A family-owned business is a business where there is more than one family member involved in the business. These owners could be spouses, parents, and children, or even cousins, aunts, and uncles.
These types of businesses have a long history. Many of the largest companies in America started off as small, family-run businesses. Think about companies like Walmart, The Ford Motor Company, or Wegmans Markets.
Most family businesses never reach the size of the large public companies and they are often very important in the communities they operate in.
Let’s take a look at the various opportunities family businesses have to benefit the family as well as all of the other stakeholders that are interested in the success of the family business.
Table of Contents:
- What does a family-owned business mean
- Who should own the family business
- How to make the family business successful
- What are the benefits of a family-owned business
- Why do family businesses fail
- Transferring the family business
- How important are values to a family-owned business
- What to look for in a family business advisor
What does a family-owned business mean?
A family business is one where more than one family member is involved. They are generally privately held, meaning the ownership in the company is in the hands of just a few people.
Typically these businesses have less than 100 employees and most of the time are even smaller than that. You will see the patriarch or matriarch of the family in control of the business. Often there will be a rising generation who is either being trained or waiting in the wings to take over the company.
Family businesses create about 60% of the jobs in the country. They have about 60% of the jobs. And literally, all the new jobs are in what we call lower middle market companies which are companies that have between 25 and 500 employees. And they’re always family businesses because they’re privately held.
Family firms generate 54% of GDP or $7.7 trillion and 88 million jobs or 59% of domestic employment in the country. About 78% of new job creation comes from family-owned firms. These are what we call lower middle market companies which are companies that have between 25 and 500 employees. And they’re always family businesses because they’re privately held.
Common misconceptions about the family business
- They're always a small business
- Family businesses are not innovative
- Family businesses are greedy
- Owners never want to get out of the way
- Family businesses have incompetent family members working in them
Who should own the family business
We like to see the owners of the family business be those who are actively leading the business. We often see either first or second-generation owners be the CEO and have the majority shares of ownership in the company.
Too often ownership will be spread between everyone in the family and that will often cause conflicts between owners in the business and owners outside the business. Owners in the business will want to use excess cash to grow the business. Outside family members who own shares will often want cash that inside owners want to use for growth. This causes conflict between family members that can become an intractable issue between different family members.
Because conflict comes from too many family members owning shares we recommend that shares in the family business only be held by those who are actively working in the business.
The exception to this comes when the business has grown to be very large and there is enough excess cash created to provide for both inside and outside owners.
How to make a family-owned business successful
Making a family business personally and economically sustainable is the same as any private business. The owners need to focus on creating a business that has the following four characteristics.
Characteristics of a successful family business:
- The business is values-led where values have been articulated with clarifying statements so everyone knows what’s important for the stakeholders of the business.
- The business has a recurring revenue stream. If there is no obvious recurring revenue, the business needs to have a sales process that creates predictable sales and cash flow.
- The leader of the business has become an expert at delegation. This is an especially difficult skill to learn for first-generation business owners.
- The business has been systematized so the team members in the business know what they need to do for excellence. Customers will also know what to expect from the business when they spend their hard-earned cash.
When these four strategic areas of a family business are done well, the business will fill the four buckets of profit. They are:
- Having enough cash to provide a great lifestyle for all of the family members actively working in the business.
- The business has at least six months of cash in an account that can be used if and when the business falls on hard times.
- The business has a fully-funded growth program. The leaders of the company have made sure that there is enough bank borrowing and excess cash created by the business to provide for all cash needs of growth. This includes money for inventory, increasing receivables, new team members that can be needed, and any equipment required for new sales.
- A fully funded retirement plan for the senior family members of the business. When family businesses are transferred the amount of cash created by the business transfer is often not enough to allow the senior family members to retire comfortably.
What are the benefits of a family-owned business?
- You don't have to worry about being fired, you own the business.
- You have the ability to use your personal values in the business easily.
- You have more freedom for how you live your life.
- If run well, you have the opportunity to have a very rich lifestyle.
- You get to try out your ideas. After all, you're the boss.
Why do family businesses fail
- Failure to communicate
According to Matt Wesley, the biggest trap is failure to communicate. He says, "What I often see business owners do is get with their lawyers and their advisors behind closed doors and develop plans that don’t involve the family as a whole and they think that they know what is going to work within their family. I’ve found that often times they’re wrong."Courtney Pullen agrees that the number one reason for failure in family businesses is poor communication. "If we, as advisors, can be steering family businesses together to really help them having more effective communication." Effective communication means the willingness to put issues out to the table and being able to handle their differences and disagreements, according to Courtney,
Not having boundaries
You have to figure out how to separate business and then your personal life, or else it can be all-consuming. Amy Bruske suggests it is important to make "sure that you can be as professional as possible. And that you don’t affect all the other non-family members. I think the forgotten people, in a lot of these businesses, are really those non-family members that have to be a big part of your future. And if you’re not able to be very professional at work, call each other by your first names, draw the line at favoritism, you can’t cluster together even where you work together – all of those kinds of things, then you’ve created an environment that doesn’t work for the rest of the organization."
On the other hand, according to Amy, having some clear guidelines and boundaries in place, and then be committed to allowing each person the freedom to be themselves, you can absolutely have a successful family business that continues to thrive over many generations.
Not being intentional in building a legacy
Courtney interviewed successful family businesses and what they were talking about was that they were intentional about being successful, saying, "We put as much energy into building a healthy family culture that we have into building a healthy bottom line for the business."
Transferring the family business
Family succession is different than just selling a business to a third party. There can be an immense amount of baggage that goes along with family succession. When transferring ownership in a family-owned business, you want a smooth transition between generations.
When asked about the core challenges for people who are trying to pass their business to their kids, Matt Wesley says, "oftentimes there are two very different systems in play. When businesses are looking to move from generation to generation, those two operating systems which have grown up entirely independently and separately from one another are all of a sudden brought together and the two operating systems often collide in ways that create a great deal of difficulty for both the family and the business as they try to navigate what this new creature looks like that they’re trying to bring together."
There are tons of reasons why transferring the business to kids is challenging, and here are some of them.
- Parents remember what their children were like when they were young.
- Parents think that all the mistakes their kids made growing up will happen over and over again in the business.
- Parents are not sure why they want their financial future tied up with their children’s ability to run the family business.
- Parents are not sure whether their kids really want to be in the business in the first place.
Having a smooth transition is part of what a sale ready company means. With a sale-ready company, an internal change of ownership happens and there is no drama around the ownership transfer.
Implementing a strategy called a leapfrog management system can help train the rising generation and make the transitions more successful.
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How important are values in a family-owned business?
All businesses and especially, family businesses need to be values-led. A family-owned business does itself a big favor when they combine the values of the family with the values of the business. This makes it easy for all stakeholders to know what's important to the business and the family.
Family businesses report to us that many of their customers enjoy working with their business because they are family-owned. Articulating values with clarifying statements allows the world to know what's important for you and your stakeholders. This allows both team members and customers to know if your business is the type they want to do business with.
What to look for in a family business advisor
There are two basic types of advisors that work with private and family-owned businesses. They are advisors who focus on economic sustainability and those who focus on personal sustainability.
Advisors who focus on economic sustainability are often CPAs, Attorneys, and Business Value Advisors. Those who focus on personal sustainability will often bill themselves as coaches. Rarely will you find an advisor that is able to provide advice and support from both sides of the business.
The most important thing to look for in a family business advisor is whether they are competent at what they do, have your best interest at heart, and follow through doing what they say they will do when they say they will do it. Make sure you spend enough time with your potential advisor and challenge them to show you how they will fulfill your needs.
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