The Family in Business

Bernard Liebowitz

• Publisher: Business Expert Press
• Year: 2011
• Print ISBN: 9781606492789
• eBook ISBN: 9781606492796
• Topic: Business
• Subtopic: Small Business
• Index: Business

Family businesses are a breed unto themselves. Though they share many features in common with other business models, they possess unique traits that clearly differentiate them. Similarly, though consultation to family buisnesses is in many respects what other businesses experience when seeking assistance, those features that set family business consultation apart are so distinctive that failure to honor and understand them can (and does) too often lead to disaster. The needs of those family members seeking consultation share a portrait in some ways similar to those in non-FOBs, but in a majority of situations are so distinctive and potentially explosive that disaster lurks on the edges, ready to appear if not respected. The audience of this book are both consultants to family businesses and family members who are looking for such assistance. Both require knowledge of each other's spheres of experience and perspective for effective consultation to occur - for the consultant, an awareness of family dynamics as intertwined with family business; for family members, a clarification of what can be expected and delivered. In addition to the interface between family dynamics and the family's business, we will explore the key tasks in family business consultation: succession planning, selection of the successor, conflict resolution, defining the role of family members in the business, how to involve the management team in succession planning, determining what happens after succession and building a board of advisors.

Chapter 1

What Is a Family Business?

The family business is part of the fabric of the American work ethic. Threaded throughout are the traditions of entrepreneurship, providing for one’s own, and hard work. What could be more heartwarming than a picture of a three-generation farm family (if they still exist) around their computer as they develop a hedging program, with the early sun breaking the horizon over their shoulders? The photograph of a father and son working together in the family business can stir the emotions of those who have not had that opportunity.

In addition to this history of the family business as a bulwark of our economy, they also share many of the same economic and psychological advantages all entrepreneurial businesses are thought to enjoy, including quick responsiveness to the marketplace, lack of bureaucracy, and close employee identification with the company and its products, among others.

However, despite being woven into tradition and enjoying many advantages over large corporate undertakings, family businesses have more often over the years been condemned, blamed, cursed, and ridiculed. They can be sources of employment and financial security for otherwise unemployable offspring and relatives. They can be a battleground of constant criticism and tension between founders and their relatives in the business. Ambitious and talented outsiders avoid employment in family businesses. In general, the image of the family business is of an organization that is grossly inefficient and the fountainhead of unsolvable family disputes.

In fact, some research has concluded that the longevity of family businesses is generally shortened because of inefficiency and mismanagement. Estimates of the number of family businesses that survive into the third generation range from 10% to 20%,¹ with other research indicating that a “mere 30% of family businesses survive past the first generation,” with many failing soon after the second generation takes over.² One research study whose results have been often quoted in the literature indicates that “only thirteen per cent of successful family businesses last through the third generation.…Less than two-thirds survive the second generation. And…fewer than five per cent of all businesses ever started actually become family businesses through appointment of a successor from the next generation.”³

Definitions serve an important function—they tell us not only what falls under their umbrellas but also what gets rained on. The usefulness of judging what a family business constitutes lies in being clear about the choice that will be made as to the specific type of family business under discussion.

The contention here is that there is no clear definition of a family business in the literature and that the declaration that the business is indeed a family business resides in the “eye of the beholder”—namely, the business owner, who frequently is also the founder.⁴ In family firms there is always a founder (one or more), whether the business was created from scratch or purchased. The owner is the one doing the defining. Having family members in a business does not by itself suggest a family business—they may function as employees who are conveniently available for either a short period or longer. Their very presence in the business does not by itself justify it being called a family business. The business might just be an investment by the founder—passing it on to family members is not his intention nor his long-term goal.

On the other hand, some businesses—for example, publicly traded firms that do not have family members working in them—have nevertheless been designated in the literature as family businesses.⁵ The basis for this is that the founder was the family patriarch who passed his ownership position on to his offspring, and in some cases, they in turn passed it on to their children. The family members have an equity stake in the business, but so do many nonfamily investors. Even if the family owns an equity stake and sits on the board, why should this alone justify the business being called a family business? Again, then, a family business is one if the business owner says it is and his descendants, by continuing their stake in it, signify it as such.

What if family members as a group invest in a business that not one of them had a hand in creating and their equity holdings are the majority? Is this a family business? The contention here is that if the family, as owners, declares the business as a family business, it is in fact a family business.

From this point of view, family members have a say in declaring the business a family business. Ownership suggests having an equity position, whether 100% or less. Family members who do have a stake in the business may be included among those who have a voice in deciding whether the business is to be labeled a family business.

