FAMILY-OWNED BUSINESSES

Family-owned businesses are recognized today as an important and distinct organization in the world economy. Family-owned businesses now operate in every country and may be the oldest form of business organization, but only within the last decade have their unique benefits been identified and studied. Family businesses have been described as unusual business entities. The description is due to their concern for the long-term over generations, their strong commitment to quality and its relation to their own family name, and their humanity in the workplace where the care and concern for employees is often likened to that of an extended family.

More than 90 percent of the companies in North America and a majority of businesses located around the world are family-owned. Some of the more recognizable businesses still managed by family members include Benneton, Beretta, Estee Lauder Inc., Tootsie Roll, Playboy, Gucci, Carnival Cruise Lines, Harley-Davidson, Inc., U-Haul, Ford Models, Forbes Inc., and Ford Motor Co. They vary widely in regard to the overlap of family and business issues, and much can be learned from studying their experiences.

Family businesses provide the only setting for an unusual social phenomenon, the overlap of family issues and business issues. The family business offers two separate but connected systems of family and business with uncertain boundaries, different rules, and differing roles. Family businesses may include numerous combinations, including husbands and wives, parents and children, extended families, and multiple generations in roles of stockholders, board members, working partners, advisors, and employees.

The two systems in a family business, described as the interaction of two separate but connected systems, are often shown as two overlapping circles depicting the unclear boundaries of family and business.

THE PROS AND CONS OF FAMILY
BUSINESS

Family businesses provide a number of advantages to family members, the most common being freedom, independence, and control. In addition, they also offer many lifestyle benefits such as flexibility,

prestige, community pride, and creativity. Family businesses normally provide for closer contact with management, are less bureaucratic, have a built-in trust factor with established relationships, and provide for hands-on training and early exposure of the next generation to the business.

On the other hand, family businesses also bring a unique set of challenges. Family businesses are often recognized in the popular press as a source of difficulty when it comes to succession issues, identity development, and sibling relationships. Succession is one of the largest challenges facing family businesses, and in most cases the process is resisted. Succession becomes an issue when the senior generation does not allow the junior generation the necessary room to grow, effectively develop, and eventually assume the leadership of the business. Often business relationships among siblings or between parent and child deteriorate due to an underlying difficulty in communication within the family. This behavior erupts into criticism, judgments, conservatism, lack of support, and lack of trust—all elements that affect the business.

Family-owned businesses typically have a set of shared traditions and values that are rooted in the history of the firm. Depending on how they are viewed, deeply rooted traditions and values can be a positive or a negative influence. In a changing world, family businesses can honor their traditions if they realize they can be guides to selecting the best course of action when there is a recognized need for change. It makes sense to honor traditions and trust them; they have survived because they have helped the family business prosper. It doesn't make sense to let traditions stand in the way of progress and change. Traditions themselves have evolved and changed over time. In fact, the best time to reaffirm the family business's tradition is when it is threatened or appears to conflict with the future prosperity of the business.

Family communication, conflict with relatives, and sibling relationships typically rank among the top ten concerns among family-owned businesses. When these issues conflict with shareholder value, it often becomes necessary to bring in an outside consultant to deal with them. The main issue in solving such family-related problems is to deal with them openly and begin communications within the family toward solving the problems. Other keys to a successful family business include mutual respect, the presence of good role models within the family, the ability to not take business issues personally, and the patience and ability to listen to others.

A history of the family business can be a useful tool to improve communication and understanding among family members. By telling the story of how the business was founded and its early struggles, the history helps members of succeeding generations better understand the values and attitudes of the family toward the business. In addition to transmitting family values, the family business history can be used to perpetuate a unique business culture and create cohesiveness among employees. It can also be used as a marketing tool to project a positive image of the company and the family behind it.

ROLES IN THE FAMILY BUSINESS

The most successful families in business have clearly defined roles and responsibilities for individuals involved in the enterprise. Most often these roles have fallen along gender lines. The most common form of family business is one in which a husband and wife are both involved. Often, such a business has typically been referred to as "his," while the wife's role is of helpmate. Women are often in the office, on the computer, or doing the bookkeeping and have even been described as "invisible." These same capable women, however, often become "instant entrepreneurs" when their husbands are ill or die, or when an economic crisis forces them to assume the husband's role. Such gender stereotypes are slowly changing.

