River Currents

Building a Sustainable Family Owned Business

Posted by Sally Ann Jones on Dec 15, 2015 11:00:00 AM
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Family businesses contribute an estimated 70% to global GDP but statistics show that 65% of family wealth is lost by the second generation and 90% by the third generation. 

Most founders concentrate on what they know best—building the business. But, they sometimes fail to execute their succession plan early enough. 

The story of one family-owned business...

Zildjian is a cymbal making family business that has lasted 15 generations. For years Zildjian's succession plan was simple—leadership (along with the secret of the ancient family cymbal-making manufacturing process) passed from father to eldest son. For fourteen generations the eldest son was made an apprentice at the age of 14 and was gradually introduced to every facet of the business.

In 1976, Avedis, the owner then aged 87 was still head of the business. At the age of 88 he tried to make his succession plans clearer by making his elder son, Armand, president of the business. The future of his younger son, Robert, then aged 54 does not seem to have been as clear.

Avedis passed away in his 90th year in 1979 and in keeping with family tradition left the entire business to his two sons. As the eldest son, Armand inherited the controlling share and became Chairman of the Board. At that time Robert claimed, "I was running 80% of that business and I was told at the death of my father that I was no longer in power and I was out. That was a terrible blow." The brothers quarrelled, and two years of bitter litigation in courts resulted in a settlement under which Armand kept the A. Zildjian Company and Robert received the AZCO subsidiary. Dissatisfied with this outcome the younger son founded a competing cymbal making company, SABIAN. He left Zildjian with a closely guarded family secret and SABIAN significantly eroded Zildjian's market share and revenue.


As this example shows, many problems for family-owned businesses are precipitated by the death of the founder or owner. Thinking ahead, and putting together plans for succession can avoid this. Being rigorous and disciplined about the skills and qualities of potential successors is vital. But the key is the family member in charge knowing when to step down. 

Developing new leaders takes time. They need to prove themselves in their own right, to be given experience of different functions within the business, and help and support from trusted advisors.

Zildjian has learned from its bitter experience. Birthright is no longer enough to secure a senior position in the business. Any family member who wants to work in the business has to demonstrate aptitude and commitment. They need a degree, preferably in business, and they need to complete an internship programme to understand the company's standards. On joining the company, strict rules ensure that one family member never reports to another.

In short, every aspiring family member needs to be assessed as any other senior leader would be for their suitability for the role. If a family member is selected, it is important to treat them as you would any non-family successor who may be brought in. 

 

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Topics: Advising CEOs