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