The Family Business Succession Puzzle

How family businesses navigate succession planning, the rise of private equity, and changing generational dynamics.

Succession’s Brian Cox and Sarah Snook

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Two weeks ago today we bade farewell to everyone’s favorite oedipal billionaires as the final episode of “Succession” wrapped up. The show’s immense cultural impact is due to many factors: top-class writing, heart-rending performances, and the sheer power Brian Cox could load into the letter ‘F’ all played their part.

At its heart, the series highlighted the often messy interlacing of family dynamics and 21st-century capitalism — and while we trust few viewers could truly relate to the Roys, that dynamic is deeply entrenched in real-world economics. Around 60% of the US workforce is employed by family-run businesses, and even the youngest baby boomers are tipping retirement age.

But what if their millennial and Generation Z progeny show no interest in taking up the reins? What if living through the Great Financial Crisis and pandemic-induced inflation whiplash has suppressed an entire generation’s capitalist desires, as many studies suggest is the case? What will happen to Uncle Ned’s fifth-generation plastics manufacturing business?

For today’s deep dive we are looking at the real-life demographics and economics of family business succession, dissecting the likely fate of the 5.5 million family businesses in the US and the millions of people who work for them. We’ll unpack how Wall Street, and even AI, will be jockeying for a seat at the table.

So suit up, blast some rap music in the backseat if you must, and never trust cousin Greg.

The Boomer Dam
Simply put, a sizable portion of the world’s wealth is held in boomer’s hands. According to The New York Times, US family wealth — even when adjusted for inflation — has more than tripled since 1989 to $140 trillion, with nearly 50% belonging to baby boomers. For context, the boomer generation encompasses roughly 73 million Americans roughly between the ages of 60 and 80 years old, accounting for around 21% of the total population.

A significant portion of that wealth is held in shares of highly illiquid family businesses. While these enterprises will never compete for splashy headlines with the likes of Apple, Meta, or Tesla, the sheer economic heft of this class of capitalism, and its importance as a ballast for the US economy, cannot be overstated:

  • According to data from The Family Business Network, family-controlled enterprises account for a stunning 70% of global GDP.
  • With the ability to operate outside of an incessant quarterly earnings cadence and the prying eyes of public shareholders, well-run family-owned businesses have the benefit of taking a long-term view and can be less likely to make snap decisions to placate public shareholders.

The numbers bear out that reality. A recent Credit Suisse survey of 1,000 global businesses found that family-run enterprises had between a 1.5% and 2.0% higher return on invested capital than their non-family counterparts. Similar research from Harvard Business Review shows that family businesses are less likely to lay off employees, noting that 9% of a family-run business’ staff turns over annually vs. 11% at non-family firms.

So while Salesforce CEO Marc Benioff may call his workers “family,” the need for a consistent rise in earnings per share runs thicker than blood, and the software giant recently laid off 7,000 kinsfolk after facing pressure from activist investors. See you at Thanksgiving.

The Kids Are Not Alright
While succession planning is not a problem unique to family businesses — just ask Bob Chapek who lasted but two short and highly controversial years at the helm of Disney before Bob Iger was summoned back to the top seat for cleanup — it is a high-wire act in a closely-held setting.

For family-controlled public companies — think the fictional Roys, Murdochs, and Arnaults — succession planning is even more challenging as family proclivities and in-fighting often play out in a public forum. Bernard Arnault, CEO of French luxury brand empire LVMH, will have a well-thought-out transition plan — he has strategically positioned five of his children within the company and reportedly invites them to monthly 90-minute lunches where he drills them on the business.
 

Flat Footed? The thorniest succession planning situations, though, are likely the millions of small and medium-sized businesses which very rarely have their choreography mapped out in advance. A 2021 survey by PwC found only a third of US businesses have a succession plan in place, and some patriarchs and matriarchs may not appreciate the time it takes to fully implement one. “Consultants usually talk about a 10-year transfer,” Steve Zimmerman, co-founder of financial planning firm Mindful Asset Planning, told The New York Times.The problem is not a uniquely American one, nor one limited to a particular industry. The Financial Post reported in April that while 40% of farm operators in Canada are due to retire over the next decade, only a third have succession plans in place.

The problem might have less to do with boomers clinging to their youth, unwilling to face up to their looming retirement, and more to do with their reluctant offspring.

An Ernst & Young survey of university graduates with a family business background in 2013-14 found only 5% planned to join their family company in the five years following their graduation. Of course, some heirs go to wet their beaks at other firms, or even other sectors, before returning to the fold, prodigal-son-style (we’re looking at you Shiv). Still, it speaks to a wider trend in younger generations showing less interest in family continuation than their parents.

Prof. Morten Bennedsen, an expert in family business at the University of Copenhagen, told The Daily Upside: “Today, social structures have changed, respect for parents has changed, and kids say ‘no’ to their parents. You’ll have operators who need to sell the idea of the business to their kids, who may be thinking ‘why would I want to be in a remote part of the country?’”

Bennedsen added, “40 years ago, offspring would learn the family business in an apprenticeship model. Today, the business climate is changing rapidly — to win you need to be educated at a top school, get experience outside the family business, and after all that, potential successors may say ‘what are my alternative opportunities,’ and never look back.” 

Money, Honey? Younger generation’s belief in the very system that allows family businesses to thrive is up in the air. A 2021 Axios poll found that just 49% of 18-to-34-year-olds held a positive view of capitalism, while 51% had a positive view of socialism.

Who Needs Kids When There’s PE?

But even without offspring willing to grab the family wheel, it doesn’t mean these businesses will disappear into the ether. Whenever market dislocation arises, you can count on Wall Street to emerge from the woodwork. Private equity firms, whose business model consists of pooling outside capital to acquire businesses using debt, are increasingly interested in family businesses as a source of deal flow.

And the industrial logic is immense.

Merging with or acquiring competitors to improve economies of scale, squeezing suppliers, and funding expansion into entirely new markets — are all tactics that private equity firms can introduce to family businesses. 

Where large deals attract many bidders, private equity firms are often able to acquire family-held businesses in off-market deals and for lower valuation multiples than might be typical in an auction context. According to data compiled by DealEdge and analyzed by The Wall Street Journal, the median return on a $1 billion-plus buyout was 19%. For smaller deals in the $1 million to $49 million range, it was 23.4%. For $50 million to $99 million, 25.4%.

But the private equity exit opportunity is typically only available in highly scalable industries where the opportunity for expansion is immense. Professor Bennedsen told The Daily Upside, “For the average family firm it is a pipe dream that will not materialize.” 

Because My AI Told Me To: New technologies may have a large role to play in shaping how accumulated boomer wealth gets distributed. In Japan, where concerns about aging populations are so intense the country has turned to state-backed matchmaking in an effort to generate a baby boom, one entrepreneur has turned succession anxiety to his advantage.

Shunsaku Sagami, 32, founded a brokerage in 2018 that matches business owners with prospective buyers partly using AI. Now, with investors aflutter around anything that smells like Chat-GPT, the company’s stock is up 47% year-to-date and Sagami’s net worth sits around $950 million.