Curiously, businesses that have no family members employed and no family member (except the owner) as an equity holder have been labeled family businesses. In this instance the owner sees the business or the proceeds of a sale as funding family members in the lifestyle they seek, both during his lifetime and beyond. After the owner’s death the business is held in a family trust or by relatives and is managed by a nonfamily professional team.

Why does our contention remain so indefinite despite many articles and books and a great deal of research on the subject? Doesn’t this literary deluge bespeak a more concrete definition than the one offered here?

Consider the situation in which several offspring are working in a business owned by the founder and may or may not have equity in it. The intent of the founder is to sell the business when a certain financial goal is reached. There is no desire on the part of the owner to retain ownership of the business any longer than this arbitrary date. Is this a family business? Perhaps it is for the limited duration it is owned by a family member, but classifying it as a family business seems more like paying lip service to a definitional condition than describing its actual status.

What about the situation mentioned earlier in which the owner has passed away, the business is being run by a nonfamily member, there is no family member working in the business, and the business is owned by a family trust. Is this a family business? Perhaps it is if so defined by the late owner and his descendants who retain an ownership position. Then of course the family may decide otherwise and, upon the death of the founder, sell the business or their shares to the highest bidder for any one of a host of reasons (e.g., to pay taxes, to distribute proceeds, to prevent continued disagreement about the way the business should be run).

There are the many publicly traded businesses whose stock is owned by the families of the founders. Are these family businesses? Again, the definition depends on the owners’ perspectives. Notwithstanding what the family might decide about its status as a family business, the public may disagree either through ignorance of the stockholders’ family affiliation or by an unwillingness to ascribe “family” traits to “big business.”

To return to its defining hallmarks, a family business is one that is designated as such by the owner(s). Generally speaking (but with many exceptions), this designation includes businesses that are meant to be kept in the family from one generation to the next, whether family members are working in them or not. Publicly traded firms are included in this grouping despite the fact that equity owned by family trusts or family members can be traded on the open market, family control over the business’s destiny is (often) diluted, or the business may no longer present itself as or be known as a family-owned business—in other words, it would depend on how the family members, the stockholders, see it.

Fortunately, for our purposes a clearer definition for the entire range of possible family businesses is not necessary. What is required, however, is a clear delineation of that brand of family business to which we will be referring here. Much of the literature fails to make this delineation, and in not doing so, the results of research that are presumed to apply to all family businesses become suspect. Much of the current research literature is devoted to answering the question of whether family businesses are better or worse than nonfamily businesses in a variety of different ways (e.g., economic performance, loyalty, culture). This research, in part, has been in response to the critics of family businesses who held sway for a number of years and continue in some corners of the professional world in pointing to those flagrant family business disputes splashed on the pages of newspapers.

Many research studies have utilized family businesses in their samples that either are publicly held⁶ or have outgrown the label of entrepreneurial.⁷ Anderson and Reeb’s article makes a good case for publicly held family firms performing better economically than nonfamily ones.⁸ Although family members have an equity stake in the business and may be in management positions, it isn’t clear in what generation they fall. If in the third or fourth generation, a plausible assumption for the research finding is that the firm’s management has accumulated considerable business knowledge and would be expected to perform better than a business without the backing of such experience. Further, that the firm has become publicly traded indicates a level of business sophistication on which public markets insist. Is this sample truly representative of all family businesses?

The sample cited in Denison, Lief, and Ward’s article utilizes a combination of closely held and publicly held family firms to suggest “that the corporate cultures of family enterprises were more positive than the culture of firms without a family affiliation.”⁹ A criteria for inclusion was that the sample family businesses appreciated the concept of organizational culture,¹⁰ which by itself could be seen as evidence that the firm has grown beyond its entrepreneurial roots and become more sophisticated in the process. That this criteria borders on self-referential circular reasoning need not be stressed.

In point of fact, there is a contradiction in the literature about the relative performance achievement of family and nonfamily firms. As indicated earlier, the longevity of family businesses in general is not an attractive statistic. What this might suggest is that those family businesses that do well and persist into future generations are a special subsample of family businesses—that is, they have developed a honed business sense. With some exceptions, nonfamily businesses live, die, or are sold in only one generation (i.e., during the life of the owner). Although many don’t live long, those that do accumulate the knowledge and experience that permits them to be well run. But have they had the time to develop the business acumen that successful family businesses have had through the first (with both owner and successor waiting in the wings, thereby extending the time in which to learn) and later generations? Again, the caution being raised is that these comparisons of relative success in different areas need to be taken with a grain of salt.

These and other similar studies of the relative effectiveness of family businesses over nonfamily firms have provided many interesting and important theories and findings (some of which will inform this writing), but can they be applied to all types of family businesses? The point to be made here is that the family business label has been bandied about indiscriminately and conceals the different types of enterprises that comprise this category.

