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Ford, Smucker's, Nordstrom-each is a leader in its business segment. Each has earned a reputation for quality and value. Each is wholly or largely owned by a family.

And these titans aren't an anomaly. According to the Center for Family-Owned Business, between 80 and 96 percent of all companies in the United States are owner managed, and most of these are family controlled. They account for up to 50 percent of the gross domestic product (GDP).

Advantages

According to Dr. Scott Kunkel of the University of San Diego's Family Business Institute, "Overall, family-owned businesses are more successful than non-family-owned enterprises of comparable size." The interdependence of family members positively impacts the dedication, teamwork and work ethic necessary to succeed, manifesting itself in a number of areas. Leveraging these advantages is key to gaining a competitive edge.

Responsiveness. Families understand that their personal and business reputations are intertwined, which is one reason family-owned firms share an unmatchable connection with customers, suppliers and community. Each member feels a responsibility to see that customers are satisfied and supplier relationships are strong because the family name is on the line. Customers recognize this commitment. According to Ross Nager, executive director of the Arthur Andersen Center for Family Business, "Customers believe the warranty of family-owned business is stronger because it will be around longer and is backed by the family name."

Long-term orientation. Because the family business is today's livelihood and tomorrow's legacy, its survival and growth represent future security to the entire family. Freed from the public company's necessarily myopic focus on short-term profits and outside investors, family ventures develop strategic horizons that span decades instead of the next fiscal year.

Challenges

Predictably these businesses also face an added set of challenges. Meeting them is as important to family health as it is to the health of the business. Three of the most significant are succession, communication and management.

Succession: The $10 Trillion Question

Never before has succession been such a pressing issue for family-owned businesses. Post-World War II entrepreneurs created the world's greatest wealth and by the year 2010, they will be retiring and passing the baton of leadership in unprecedented numbers. Cornell University economist Robert Avery estimates that this will result in the transfer of approximately $10.4 trillion of net worth by the year 2040- with $4.8 trillion of that transfer occurring within the next 20 years. Though inevitable, succession is often the least planned and, consequently, the most perilous event for a family business. History has shown that only one in three firms will survive the transition to the second generation. Only 10 percent of the original group will survive into the third generation of ownership.

Succession is a highly emotional issue for senior generation owners. Some are reluctant to face their own mortality. Others grapple with how to split ownership equitably and choose a successor without creating family chaos. And some aren't confident the next generation even has the right stuff to do the job.

The financial consequences of such procrastination can be devastating. According to Dr. Kunkel (University of San Diego), "Should the primary owner die, estate taxes could claim up to 55 percent of the total assets of a business, making Uncle Sam your new partner!" With a significant portion of family assets invested in the business, heirs are sometimes forced to sell in order to meet the tax liability.

Ideally, a family business should begin the process of succession planning a decade or more before the event. Having time to discuss issues and options will increase the odds for success while building family acceptance. These issues include dividing the ownership pie; choosing and training a successor; preparing the incumbent and non-family employees for the change; and setting a timetable for the transition.

Dividing the ownership pie. This can be particularly difficult if some of the heirs are active in the business and others are not. Prevailing wisdom recommends dividing the business interests among those who are active in the company and leaving other assets to the non-involved heirs. This eliminates the potential for conflict that often emerges from differing objectives of insider and outsider shareholders.

Choose a successor. When several heirs are active in the business, choosing its next president can be fraught with conflict. Separation of family relationships and business is especially essential at this juncture. The decision must be based on qualifications regardless of family dynamics. Sometimes, the best choice for this role may be an outsider, particularly if time is too short to fully train a family member in the firm's operations.

Train the successor. It's never too early to start. By elementary school age, youngsters can stuff envelopes and help with office housekeeping chores. As they mature, their participation can grow accordingly. Early socialization in the family business provides valuable lessons in commitment, teamwork and work ethics and, more importantly, begins to develop the family business mindset.

Experts also recommend that the incoming generation work in the broader business world before permanently joining the family venture. Members will gain invaluable skills, objectivity and confidence. "Earning their spurs" on the outside also builds credibility with employees, suppliers and the financial community.

Once inside, training for the successor must be comprehensive. Rotate the successor through every department and division to build the comprehensive expertise needed to run the company. Assign profit and loss responsibility to give the successor an opportunity to prove himself. Expertise and success will build the candidate's confidence and credibility.