The role of a father who is also the boss of his children is more often a difficult one to balance. One father shared the story of his son who was always late for work and provided a bad example for other employees. He called him aside one day and said, "Son, as your boss, I have to tell you you're fired, and as your father, I am sorry to learn you have just been fired."

Research indicates adult children describe their fathers as bosses in many different ways. One son's statement relates the patterns that repeat in families and therefore carry over to the business, "I'm stubborn just like him, and it is like looking in a mirror." In the ideal case, the father serves as a role model and trainer for the next generation. He treats both his sons and daughters equally and exposes them to various aspects of the business. He listens to their ideas and lets them make their own mistakes. He views the business as a team project rather than an individual effort and turns over the leadership reins before the children reach the age of 35.

Mothers are influential whether they work in the business or not, and their roles need to be recognized. Traditionally, mothers have worked behind the scenes supporting their husbands and maintaining the home. The changing roles of women have brought them challenges when trying to balance home and business. One woman said she wished she was more like Mrs. Cleaver, which seemed to reflect her confusion about not being a mother like her own, yet also not being comfortable in a leadership role in a business. Often women do not get equal credit in the role they choose. Just like the case of the fathers, these roles also carry over into the next generation and influence both daughters and sons.

Brothers and sisters usually disagree in their views of their mother, but agree in their views of their father. This might be explained by the fact that fathers are seen primarily as the leaders in the business, while the mothers play a variety of roles, and sons and daughters describe the role they are most comfortable with. For example, one son describes his mother as always being at home for him, while the daughter described her active role in the business.

FAMILY BUSINESSES AS A TRAINING
GROUND

Perhaps the best job training programs throughout history have been family businesses. Research indicates that over two-thirds of all people starting businesses today grew up in a family business environment. Many share stories from early childhood when they stayed at the family store, rode on the delivery trucks, or went to visit customers with their parents. This early exposure enables them to hear, see, observe, and absorb the business environment. This experience can teach children about the value of money, customer relations, dealing with employees, and how an organization operates.

A number of factors have been found that predispose children to be interested in the family business. The first is time spent with their father in the business. Most family businesses currently operating in the United States were started after World War II and most were founded by men. As more women start businesses, children will also benefit in this way from spending time with their mother in the family business setting.

Exposure to various aspects of the business positively affects children. As they grow they assume new and varied roles, developing skills in the business as they take on each new role. With encouragement and a positive attitude from the parents about the business, their interest is heightened. Along the way, as children work in the family business, their individual contribution to the team needs to be recognized on a regular basis.

Lastly, an opportunity to join the company needs to be presented to the children as a career option. Not all children will join the family business, but they should know how to fully take advantage of the opportunity if they so choose. Throughout this training process children and parents who see each other as peers have an optimal relationship.

Daughters have special needs when it comes to developing as leaders in family businesses. They normally spend less time in the business, develop fewer skills, and face a major obstacle right from the start because fathers typically consider sons over daughters as potential successors. The process of preparing daughters to join the business is often overlooked. A report from the family business workshops held at the Wharton School of Business over a three-year period showed that among female Wharton business students, only 27 percent planned to enter the family business and only 22 percent studied business in college.

Research shows a number of surprising factors which influence the leadership interest of women. Women tend to show an interest in leading the family business when their brothers are not strong leaders, when they do not have a spouse or children of their own, and when they are asked by the father to join the company. Women are found to be held back from leading the company when they lack skills and knowledge, experience constraints within their own family, or have little encouragement from their father or husband. Women who are not at all interested in the family business have not developed an identity in the business, have found better opportunities elsewhere, or are dependent on their spouse to satisfy their financial needs.

When it comes to sons, researchers found that the quality of the work relationship between fathers and sons varies as a function of their respective life stages. When sons are between the ages of 17 and 22, and they are in the process of establishing identity and separating from the family, poor communication is common. At this time, the father is typically in his forties and is also re-examining his identity and appraising his life. Here fathers want to give their life meaning and exert power and control, needs that are in conflict with the needs of their sons at this time. As the father reaches his fifties, and the son matures from 23 to 33, the father has become less competitive and with his experience he may have the inclination to teach. Sons during this time feel an urgency to focus their lives and settle in, re-appraising the past and considering the future. They strive for competence, and desire recognition and advancement. By 40 the goals of competence, recognition, advancement, and security become pressing, and the son struggles with authority if the father is still involved in the business. The father, perhaps in his sixties, is reminded about retirement and often death, which leads to a problematic relationship should he try to hang on to the business. There are numerous cases of sons in their fifties with fathers in their seventies and eighties who still are in control of the family business. This becomes problematic for the individuals involved as well as for the business itself.

