Family Business: 
The Best of Times and the Worst of Times

A headline in the Denver Post recently read: “Family-owned businesses are weak, relatively speaking.”

The article cited the Family Business Survey conducted by Seattle-based Laird Norton Tyee.  The report begins by acknowledging that family-owned businesses are “alive and well” and that owning your own business remains an American dream. 

The business leaders interviewed during the first quarter of 2007 were overwhelmingly optimistic about the future of their companies with half of the respondents predicting growth this year despite a softening economy. 

With that said, though, the report did find some troubling warning signs among the businesses studied.  There are several reasons why 50% of family-owned businesses fail to last beyond one generation.

Lack of succession planning.  Although 60% of the majority share-holders in family businesses are over 55 and 30% are 65 or older, only 29% of the companies have established documented succession plans.  Even though 90% indicated that the company’s next leader will be a family member, just 40% have identified and prepared the successor to the current CEO. 

Family-owned business leaders are committed to having future generations succeed them, but nearly two-thirds of those surveyed don’t require those entering their companies to have any specific qualifications or previous experience.  More importantly, nearly 25% think the next generation is not qualified for leadership roles.

Over 67 percent of the respondents believe that their current CEO will not leave the company in the next five years.  However, based on the age of most of the owners, that expectation is probably unrealistic.

Lack of formal business planning.  Even though 95% of respondents said they think they manage their businesses in the same way that other enterprises are run, their practices don’t bear that out.

Strategic planning appears to be an under-utilized tool.  Just over half of those surveyed reported having any kind of written business plan with clearly-stated goals and objectives.

Most companies, however, did report that even though it may not be formalized, there seemed to be some kind of a working process for making decisions and that their managers could easily approach them to raise difficult issues.

Surprisingly, 75% said that their strategic decisions were guided by some kind of board of directors or board of advisors.  Most of the boards were made up of family members, but 43% of them did include non-family advisors on them.  Three quarters of those who said they used a board said that they made significant contributions to their companies.

Lack of financial diversification.  93% of those surveyed said they had no source of income beyond their businesses.  Because they have the majority of their assets tied to the business, estate taxes continue to be a major challenge.  Families may face liquidation of the company to pay the founder’s estate taxes.

There are a number of things you must do to avoid the pitfalls faced by most privately-held companies.

• Professionalize your business.  Run it like a business, not like a family. Hold your family members to the same standards you have for all of your staff. To ensure your continued business success, you need leaders who are competent whether they are family members or outsiders.

• Formalize your business planning process.  Establish a strategic planning committee to develop concrete goals and objectives.  Monitor progress toward your goals and revise your plan each quarter.

• Develop and communicate to family members a guideline for entering the business and for becoming a candidate to succeed you.  Do you require higher education?  Experience outside the field?  Experience within your industry?  At what point does the window of opportunity close?

• Compensate family members for their job, not for their position in the family.  If the skills one family member has are better than her sibling’s she may deserve to earn more.  If the position that your son is qualified to assume pays more than his previous job, give him a raise.  If you want to retain qualified outside managers let them help train, develop and promote your potential successors.

• Plan for your retirement and create a succession plan.  Develop a job description for your successor including required skills and experience.  Set a date for your retirement so that successor candidates know when they have to be prepared for the transition.  Plan for your retirement so you have something exciting and interesting to do. No one remains at the top of his game forever.  The most talented athletes have had to yield to younger competitors.  Large companies sometimes have mandated retirement ages to ensure that leadership remains fresh, young and creative.  The best business leaders understand their value in developing strong successors.

• Diversify your portfolio.  Don’t assume that you’ll be able to sell your business to fund your retirement.  When businesses start, it’s important to reinvest profits back into them.  At some point, though, owners need to generate enough profits to compensate themselves and to provide income outside of the business for their retirement. 

There’s no place better than the family business to transmit your values and your heritage.  The years I spent in my family’s store were among the best of my life. 

A family business gone bad though, can irreparably damage both the business and the family.  It takes hard work to avoid being among the family business failures—but the effort yields great rewards to those who do it well.