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.

Why do some Business managers reach the gain goal more often than others? They do it because they keep their operation pointed in
that direction - direction of profit making. They never drop sight of the goal - to finish the year with a gain.

This manual Gives suggestions that should help an owner-manager to zero on profit making. It points out that you have to stay
educated, make timely decisions, and take action. In effect you need to control the activities of your company rather than being
controlled by them.

Topnotch Performance in golf, shootingfishing requires understanding, training, and perseverance.

Likewise in Small businesses, year-end profit comes to the owner-manager who strives for topnotch performance. You attain profit
making targets by understanding your performance, by practicing the craft of earning timely, balanced decisions and by controlling
the organization's activities.

Adapt the Tips in this manual to your circumstance. They ought to help you call the shots to keep your business headed in the
ideal direction - toward profit making.

First Rule of Profit Making: Know Your Business. The Time-honored truth"Knowledge is power" is especially pertinent to this
owner-manager of a small business. To maintain your business pointed toward profit you must keep yourself well informed about it.
You have to know how the company is doing before you may improve its performance. You have to understand its weak points until you
can correct them. A number of the knowledge you need you pick up from daily personal observation, but records should be your main
source of advice about gains, expenses, and sales.

Know Your Profit. The gain and loss statement (or earnings Announcement ) prepared frequently each month or every quarter by your
accountant is one of the most vital indicators of your company's value and wellbeing. You need to be certain that this
announcement contains all of the details you will need for assessing your profit. This statement must pinpoint each revenue and
cost area. For example, it should demonstrate the profit and loss for each of your products and product lines as well as the gain
and loss for your entire operation.

It is a great Thought to have your profit and loss statement prepared that it reveals each product for the current interval, for
the same period this past year, and also for the current year-to-date. By way of example, a P&L announcement for the month of
November would show income and expenses for the current month, for November this past year, and prices for the eleven months of
the current calendar year. Many businesses publish their annual reports with a few previous years so stockholders can compare
earnings.

Comparison is The trick to using your P&L statement. If your accountant is not already supplying figures that you may compare, you
should discuss the possibility of getting them supplied.

Financial Ratios out of your balance sheet also allow you to know if your profit is what it ought to be. For instance, the
proportion of net worth (return on investment ratio) shows what the company brought on the equity capital invested.

Know Your Costs. An owner-manager should know prices in detail. Following that, you can compare your price figures as a percentage
of earnings (operating ratio). Be sure your prices are itemized so you can set your fingers on the ones that appear to be climbing
or falling according to your expertise and the price figures of your industry. When costs are itemized, you are able to spot the
offender once the overall figure is greater than what you'd budgeted. Take advertising costs for example. You can grab the
offender if you break out your advertising expenses by product lines and from websites. In addition, a comprehensive check of
question returns from advertisements will help avoid unsuccessful books.

In understanding your Prices, keep in mind that the formula for profit is: Profit equals Sales minus Costs.

Know Your Product Markup. Be sure That the pricing of your goods supplies a markup adequate to the sort of profit you expect to
attain. You have to keep constantly informed on pricing since you need to adjust for increasing costs and at the exact same time
keep costs competitive. Knowledge on your markup also can help you to run workouts with your eyes open. Continuing to generate a
product that only a few clients want is an effective merchandising tool only once you use it on goal - for example, to hold or
draw buyers to additional high markup solutions. Don't be afraid to shed a loser from your line.

Garbage-In, Garbage-Out. An Owner-manager shouldn't fudge the documents. The acronym GIGO that the computer business uses is
accurate with manually stored records as well as with machine-processed ones. When an owner-manager allows"garbage" to enter the
records, the accounts will include"garbage" Reports do not need to be extensive but they need to be accurate.

Look For Trends. Try not to look at one month's sales or Profit image alone. The figures in your operating statements are
significant only when you put the picture in the right framework - that is, take a look at your characters in the context of
what's happened and what's very likely to happen. In that manner, you catch a downward trend before it gets out of hand.

You should also Concern yourself with all the figures behind the bucks - for example, the number Of units offered or the number of
orders. Insist on cost-per-unit figures. The Fluctuation of this cost-per-unit can be more meaningful than just looking At the
dollar figures alone. Another idea would be to display these comparative Figures on charts so that important trends can be viewed
easily.

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