Family businesses are crucial to the economy, and when it comes to passing them down to the next generation, founders are confronted with tough choices, as discussed in a recent podcast episode.
The latest installment of Goldman Sachs Exchanges touched on how family-owned enterprises should plan for generational transitions, given their significant economic impact, as outlined in a transcript obtained exclusively.
FX de Mallmann, chairman of investment banking at Goldman Sachs, highlighted that there are over 32 million family businesses in the U.S., accounting for more than 80% of all businesses.
He noted, “These businesses make up over 60% of GDP and employ more than 60% of the workforce. If you look at Fortune 500 companies, about 35% are family-controlled or have strong family ownership, which is quite notable,” he added.
Family businesses also play a significant role worldwide, representing around 70% of the global economic output and a substantial portion of jobs.
Tucker York, chief of global wealth management at Goldman Sachs, mentioned that through history, family businesses used to dominate the landscape more significantly, but with the rise of corporate structures over the past couple of centuries, that trend has shifted.
Despite their large contribution to economic output and employment, it’s surprisingly uncommon for these businesses to be successfully handed down across generations. As Goldman Sachs pointed out, only three out of ten family-owned businesses manage to transition to a second generation, and about one in ten reaches the third generation.
“When investors start thinking about the next generation, it’s a shift in mindset from short-term needs to a long-term vision,” York observed.
Generational transitions are pivotal, de Mallmann explained. Founders typically face two key decisions: whether and how the family will stay involved in running the business, and how ownership and stock will be passed down.
“It’s crucial to consider these factors early on, especially before the family membership grows too large,” he noted, emphasizing the importance of having an exit strategy and mechanisms for conflict resolution to address disagreements.
Other points in succession planning include understanding the capital needs for expansion and evaluating potential investors, as well as the implications for family equity.
De Mallmann added that third-party investors can introduce a level of discipline, prompting families to engage in vital discussions, which may sometimes lead to selling the business.
“From what I’ve seen, while selling can yield favorable economic outcomes, the emotional impact on the family can be substantial, as their identity is often interwoven with the business,” he remarked.
York further explained that succession planning isn’t a one-time task; it needs regular review and stress-testing to adapt to changing circumstances over time.
