Family-Owned Businesses: Is There A More Difficult Type Of Business To Run?

Running a family business creates a unique challenge for the founders/parents: to rear their children into mature adults and into mature business people as well. This is quite a tall order, to be sure.

The Facts

• The average life span for a family-owned business is less than 25 years (which just happens to be the average tenure for a founder).
• Fewer than 33 percent of FOBs make it to the second generation.
• Only about 15 percent make it to the third generation, and just 3 percent make it beyond that.
• FOBs account for more than 65 percent of all businesses in the world and are becoming more, not less, prevalent—Harvard Business School, 2001.
• Often, an FOB will have collapsed or declined because of the failure to manage the complex and emotion-laden issue of succession—BDO Stoy Howard, 1999.
• Successful continuity management in an FOB is a complex and demanding womb-to-tomb process that requires great management skills and psychological finesse.
• Most FOB management at some point will have to deal with low performing members or business misfits, without hurting either family or business.
  In spite of these daunting challenges, creating, building and sustaining a family business is still a fundamental American dream, pursued today by more than 20 million family businesses in the United States alone.

What’s In It For The Family?

A family business tradition creates a strong heritage for the family. In the community, the business serves as a testimonial to the success and potency of its owners. For future generations, a family business provides a career and financial safety network. It offers family members independence and control of their own fate to a great extent. It establishes a glue that holds a family together around a common set of activities, interests, challenges and opportuni­ties. It makes it more certain that individual members will have the fullest opportunities as adults to stretch themselves developmentally. It is more likely that significant financial advantages will accrue to the family and its progeny. Finally, it allows a family to perpetuate a legacy through philanthropic activities.

The Challenges

The odds are tough. Besides the common competitive market barrier and obstacles that confront all busi­nesses, the head of a family business must also contend with the parallel and equally potent set of family-based issues that arise.

Consider the following dicey matters:

• Family culture prefers to operate on an egalitarian, supportive basis. However, to be successful in business, meritocratic principles must govern the placement and advancement of family members. Children often wind up with different-sized roles.
• How do family dynamics play out in the business setting? How does the family head and business president resolve such thorny issues as sibling rivalries and feuds, jealousy and selfishness, and rebellious and resistant behavior?
• Family dynamics at home can turn into family dynamite at work when the founders approach the time to pass the baton to the next generation. How they let go, get out of the way and pass the baton is probably the pivotal issue for transitional success.
• How does the head of the family business involve and manage the needs of “outsiders”—non-family members with key roles in the company?
• How does the founder empower the next generation to make hard decisions about ownership, wealth distribution and lines of authority—all involved in ensuring that the FOB will not die?
• How do family businesses invest working capital for expansion and growth, and balance that with the need to ensure adult children’s lifestyle and future retirement income for the founders?
  Managing For Future Generations

It can be seen why there is a critical need in family businesses for management skills and psycho­logical finesse to steer an FOB to the next generation. The Global Consulting Partnership has found ten levers that help in this process:

• Shared visions and values regarding strategy, relationships, work ethic and success.
• Shared influence across generations, among spouses, siblings and cousins, geared to individual capabilities.
• Valued traditions that are characteristic of the family and set it apart from other families.
• Receptivity to learning and growth—being open to new perspectives and new approaches; mastering change and overcoming obstacles.
• Investment and relationship enhancement: Robust families have traditions and mechanisms to play together. These essential family rituals serve as a buffer during difficult times.
• Open demonstrations of empathy and affection for family members, during good times and bad, that say “You are important to me.”
• Mutual admiration earned by building trust based on a record of accountability and truthfulness.
• Being there, especially in times of grief, failure and embarrassment. How a family interacts with a distressed family member is highly correlated with long-term harmony and business success.
• Maintaining space means respect for the individual privacy and the privacy of each family within the extended network.
• Circumscribed/managed conflicts: Feuding members frequently bring in their “reinforcements.” The family needs to learn how to prevent less involved members from getting in the middle and how to circumscribe the conflictual issues and address them with finesse.
• The “family-owned” dimension creates a potent multiplier effect on the challenges that confront the head of a family business. Leveraging the process with finesse is essential.

Reprinted with permission from The Family Business Report sponsored by the Goering Center at the University of Cincinnati College of Business Administration.