Our focus is primarily on businesses in which the primary owner (often the founder and the father) and those second-generation members working in the business hold the major portion of equity; the owner intends to pass the business on to the second generation, who will succeed him; and the second generation works in the business with the understanding that generational succession is in the offing.

The Founder’s Values

As we have seen, the attempts to define what exactly constitutes a family business have been less than fully successful. This lack of definition specificity in turn has made it more difficult to define the virtues of the family business in contrast to nonfamily firms, although some very interesting theories have been proposed. Other research has delved into the personality of entrepreneurs to see if it is possible to predict success or failure in their endeavors, with the hope of eventually establishing personality features of family business founders.¹¹ The lack of success in developing even a list of traits entrepreneurs exhibit does not hold out much promise for discovering the traits of a family business founder.

Whether we can accurately define a family business or not, the fact remains that certain businesses are labeled as family businesses and employ family members. Given that the definition of whether the business is a family business or not lies in the eye of the beholder—the owner—what does he or she see? What might the business represent for the owner? What value does it hold for him or her? What determines the value the owner holds for the business? Given the owner’s value perspective, how does this affect family members? What family issues crop up? What problems can develop? In brief, can the value system of the founder of a business cast light on whether his or her business becomes a family business?

The importance of the concept of value lies in its representing, embodying, and reflecting everything an individual believes; in its incorporation of the individual’s hierarchy of needs; in his absorption and understanding of the standards of his culture; and in the psychological sense the owner has made of his background and experience. A person’s values are explicit and demonstrated in his behavior and how he interacts with others. Values are also hierarchical in nature—that is, they subsume various subcategories that in some cases may conflict with each other. This is not surprising in view of the fact that we play different roles in different situations, each demanding a slight turn on our value scale.

This notion of values is obviously very broad. In fact, there have been many attempts over the years to define a person’s set of values and to develop a test that reveals his or her basic value system. Precisely because values is such a broad term, testing for a person’s value system is limited in what it can reveal about a person. For the concept to be useful, then, it has to be contextualized and the context specifically defined. The context of interest here is the privately owned business that an owner has either founded or purchased, which he may or may not have as yet defined as a family business, even though other family members may already be employed. Further, even if the founder has defined the firm as a family business, the second or later generations can redefine it as something other than a family business (e.g., an investment to be sold).

There are at least five types of value-laden business perspectives an entrepreneurial business owner might assume. To some extent they overlap, and in some cases, considerably so. Viewed on a continuum, they range from a focus exclusively on the business as such through to an underlining of the importance of family in the business. The overlap between the value categories lies in the notion that the success of the enterprise is itself a continuing goal, but, as we will see, in many situations that is not the only factor to be considered.

Each value category reflects the behavior an owner in that category exhibits as an owner, the attitude he takes toward the business, and the intention he has about the future of the business. This includes how he treats employees, his vision of what the business can do and be, and how far into the future he looks. From our point of view, what makes the owner’s business value system so important is that it communicates whether his business is indeed a family business or not.

The Business as Investment

Generally all businesses are viewed as an investment by their owners. Time, money, planning, and energy are the constituents of the owner’s investment. What differentiates the business-as-investment value system from other types lies in its being considered only as an investment. Consider a business in which family members may be employed (with or without an equity stake in it) but that is sold when the price is right, a price level for which the owner had been waiting.

This situation is to be differentiated from those where the business is not simply and only an investment, where the owner had intended to retain ownership for future generations, but where he is required to sell. In this case, other considerations motivating the sale might exist—a determination that declining sales cannot be reversed, the family talent pool may not be up to the task of running the business, illness is preventing adequate oversight, and so on. In other words, the sale of the firm was not part of the owner’s original intentions but had to be undertaken for a variety of reasons.

To repeat, the primary value the business holds for the owner is as an investment. Family members might be employed in the business, but the owner’s intent is primarily to derive the most profit from his investment, and that happens to be its sale. The family may eventually benefit from the sale, but family employment doesn’t weigh on the owner’s value scale. Their employment may have been an essential ingredient in the success of the business and they may well have participated in the benefits of the sale, but the longevity of the business, its becoming a family asset, and its value as a business in which family members play an important role in its continuation exerts little weight.

A significant exception is seen in a family business dedicated to buying and selling businesses as a matter of course. How frequently such family businesses appear in the marketplace is not known, but a first-blush impression is ...

Table of contents

• Title Page
• Copyright Page
• Contents
• Preface
• Chapter 1: What Is a Family Business?
• Chapter 2: Planning for Transition
• Chapter 3: Family Dynamics
• Chapter 4: When Consultants Are Called
• Chapter 5: Succession
• Epilogue
• Appendix A: A Workbook on Transition Planning for the Family Business
• Appendix B: Case Studies
• Notes
• References
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