Sibling relationships in the family business are important since these are the vehicles by which social skills are learned, and siblings often go on to work together. These relationships play a significant part in identity development, yet research is sparse in this general area. Sibling accommodation in the family business occurs when they agree on their relative positions of responsibility and power.

EXTENDED FAMILY

Extended family members can play a wide range of roles in the family business. Family businesses become more complicated in multiple generations when all of the family members stay involved in some manner. For example, a husband and wife start a business and involve their three children. These three children have six children each for a total of 18. These 18 have a total of 29 children between them. Within 50 years over 50 direct descendents could now have involvement, and that does not include in-laws.

In-laws are controversial in family businesses. Some businesses have a rule not to involve in-laws in either ownership or management, while others involve them to varying degrees. In either case it is best to have clearly defined rules when it comes to the role and responsibility of in-laws, and clear expectations of the consequences in the event of a death, divorce, or involvement of children. In one case, the son-in-law was asked to stay on in a management capacity in the business after the daughter divorced him, which caused friction between the father and his daughter for the next 20 years.

THE PLANNING PROCESS

Planning is more crucial to the family business than to other types of enterprise because most families have a majority of their assets tied up in their business. Estate planning becomes essential and is intertwined with succession planning, business planning, and family planning.

Estate planning involves the financial and tax aspects of the company. Families plan to minimize taxes at the time of the owner's death so the resources can stay within the company. Current tax laws provide disincentives for families wishing to continue the business.

Business planning often guides the entire planning process and sets the agenda for the future operations of the business. This process may be overseen by a board of directors, an advisory board, or professional advisors. Owners must ask themselves where they want the company to be in 5, 10, or 20 years, including the level of family involvement. Owners often have a mental picture of this, but unless a business plan for financing purposes is necessary, it is usually not down on paper.

Succession planning is a long process that owners normally wait too long to address. The grooming, training, and development of talent in the next generation should start in the preadolescent years.

Most family businesses do not have a succession plan. This becomes crucial in the event of a sudden death. Often the remaining family members do not know where to begin to pick up the pieces. This is the reason most family businesses do not succeed to the next generation. The issues involved in succession are too numerous to leave to chance, and without planning, it is likely the family business will not successfully continue.

The lack of planning, particularly in first to second generation businesses, is often the fault of the founder himself. Usually the business is such an extension of his life that he has few outside interests and cannot imagine leaving the helm. As a result, his business dies with him. Others who recognize these issues too late in life may hastily turn over the business to an ill-prepared child, only to have him fail.

Family planning takes into account the needs and interests of all family members involved with the business. The formation of a group called a family council often guides the communication process between family members and management. They address issues such as rules for entry, conduct, and community relations.

A 1999 survey of 500 family-owned businesses conducted by family business consultants Regeneration Partners of Dallas, Texas, found that the number one concern among family-owned businesses was planning for estates, taxes, and wealth. Ownership transfer or succession ranked second. In spite of the significance of these concerns, an estimated 25 to 50 percent of all senior-generation business owners have put off making business estate plans.

SYSTEMS FOR PLANNING IN THE
FAMILY-OWNED BUSINESS

There are numerous systems which can aid planning in the family-owned business. Estate planning is normally handled by a team of professional advisors, including a lawyer, accountant, financial planner, insurance agent, and perhaps a family business consultant. Estate planning normally begins with the success of the enterprise and is continually updated as the business and family change.

A professional family business consultant can be a tremendous asset when confronting these planning issues. The consultant is a neutral party who can stabilize the emotional forces within the family and bring the expertise of working with numerous families across many industries. Most families believe theirs is the only company facing these difficult issues, and a family business consultant brings a refreshing perspective. He or she can be involved at many levels, including working through the succession process. This may involve a variety of issues, such as training the children, selecting a successor, involving non-family management, and facilitating the transition process. In addition, the family business consultant can establish a family council and advisory board and serve as a facilitator to those two groups.

Often the firm's attorney and accountant may see planning problems coming, but they are not prepared to face them directly for many reasons. Some do not feel they have the specialized understanding of family dynamics, while others fear they could lose a client when dealing with sensitive issues. Instead, they may make the recommendation to bring in an outside family business consultant for an interim period of time.

