What is the state of family business today?
From mom-and-pop stores to Fortune 500 firms and from start-ups to the country’s leading brands, family businesses remain a mainstay of the American economy. For the most part, family business owners are overwhelmingly optimistic about the future of the company, but our research shows this optimism may be premature. These enterprises face challenges both now and in the near future that will determine their long-term viability.
Every family business must balance the normal priorities and issues faced by any business undertaking with the added challenges of family dynamics and generational changes.
Alarmingly, a majority of family-owned businesses lack both succession plans and strategic plans. Plus, an overwhelming reliance on the business as the major source of family income could damage the long-term success of both the business and the family.
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Why is Laird Norton Tyee, a wealth management firm, talking about family businesses?
Our legacy is family business. It's our past, our present and our future, but most of all it's our passion. We work with family businesses every day, and our majority shareholder is a seventh-generation family business. This foundation gives us the unique ability to understand and advise family business clients effectively.
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What are the key traits of a successful family business and how are they different from nonfamily companies?
Maintaining strong family relationships both inside and outside of the business and ensuring business continuity across multiple generations are important traits of family businesses. Nonfamily businesses typically do not share these traits.
By looking closely at the survey, we see that leaders of successful family businesses have an uncanny knack for instilling their personal values into the fabric of the company. They also maintain a deep commitment to having future generations participate in the business.
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What are the top challenges that family businesses face today?
Succession of the leadership will likely be the biggest challenge for most family businesses. With today’s longer life expectancies, there are often multiple generations of a family involved in the business at the same time. This adds another layer of complexity to the succession process.
In addition, shorter business cycles as a result of global competition make it important for family-owned firms to formalize their business and strategic plans by putting them in writing. They also should shore up their company and organizational structure by clearly identifying roles and leadership responsibilities. Finally, the burden of estate taxes continues to be a major challenge.
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What are some common reasons family businesses fail?
One of the primary reasons family businesses fail is lack of a written succession plan. Without a clear plan in place, there is no communication of expectations and future direction. Often, the current leadership waits too long to bring along the next generation, creating missed opportunities for knowledge transfer. Future leaders may not seek to acquire the skills, knowledge and experience that will allow the enterprise to successfully continue beyond the current generation.
A second reason family businesses fail is the unwillingness or inability to create a formal strategic plan. There is also a failure to formalize governance and management structures. The company leadership may be too wrapped up in the day-to-day tasks of the business and fail to take in the big picture. Without a long-term view and clearly defined governance and management roles, the business cannot adequately be prepared for the future.
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What can a family business learn from this survey?
The research shows a critical need for family businesses to “professionalize” their companies in three key areas: Strategic planning, governance and management structures, and succession planning.
It is clear that family businesses should create written strategic plans and update them regularly. This will keep the business on target and serve as communication tool for all business stakeholders.
Developing suitable governance structures for owners and family members is essential. Established management structures and processes enable companies to handle the pressures of growth, change, decision making and management capabilities, without straining the company infrastructure.
Finally, as businesses become more complex, a succession plan is imperative. A well-crafted plan should take into account the input of multi-generational stakeholders. It should also define the educational background, work experience and leadership skills required of future generations to facilitate their accession into the role of responsible family business owners and leaders.
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How early should a leadership team develop a succession plan in a family business?
A succession plan is critical to the future of a family business, and should be done as soon as possible. Family businesses succeed in large part from the continuity of family involvement. A sudden loss of leadership, even at small and mid-size family businesses, can have profound repercussions.
Once an initial succession plan is in place, the leadership team should commit to periodic updates as new generations hit key milestones such as entering high school, graduating from college or getting their first job outside the family business. This identifies opportunities for younger family members to pursue career paths and seek experience that will lead to successful continuation of the business.
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What are the critical elements in developing a succession plan in a family business?
First, and often most difficult, the current leadership must become comfortable with the concept that succession is a natural process in any successful family-owned business. Many times, it is difficult for a founder to imagine the business without his or her presence. A trusted outside advisor can facilitate and support this process.
Effective plans should outline goals for the business, operations and assets. Ownership and management should be clearly defined. Policies should be established about entry into and exit from the business for all family members including the founder.
Finally, senior generation business leaders need a diversified independent source of retirement income. The family business represents the majority of the family's income for 93 percent of respondents. This creates a potentially disastrous position if there is a downturn in the economy or the business.
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What were the most surprising results of the 2007 survey?
The most surprising finding of our 2007 survey is the lack of formal planning, including strategic business and succession plans, for many family businesses. If the trend continues, it could very well have a detrimental long-term effect on these companies.
It is also interesting to note that, for perhaps the first time ever, family business leadership is comprised of three distinct but overlapping generations: the Depression Era (b.1927 to 1945), Baby Boomers (b.1946 to1964), Generation X (b.1965 to 1983) and the emerging of Generation Y (b. 1984 to 2002). This underscores the growing complexity of family businesses today and demonstrates that entrepreneurship is alive and well.
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How will future family businesses differ from those of today?
Future family business will likely start with a broader market or audience than their predecessors due to the growing global market and the international reach provided by the Internet. Current and future family business owners have instant access to anywhere in the world that their parents and grandparents never had.
The traditional family business model of growing organically within a geographic region is rapidly becoming outdated as customers, suppliers and even employees spread across the global supply chain. The need for broader and more complex business models adds urgency to the need for sustainable business practices. We hope that the results of this survey inspire family businesses to focus attention on planning, governance and management structure, and other key elements that will drive family owned businesses to success, both now and in the future.
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Laird Norton Tyee Family Business Survey 2007
© 2007 Laird Norton Tyee