet in the last five hundred years and people would still quietly hold some skepticism until you’ve proven yourself. This also means that to get the respect of outside talent you hope to attract, you have to prove that you can hold your own, not by birthright, but by absolute capability. This is no small challenge.
The low survival rate of 2Gen companies isn’t necessarily the fault of that second generation. There is nothing worse than someone handing you a job you don’t really want and expecting you to hold it for the remainder of your life, especially when the company faces real challenges. I’ve met multiple 2Gen CEOs who never really wanted the job their parents handed them in the first place. They had other passions they wanted to pursue, but felt a sense of duty to compromise who they are for the sake of family tradition.
Just to be clear, the survivability of companies that are thirty years old or older while managed in the hands of someone unrelated to the family isn’t all that great either. Market forces in the form of competition, indirect economics, labor costs, can all bring a company to its knees before anyone knew what happened, most having nothing to do with the talent of the 2Gen owner. This point couldn’t be better illustrated than in the book “Big Bang Disruption” by Larry Downes and Paul Nunes that highlights the plight of companies that found themselves obsolete overnight with no warning. Products such as roadmaps, followed by car-mounted portable GPS navigation methods that were ultimately clobbered by smart phones and built in GPS.
Now that you have the keys to the company a lot can go wrong and it’s up to you to consider every possibility as you continue with the work they started. Not only must you become an expert in your role, you must also be thinking far ahead and be prepared to pivot if necessary.
There are some outstanding 2Gen CEOs who earned a reputation as solid leaders while others think that change in ownership is time to party or spend the company’s money on a garage full of Ferraris, while the company is starved for cash. We know of one CEO who was handed all the tools to start a new version of their company and did exactly that.
I was appointed trustee of a heavy industry company where the successful and well-loved founder married someone much younger who had a son from a prior marriage. The founder died suddenly and his widow, not knowing how to run the company, turned the company over to her son who’s only prior experience was that of a pest inspector. He destroyed the company in a tiny fraction of the time it took to build that once great organization. When I asked him what went wrong, he just shrugged his shoulders, not having any idea what he just did to the lives of so many families. He didn’t seem to care either. Just because you got the keys to the company doesn’t give you the right to ruin the lives of those who dedicated their lives to building the organization in the first place.
I’ve met others who because of great parenting understood the duty of CEO from the time they were young and continued to build outstanding organizations. I often think of Steve Forbes and his ability to step into the shoes of his father Malcom who was a very colorful and dynamic leader with tremendous business influence and the friend of extremely powerful people worldwide. Malcom inherited the business from his father who started the publishing empire and properly raised Malcom. With each generation from Bertie Charles, to Malcom then to Steve, each created their own unique imprint as technology and their industry and readership changed. They are a rarity in the corporate world.
Taking over a family-owned company is a huge responsibility and shouldn’t be taken lightly. Once in a while I run into people who genuinely think that as you move up the corporate ladder, the role is easier and that you have to less work and not more. It couldn’t be more backwards. I can’t think of a single successful CEO/owner who reached their initial success without hard work. It’s a fallacy that as a company grows the CEO has less to do. It’s the complete opposite.
For those of you who are getting the keys to the family company, I have a few tips:
Build a strong board made up of people who know the history of the company and at the same time add additional members who have current successes in their lives. It’s important to know the difference between continuity and obsolescence.
Seek and follow good advice from those who have real experience in areas where you have concern.
Know your industry landscape inside and out. Don’t trust any one source and continually cross reference the data to prevent a scenario where you only see what you want to see. If there is trouble on the horizon, take it seriously and be prepared to act.
Evolve with the company to take advantage of technology and trends as they appear. I’ve seen numerous companies that were in serious trouble simply because the founder was so unwilling to adopt new technologies or modernize their equipment.
Embrace positive change. There are new companies springing up every day led by young vibrant teams willing to challenge the conventional and implement faster ways of doing business. The death of the fax machine to be replaced by DropBox, scanners and PDFs, and email attachments, to now be replaced by Evernote, Slack and others.
Use dashboards to measure your effectiveness and consider both short and long term indicators of your overall progress to keep surprises to a minimum.
Assume you will put in much longer hours than your parents. That you will have to work hard to earn and sustain the respect of your coworkers.
If you are not up to running the company, please step aside and get a terrific manager to take over while you check in periodically. There is nothing wrong with you pursuing another passion while someone else runs the company on your behalf. After all, this is what happens when you’re a shareholder in a public company.
No matter what, someone has to take charge. Do not leave the business unattended or group-managed by siblings who don’t care. Make sure that interests are aligned so that everyone cares.
If you decide to run the company, regard the role as continuing education and take the approach that you’re going to continue to evolve your management style to build the best organization possible.
If you really hate the business, don’t go in and run it into the ground. Sell the business while it has real value so you can pursue your passion. There is nothing to be gained by holding onto something that you don’t love only to be a part of it becoming worthless. Don’t sell without considering the timing as the value can be dramatically different.
If you don’t love the business, consider selling to the employees who will have a strong interest in the continued success of the company. There is an art to selling any company so it is very important to seek out multiple opinions before making that decision to sell, even to your employees.
Your pursuit of happiness can have a profound impact on the success or failure of the company now in your control so how you are in the world actually matters. Take the role seriously and you could see the business flourish. On the other hand, if it’s not your passion, do something about it and don’t let the company tank.