As Dominic Toretto once said, “Without family, you’ve got nothing.”
The central protagonist and patriarch of The Fast and the Furious franchise knows a thing or two about a family business.
True, that business tended to involve illegal heists, street racing, and espionage, but it was all about family, nevertheless.
The real-world stakes in family-owned businesses are no less dramatic — they employ tens of millions, yet mismanaged leadership transitions can threaten trillions in value.
Family-owned businesses power the U.S. economy: 32.4 million enterprises generate $7.7 trillion in GDP and employ 83.3 million people, according to the University of North Carolina.
“There are huge advantages to being a private, family-owned business,” Ryan Young, president and CEO, Young Electric Sign Company, Salt Lake City, Utah, said in an interview with Family Business Magazine. “One is the ability to make decisions and investments on a decade or multi-decade time horizon. But the key to being able to endure as a family business is stewardship.”
“Personal motivation inspired just by one member or multiple members of the family trying to increase their wealth or their power is what kills family businesses,” he added.
Family-owned businesses power the U.S. economy.
Image source: Shutterstock
Succession is critical in family-owned businesses
Young said that while the company is 105 years old, “we’re proud of our entrepreneurial success.”
“A lot of companies have a hard time reinventing themselves, but we’ve had a streak of successful ventures going back decades,” he said.
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Succession is a critical issue facing family-owned businesses, according to a 2023 PwC survey, which found that “families may be loath to discuss succession planning” when the business has been thriving for decades.
The firm said that 75% of respondents have a shareholders’ agreement, while only 64% have a will — one of the most foundational governance documents.
Reticence can stem from CEOs reluctant to step down or a missing heir apparent.
However, with 78% of respondents saying that protecting the business as the most important family asset is their top long-term goal for the next five years, and 72% saying they want to ensure the business stays in the family, succession planning needs to be a priority.
In 2021, only 34% said they had a robust, documented, and communicated succession plan in place, PwC said.
“Mismanaged succession at family-owned businesses has far-reaching implications given that these businesses generate more than 70% of global GDP and employ approximately 60% of the worldwide workforce,” the consulting firm McKinsey said in a February 3 report.
“And there is much more at risk for family-owned businesses beyond just erosion of shareholder value: The family’s reputation and legacy are also on the line.”
When done well, however, CEO succession can both preserve the family’s vision and drive institutional renewal, McKinsey said.
Family-owned businesses consistently outperformed their non-family-owned counterparts, with returns to shareholders that were twice as high as those of non-family-owned businesses from 2012 to 2022.
Firm cites best-in-class transitions
“CEO succession at family-owned businesses defies one-size-fits-all solutions,” the report said. “Every family operates within a unique context, influenced by generation, size, family dynamics, and business scale. Thus, a change in leadership requires a more tailored approach.”
McKinsey said that CEO succession at family-owned businesses follows one of four transition archetypes: family to family, family to nonfamily executive, nonfamily executive to nonfamily executive, and nonfamily executive to family.
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Poorly managed CEO successions can potentially wipe out up to $1 trillion in market value per year, McKinsey said, citing Harvard Business Review, and the firm’s own research found that family businesses are not immune to the risk.
Family businesses often underperform after a new CEO takes the helm, and the firm noted that on average, total shareholder value declined 5.7 percentage points in the five years after the transition, compared with the five years immediately before the transition.
Revenue growth and EBITDA margin growth also declined after CEO changes, McKinsey said.
However, slightly over one-third of family businesses bucked the trend of post-transition value erosion, as they elevated operational performance after the CEO succession, attaining higher average total shareholder value and growth in EBITDA and revenue.
McKinsey’s analysis revealed several practices make for “best-in-class transitions,” including evaluating multiple successor candidates, establishing and upholding neutral governance mechanisms, and enabling non-family-executive successors to think and act like owners.
“Because the CEO succession journey unfolds over many years and shapes the business’s future, selecting and preparing the next CEO is the family’s most important investment,” McKinsey said.
“It is critical, therefore, that families approach this moment with the same pragmatism, planning, and rigor they would bring to their highest-stakes capital projects.”
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