Psychologically prepare the retiree. Most founders are hard-charging entrepreneurs who have devoted themselves almost exclusively to their business. Often, they have few outside interests, their friends are professional associates, and the business is their central focus. A life spent playing golf three times a week and traveling often holds little appeal for these dynamic individuals.

Consider other options. Charities, churches and community groups are hungry for volunteers. Some retirees find fulfillment in mentoring other businesses, by serving on boards of directors or working with organizations like the Service Corps of Retired Executives (SCORE). Others actually take up the entrepreneurial gauntlet one more time and start another business.

Prepare the non-family employees. Succession is quite unsettling for non-family employees, particularly those with many years of service to the company and strong ties to the incumbent owner. These key players need reassurance that they will have a place after the incumbent retires. Conversely, incumbents need to help them understand that they must enthusiastically support the succession process and the incoming leadership.

Setting a timetable. Once the succession process is put in motion, the family needs to set a date when the retiring owner cedes full control to the new leadership. Although it sounds simple, actually letting go can be difficult. However, it is crucial to the ultimate success of the heir and, at the same time, serves as final acknowledgement of a job well done.

Communication: The Key to Resolving Conflict

Communication in family-owned businesses is much more complex and fraught with conflict than average because three communication systems are operating simultaneously: business management, business ownership and the family. Trouble arises when one or more of these systems overlaps and conflicts with another.

Many times, family and business values are naturally at odds. Traditionally, the function of a family is to nurture relationships and care for its members, particularly those who are least able to care for themselves. Conversely, business thrives by weeding out the weak and supporting the strong to increase production and generate profits. Conflict can arise, for example, when an employee/son has a business disagreement with the owner/father and takes his case to Mom. Mom intercedes to protect the son on behalf of the family, and conflict erupts. Another all-too-familiar scenario plays itself out when the parent/owner continues to view the next generation's members as children, devaluing their abilities and contributions to the firm.

In each case, reason becomes muddied when the various systems clash, creating stress and ambiguity. Here are some tips to help separate the systems, ease communication and reduce conflict.

1. Head off conflict by establishing a family council to discuss potential issues and establish policies in advance. Because the issues are hypothetical, discussions can be more objective and less emotionally charged.

2. Establish regular family business meetings to discuss pending issues. If serious conflict exists, hire a trained facilitator to help work through the issues.

3. When an issue arises, determine which communications sphere it belongs in and proceed accordingly. Don't bring family into business issues.

4. Conversely, set aside time strictly for family. Thanksgiving dinner isn't the place to hash out the latest marketing plan.

5. Most importantly, establish the habit of communicating openly. Whether the issue resides within the family or business sphere, keeping quiet can be a sure prescription for disaster.

Management

The integration of family, management and ownership systems also generates special challenges for both family and non-family members of the management team. Here are some winning strategies for meeting them.

1. Treat family members the same as other employees. Hire them because they are competent to do the job and provide them with ongoing education and training to facilitate professional growth. Consider having family employees report to non-family management employees to add valuable objectivity.

2. Establish clear job descriptions and lines of authority to ensure both family and non-family employees understand their responsibilities and place in the organization.

3. Observe management lines of authority. Don't interfere between family employees and their non-family supervisors. Conversely, don't allow any employees to sidestep management by appealing to the family. Either leads to managerial chaos that leaves non-family managers demoralized and ready to quit.

4. Change with the times. Family businesses can easily become mired in tradition out of respect and admiration for the founder. Be vigilant about monitoring changing customer needs, industry trends, and what the competition is doing. Make adjustments quickly and efficiently.

5. Finally, consider establishing an independent board of directors that includes members from outside the organization. Choose CEOs from firms that are the size your business hopes to be in three to five years. Look for people with expertise in areas where your company is challenged. Select experts who can help the firm expand into new areas such as exporting.

Conclusion

A family-owned business can be a source of great reward, pride and prosperity. Leverage individual talents. Respect the division between family and business. And call upon specialized family business resources like the Family Firm Institute and the Arthur Andersen Center for Family Business. Each can provide valuable assistance and referrals to family business programs at universities across the country.

 

A Healthy Family Proved the Best Recipe for Success

San Francisco-based King Security provides security for retail giants like Safeway and Macy's, and Muni, the city's mass transit system. Kim King, president and CEO, is the daughter of founder James King, an industry veteran who operated the company successfully until 1990-when he and his wife Jolanta decided to pull up stakes and move to New Orleans.

