Openness, Strategic Planning Essential

Downsizings, mergers, takeovers, poison pills. With the business news full of public company turmoil, we must not forget the backbone of the U.S. economy: family owned businesses.

Since our nation’s birth, family owned businesses have been the bedrock of the local and national economies and have shaped the identities of communities.

Many a school, hospital, town square and park have been built as a result of family business philanthropy. Indeed, entire towns have flourished on the initiative and perseverance of family owned businesses.

Family businesses still are a formidable sector of the U.S. economy. Witness some statistics from a recent survey conducted by Arthur Andersen’s Center for Family Business and Massachusetts Mutual Life Insurance Co.

The 3,033 respondents have combined revenues exceeding $67 billion and are representative of a group of about 37,000 family businesses. The median business has sales volume of $9 million, employs 50 people and is 46 years old.

Family businesses, it is estimated, contribute as much as half of America’s gross domestic product. Research on family businesses also indicates that they are responsible for most of new job growth.

Unfortunately, this sector is facing significant turbulence.

Because of the large numbers of aging post-World War II family business founders, these businesses will soon experience an unprecedented level of management transition.

More than 40 percent of the 3,033 respondents expect their chief executive officers to retire or semi-retire within the next five years. Within 10 years, 74 percent expect the CEO to semi-retire and 53 percent expect the CEO to retire.

Since the tenure of the average family business CEO is as much as six times longer than that of the CEO of the typical public company, this level of turnover is unparalleled.

Although management transition is difficult for most companies, it can be especially painful in a family business. Many won’t survive.

However, family businesses are rising to the challenge.

In their quest for survival, they are breaking gender and management stereotypes. Twenty-five percent say that the next CEO may be female, up from the 5 percent led by women today.

They’re experimenting with new management approaches, with 42 percent considering co-CEOs, compared with 11 percent using co-CEOs today. Also, 12 percent have experimented with nonfamily CEOs, and the preponderance considered the experience successful.

Even longstanding family businesses have turned to nonfamily professionals to head their operations.

Family owned businesses share a fierce desire to survive. Fully 79 percent of the senior generation is committed to continued family ownership, a desire shared by about 70 percent of younger-generation family members.

The bond between business and family is clear, since virtually all believe that the business contributes to the family’s identity in the community. But if these businesses are to survive, they must manage numerous challenges, in addition to the upheaval that may occur when their CEOs retire.

For example, they must learn how to ensure career opportunities and to best use the talents of both family and nonfamily employees.

Among survey respondents, almost one-third have let go at least one upper-level nonfamily manager within the past five years. In the same period, one-third have had a family member leave the business, and 30 percent have bought out at least one family member within the last 10 years.

Twenty-two percent have seen at least one family member end a marriage through divorce in the last five years.

And business is tough. Almost a third of respondents experienced flat or declining sales over the past year.

They view domestic competition as their most significant hurdle to future growth and survival, and income taxes as well as environmental laws as the greatest regulatory burdens.

Continuing family ownership requires grappling with management succession, estate taxes and the normal stresses of business.

Conflicting opinions and differing objectives can damage family harmony. Uncle Sam’s demands for estate taxes and disinterested heirs’ desire for capital to pursue other interests can sap the business and distract managers.

Planning and communication, not the strong suits of many entrepreneurs, become critical.

Unfortunately, less than a third of the survey respondents have written strategic plans. Only two-thirds of those have shared the plans with the managers who, presumably, are critical to implementing them.

However, respondents with strategic plans appear to be taking other actions necessary to assure survival. They are more likely to have buy-sell agreements, to periodically appraise stock value, to hold board of directors meetings, to conduct family meetings and to attend family business seminars.

The key to survival for family businesses is openly addressing the issues they face, with family, managers and advisers. Having advised family owned businesses for more than 20 years, I cannot overemphasize the importance of tackling difficult succession and ownership issues at the earliest possible time.

The business’ survival and success depend upon it, as does family harmony.

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