Family businesses played a vital role in our nation’s early history and they remain important today, providing the path to financial freedom for many individuals and their families. In many ways, the creativity, drive and commitment required to launch an entrepreneur’s idea into a thriving business still represents the pioneering spirit of our nation’s past. But the steps along the way – from new idea, to new business, to retirement and a new generation of owners - are not always a clear-cut path. Family businesses face a unique set of challenges on their road to success. The 2008 Laird Norton Tyee Northwest Family Business Survey takes aim at some of those challenges, and provides a snapshot of family businesses in the states of Washington, Oregon and Idaho.
The challenges facing these businesses are quite different from the challenges of nonfamily firms. Families often want a successor, either from within or outside the family, who will not only effectively run the business, but also continue to represent the family’s values and their community legacy. Senior generation family members may also find a challenge in diversifying their income to make sure an entire generation’s wealth is not solely tied to their business. And unlike publicly held firms who answer only to management and shareholders, a family business must also consider the needs and desires of family members as well. Many of these family members may not own or work in the business, but still have considerable influence on the business’s actions.
The survey shows how family business leaders in the region feel about their future prospects, where they may benefit from planning for the future, and what their different stakeholder groups – including management, ownership, and the family itself – value the most when making decisions concerning the business. Among our findings, we discovered:
Incorporating the needs and desires of each different stakeholder leads to greater success for family businesses. Family business leaders answer to a unique mix of stakeholders. Just like with a nonfamily business, they must try and meet the different needs of management and ownership, but family business leaders must also answer to a third stakeholder – the family members themselves. Not every family member will have ownership in the firm, but they can still hold sway in decisions about the family business. Whether business leaders should listen to that third stakeholder group is a subject of great debate. The 2008 Laird Norton Tyee Northwest Family Business Survey found that understanding and satisfying the needs and wishes of the family members can improve profitability. Family firms dedicated to reaching their highest potential would do well to listen to all three groups, the study shows.
Succession planning is still needed for many family businesses. While 88 percent of those surveyed said they strongly believe their business will still be controlled by the family in five years, a quarter of all survey respondents said they have spent little or no time on succession planning. Only half said that the senior generation shareholders of the family business have written and signed estate plans.
Family businesses lack income diversification. Survey respondents said that excluding real estate, an average of half of their personal net worth is the family business. The pressure of having so many eggs in one basket can often cause business owners to delay retirement and delay transitioning the business to the next generation. Having so much wealth tied up in the family business can also put the senior generation family members at considerable risk – if for some reason the business declines, so does the family’s biggest asset.
Family business boards add significant value to the firm. Creating a board of directors can help a family business identify and articulate a long-term vision. When family businesses in our study were asked to rate how well their boards were contributing to the direction of their business on a 0 -10 scale, the average rating was 8.9, where 0 meant they strongly disagreed that their legal board of directors were making a valuable contribution to the direction of the business, and 10 meant they strongly agreed the board was making a valuable contribution.
More findings from the survey are discussed in the full report. We hope this information sheds more light on best practices for family businesses and sparks conversations that promote their future success. It is a topic of great interest which we eagerly continue to explore.
Laird Norton Tyee Family Business Survey 2008
© 2008 Laird Norton Tyee