When the senior Kings asked their daughter if she would be willing to take over management of the family business, even though she hadn't worked a day for the company, she and her husband agreed. Confident entrepreneurs, they knew they could do the job.

After only nine days of training, King assumed the helm and the elder Kings took off for a new life. With her husband Mark Fernandez handling sales and marketing, the business has grown 1500 percent-from $300,000 in 1990 to $5 million in 1998.

In an unusual twist, James and Jolanta King returned to the Bay Area in 1992 and rejoined the family business as employees. What could be a dicey situation works well for the Kings. The strong bonds of love, respect and trust that are so apparent within this family make all the difference.

"There's no one in the world I trust more than my parents, so having them in the business is a huge asset," asserts King. "Dad manages special projects and some of the personnel issues, which frees me up to concentrate on the big picture. Mom keeps the books and in our business where profit margins are small, I know she's vigilant about every penny spent and every account due."

Little conflict seems to exist among the two couples, and although each of the four has equal voting rights, there has never been a decision deadlock. The key, King says, is a willingness to listen, respect for each other, and a commitment to building consensus.

The King's story illustrates that the best recipe for a successful family business is a healthy family.

 

Succeeding With Your Siblings

J.R. Custom Metals is one of the most successful small companies in Kansas and its president, Patricia Koehler, was named the state's Small Business Person of the Year by the U.S. Small Business Administration in 1998. Sharing ownership with two brothers and one sister, she is credited with artfully blending the family talents to increase sales by 50 percent since assuming the helm in 1995.

After emigrating to America, Koehler's father, Jesus Raul Martinez, was a metal worker for many years before founding J.R. Custom Metal Products in 1974. Handicapped by limited English fluency and meager capital, he and his family nevertheless beat the odds to succeed. The four eldest of his five children worked in the business from the time they were youngsters and have made it their career.

That Mr. Martinez passed the business on to his children is not surprising, but that he appointed his daughter to lead the firm was a maverick decision, both culturally and within the male-dominated metals industry. He divided ownership equally among the siblings, but granted Koehler 52 percent of the voting stock. The wisdom of his groundbreaking decision is proven by performance-the small shop that grossed $12,000 its first year hit the $6.6 million mark in 1998.

While Koehler admits the transition was bumpy at first, today consensus exists on most decisions. The siblings have developed rules of conduct to head off conflict and guidelines for how their children may enter the business. The eldest generation works hard at keeping an arm's length distance and family tensions have dissipated. Koehler credits three guiding principles for their success:

1. Every customer, from smallest to largest, is your most important.

2. Sharing all information (even financial) among family and non-family employees is the surest way to reach business goals.

3. Never hesitate to bring in outside expertise.

 

Succession Flexibility through ESOP

Mathew "Bud" Fleischer is the second-generation owner of Fleischer Manufacturing, which was founded by his father and uncle in 1945 to develop a more comfortable tractor seat. Today, Fleischer's "Buffalo" brand is a pioneering leader in conservation tillage equipment.

Fleischer learned the family business from the ground up. At the age of nine, he started sweeping floors and sorting nuts and bolts for 25 cents an hour, continuing to work part time throughout high school and college. Upon completing his degree in industrial management in 1969, Fleischer joined the business full time, working his way through every area of the company. He was promoted to secretary in 1971 and president in 1978.

In 1986, his father turned over full ownership of the company to his three children. Fleischer received 53 percent of the stock, while his two brothers, who are not actively engaged in the business, divided the remainder equally.

Fleischer, a visionary unconstrained by tradition, knew by the early 1990s that he needed help to take the company to the next level. Believing strongly in his employees, Fleischer promoted two long-time, non-family staff members to the posts of CEO and executive vice president in 1994-a decision he has never regretted.

That same year, the Fleischer family offered a large share of the firm to employees through an employee stock ownership plan (ESOP), which turned employees into committed stockholders and provided tax-sheltered liquidity for the Fleischer brothers.

Asked about his succession plans for the next generation, Fleischer has created a place for his son after he graduates from college, but is encouraging him to "explore his horizons" before choosing Fleischer Manufacturing as a career. If he doesn't, the Fleischer brothers plan to offer the rest of their stock to the employees who have helped build Fleischer Manufacturing into the success it is today.

 


Excerpted with permission from Small Business Success, Volume XII, produced by Pacific Bell Directory in partnership with the U.S. Small Business Administration.