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Family Owned Businesses: Understanding The Family Business

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Understanding The Family Business

Family owned businesses are a vital force in the economy. more than 60 percent of all businesses are family owned or controlled. They range in size from the traditional small business to a third of the Fortune 500 firms. It is estimated that family businesses generate about half of the country's Gross National Product and half of the total wages paid.

Our economy depends heavily on the continuity and success of the family owned businesses. It is unfortunate, even alarming, that such a vital force has such a poor survival rate.

Less than one third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership.

At any given time, 40 percent of businesses are facing the transfer of ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few. The following is a list of options to consider:

  • Close the doors.
  • Sell to an outsider or employee.
  • Retain ownership but hire outside management.
  • Retain family ownership and management control.

To be one of the few family businesses that survive transfer of ownership requires a good understanding of your business and your family. There are four basic reasons why family firms fail to transfer the business from generation to generation successfully:

  • Lack of viability of the business.
  • Lack of planning.
  • Little desire on the owner's part to transfer the firm.
  • Reluctance of offspring to join the firm.

These factors, alone or in combination, make transferring a family business difficult, if not impossible. The primary cause for failure, however, is the lack of planning. With the right plans in place, the business, in most cases, will remain healthy. There are four plans that make up the transition process. By implementing these plans, you will virtually ensure the successful transfer of your business within the family hierarchy.

A brief explanation of each plan follows.

- A strategic plan for the business will allow each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company's future.

- The family strategic plan is needed to maintain a healthy, viable business. This plan establishes policies for the family's role in the business. For example, it may include an entry and exit policy that outlines the criteria for working in the business. It should include the creed or mission statement that spells out your family's values and basic policies for the business. The family strategic plan will address other issues that are important to your family. By implementing this plan, you may avoid later conflicts about compensation, sibling rivalry, ownership and management control.

- A succession plan will ease the founding or current generation's concerns about transferring the firm. It outlines how succession will occur and how to know when the successor is ready. Many founders do not want to let go of the company because they are afraid the successors are not prepared, or they are afraid to be without a job. Often, heirs sense this reluctance and plan an alternative career. If, however, the heirs see a plan in place that outlines the succession process, they may be more apt to continue in the family business.

- An estate plan is critical for the family and the business. Without it, you will pay higher estate taxes than necessary. Taking the time to develop an estate plan ensures that your estate goes primarily to your heirs rather than to taxes.

For business owners who do little planning, the idea of preparing four plans may seem overwhelming. Although it is not easy, the commitment made by all family members during the planning process is the key ingredient for business continuity and success. The first rule for successfully operating and transferring the family firm is: Share information with all family members, active and nonactive. By doing this, you will eliminate problems that arise when decisions are made and implemented without the knowledge and counsel of all family members.

UNDERSTANDING THE FAMILY BUSINESS

This section will explore the nature of the family business as a dual operating system, and will identify issues of greatest concern to family business owners, as identified by family business owners across the country. As you review these issues, you will see that, although you and your family are unique, the challenges you face are not, because almost every family business shares the same problems.

Also, perspectives of the individuals involved in a family business will be presented. We tend to confuse personality with perspective--understanding the viewpoints of the different actors involved in the family business (active and nonactive) can help alleviate conflicts that may arise.

What Is a Family Business?

Defined simply, a family business is any business in which a majority of the ownership or control lies within a family, and in which two or more family members are directly involved. It is also a complex, dual system consisting of the family and the business; family members involved in the business are part of a task system (the business) and part of a family system. These two systems overlap. This is where conflict may occur because each system has its own rules, roles and requirements. For example, the family system is an emotional one, stressing relationships and rewarding loyalty with love and with care. Entry into this system is by birth, and membership is permanent. The role you have in the family--husband/father, wife/mother, child/brother/sister--carries with it certain responsibilities and expectations. In addition, families have their own style of communicating and resolving conflicts, which they have spent years perfecting. These styles may be good for family situations but may not be the best ways to resolve business conflicts.

Conversely, the business system is unemotional and contractually based. Entry is based on experience, expertise and potential. Membership is contingent upon performance, and performance is rewarded materially. Like the family system, roles in the business, such as president, manager, employee and stockholder/owner, carry specific responsibilities and expectations. And like the home environment, businesses have their own communication, conflict resolution and decision-making styles.

Conflicts arise when roles assumed in one system intrude on roles in the other, when communication patterns used in one system are used in the other or when there are conflicts of interest between the two systems. For example, a conflict may arise between parent and child, between siblings or between a husband and wife when roles assumed in the business system carry over to the family system. The boss and employee roles a husband and wife might assume at work most likely will not be appropriate as at-home roles. Alternatively, a role assumed in the family may not work well in the business. For instance, offspring who are the peace makers at home may find themselves mediating management conflicts between family members whether or not they have the desire or qualifications to do so.

A special case of role carryover may occur when an individual is continually cast in a particular role. This happens primarily to children. Everyone grows up with a label: the good one, the black sheep, the smart one. While a person may outgrow a label, the family often perceives that person as still carrying the attribute. This perception may affect the way that person operates in the business.