A family council is a system that encourages family involvement and communications. It allows for a regular meeting where family members can voice their opinions and plan for the future in a structured way. Ultimately a more organized and strengthened family will emerge. Children gain a better understanding of the opportunities in the business, learn about managing resources, and inherit values and traditions. Conflicts can be discussed and settled.

Topics brought to family councils can include: rules for joining the business, treatment of family members working and not working in the business, role of in-laws, evaluations and pay scales, stock ownership, ways to provide financial security for the senior generation, training and development of the junior generation, image in the community, philanthropy, opportunities for new businesses, and diverse interests among family members.

These family meetings evolve and change as the business evolves. A business in the first generation usually only involves a nuclear family, whereas a business in the second generation with a sibling team faces additional issues of family harmony, equal treatment, and the involvement of multiple children in the business. A family business in its third generation or beyond may include cousins, in-laws, and family members not working in the business. Issues in this case become much more complicated and may include commitment, traditions, community image, and resource allocation.

Family businesses typically evolve through three stages, and the type of leadership required at each stage is different. In the entrepreneurial stage, the business is designed around the founder or leader. It is driven by personal and family goals and depends on the leader's intuitive direction. Eventually the business evolves to the managerial stage, where it is more organized but still like a family. The firm begins to require outside expertise and financial discipline. Structure and accountability are established. Tension can arise as family members begin to lose some of their freedom from structure, but they recognize that a lack of structure is causing frustration, too. Finally the firm enters the professional stage, where it is driven by what is best for the business. More goal-setting and market-driven strategic planning takes place. In determining who will be the next leader of the family-owned business, it is necessary to recognize what stage the business is in and select the leader with the most appropriate strengths and characteristics.

Family members who participate in family councils find it a good forum to voice their opinions. They feel more like a team, and they see progress being made. Leadership of the family council can be on a rotating basis, and the family business consultant may leave the facilitating role once the forum is well established and emotions are under control. Stepping out too early, however, can lead to a collapse of the entire system.

Advisory boards can be established to advise the president or board of directors. These boards consist of five to nine non-family members who meet regularly to provide advice and direction to the company. They too can take the emotions out of the planning process and provide objective input. Advisory board members should have business experience and the capabilities of assisting the business to get to the next level of growth. For example, a company with five million dollars in annual sales should seek advisors who have experience with moderately more profitable companies. In most cases, the advisory board is compensated in some manner.

As the family business grows, the family business consultant may suggest many different options for the family. Often professional non-family managers or an outside CEO are recruited to play a role in the future growth of the business. Some families operate with few or no family members in the business and simply retain ownership. The family can retain ownership by serving on the board of directors or setting up a holding company, which may manage several companies and investments for the family.

One second-generation family in the steel business recognized a declining market for its product and decided to sell off their divisions and liquidate the remaining assets. The dollars generated from this process led to the sibling team staying together and forming an investment company. Today they are in the business of buying other family businesses and putting in professional managers to operate them. They now manage eight such companies in a variety of industries throughout the United States.

THE FUTURE OF FAMILY BUSINESSES

Family businesses will continue to play a greater and greater role in world economies into the next century. They will become more recognized as business organizations, and be studied and written about in increasing depth. Schools and colleges will recognize the family business as a career option of choice and provide direction and resources for students to pursue opportunities there.

Over fifty percent of the leaders of family businesses in the United States think their businesses will be owned and managed by two or more of their children, so the future looks bright. Even in Eastern Europe entrepreneurs are emerging and rekindling family businesses from years ago. They are starting family businesses for the next generation, and others are using family support systems to launch new enterprises. In Italy, family businesses are so common that the Chamber of Commerce tracks each family member and their position in the firm along with the traditional business information which is regularly collected. Asians have a legacy of passing on their family traditions in business and of all working together with a central business focus. The next century will bring more research on how ethnicity affects families in business.

RESOURCES

There are a growing number of resources now available to families in business. The Family Firm Institute is a group of more than 1000 professional advisors serving the field; it has more than 100 university-based programs. The Family Business Network is headquartered in Switzerland and holds an annual convention. The American Alliance of Family Businesses was formed in 1995 to provide a full range of services to family-owned businesses, including lobbying, information, and professional development programs.