Family communication patterns don't always affect the business, but when they do it can be very embarrassing. Often you say things to family members in a way you would never speak to other employees or managers. This problem is compounded when your communication is misread by the family member. Often parents are surprised by a son's or daughter's negative reaction to a business directive or performance evaluation. This reaction is probably because the individual perceived the instructions or evaluation as orders or criticism from Dad or Mom, not from the boss.

System overlap is apparent when conflicts of interest arise between the family and the business. Some families put personal concerns before business concerns instead of trying to achieve a balance between the two. It is important to understand that the family's strong emotional attachments and overriding sense of loyalty to each other create unique management situations. For example, solving a family problem, such as giving an unemployable or incompetent relative a position in the firm, ignores the company's personnel needs but meets the needs of family loyalty.

Another example of conflict of interest occurs when business owners feel that giving children equal salaries is fair. Siblings who have more responsibility but receive the same pay as those with less responsibility usually resent it. In cases of sibling rivalry, it isn't unusual for one sibling to withhold information from another or try to engage in power plays, i.e., behaviors that can be detrimental to the firm.

Much of this behavior can be eliminated or managed by devising policies that meet the needs of both the family and the business. Developing these policies is part of the family strategic planning process. Before discussing them, you should make sure you have identified all the issues that need to be addressed.

Issues in the Family Businesses

The list below contains the issues that most family businesses face:

Participation--who can participate in the family business and under what circumstances.

Leadership and ownership--how to prepare the next generation to assume responsibility for the business.

Letting go--how to help the entrepreneur let go of the family business.

Liquidity and estate taxes.

Attracting and retaining non-family executives.

Compensation of family members--equality versus merit.

Successors--who chooses and how to choose among multiple successors.

Strengthening family harmony.

All of these issues and the others you include in the Family Business Assessment Inventory can potentially cause business conflict and family stress. But there are three steps you can take to manage conflict and stress in a family business:

Identify issues that may cause conflict and stress. Discuss these issues with the family. Devise a policy to address them.

Who Are the Actors?

The next consideration in understanding the family business is to understand the perspectives of those involved. Without this understanding, managing a family business will be difficult.

The actors in the family business can be divided into two groups: (1) family members and (2) non-family members. Each group has its own perspective and set of concerns and is capable of exerting pressures within the family and the firm.

Family Members

Neither an Employee nor an Owner - Children and in-laws are usually in this group. Although they may not be part of the business operations, they can exert pressure within the family that affects the business. For example, children may resent the time a parent spends in the business. This creates a problem because parents usually develop guilt feelings as a result of their neglect and the resentment expressed by the children. In-laws, on the other hand, are viewed either as outsiders and intruders or as allies and therefore are usually ignored or misunderstood. For example, a daughter-in-law is usually expected to support her husband's efforts in the business without a clear understanding of family or business dynamics. She may contribute to family problems or find herself in the middle of a family struggle. The son-in-law faces similar, if not worse, problems. He may be placed in a competitive situation with his wife's brothers. If he isn't involved in the family business, he can still exert pressure on the business in his role as his wife's confidant.

An Employee but not an Owner - This family member works in the business but does not have an ownership position. For this individual, conflict may arise for a number of reasons.

For example, if he or she compares himself or herself to the family member who has an ownership position but is not an employee, a sense of inequity may result. The member may voice his or her resentment: I'm doing all the work, and they just sit back and get all the profits. Or resentment may occur when decisions are made by owners alone. Here, he or she may feel: I'm working here every day. I know how decisions are going to affect the company. Why didn't they ask me? Family members employed in or associated with a family business generally expect to be treated differently from non-family employees.

An Employee and an Owner - This individual may have the most difficult position. He or she must effectively handle all the actors in both systems. As an owner, he or she is responsible for the well-being and continuance of the business, as well as the daily business operations. He or she must deal with the concerns of both family and non-family employees. Often, the founder, as the sole owner and chief executive, falls in this category.

Not an Employee but an Owner - This group usually consists of siblings and retired relatives. Their major concern usually is the income provided by the business; thus, anything that threatens their security may cause conflict. For example, if the managing owners want to pursue a growth strategy that will consume cash and has an element of risk, they may face resistance from retired relatives who are concerned primarily about dividend payments.

Non-family Members

An Employee but not an Owner - This group deals with the issues of nepotism and coalition building and the effects of family conflicts on daily operations. Owners' concerns for non-owner employees usually involve recruiting and motivating non-family employees and non-family owner-managers who will have little or no opportunity for advancement, accepting children of non-family managers into the business and minimizing political moves that support family members over non-owner employees.

An Employee and an Owner - With the emergence of stock-option plans, this group has become more important. Employees may become owners during a succession. In companies where a successor has been chosen, partial ownership of the company by its employees can foster cooperation with the new management because the employees will personally share the benefits and responsibilities of the company. In cases where there is no successor, selling the company to the employees who have helped build it makes good business sense. Employees who own the company will want to be treated like owners, which may be difficult for family members to understand and accept. A thorough understanding of the behavioral consequences of an employee stock ownership program (ESOP) should be grasped before a family implements such a program. Understanding the perspective of the individuals around you, both family and non-family, will make communicating and decision making easier.

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