Family-owned businesses really are the heart of the U.S. economy. Forbes magazine estimates that 90 percent of all U.S. businesses are family-owned or controlled by a family. More than that, family-owned businesses account for 50 percent of the U.S. Gross National Product. Clearly, they are critical to the stability and growth of the U.S. economy, as well as to job creation.
A major shift, however, has started in family-owned businesses as members of the baby-boom generation begin thinking about retirement. Many do not have plans either for the successful sale of their businesses or orderly transitions to the next generation of leaders. That’s a problem.
According to information from the California Association of Business Brokers, retiring business owners will sell or bequeath upwards of $10 trillion of assets, held in more than 12 million privately-owned businesses, in the next 20 years. The future of these businesses is vitally important to the retiring owners, as well as to their employees. It is also vitally important to the U.S. economy.
Family interactions, however, aren’t always easy. When consultants work with clients to develop succession plans, the sessions are often as much family counseling as they are about financial counseling. A successful business sale or transition depends on navigating the personalities, priorities and goals of various family members, particularly if the business has survived through several generations.
Despite issues with family dynamics, however, I would argue that the biggest challenge family-owned businesses face is complacency because complacency can lead to the death of the business. We see it all the time – upper management is celebrating 30 years in the business and is enjoying their last few years by coasting to the finish line. The competition, on the other hand, is working harder than ever. Before you know it, the family business is shutting its doors.
Successful family-owned businesses share certain traits. They have developed roles and responsibilities that focus family members on continuing the culture that has made the company so successful. It’s often the culture that was created by the original founders.
Successful family-owned businesses also anticipate change and plan strategies to help the company stay ahead. They support innovation. They encourage feedback to make the business better. They recruit skilled employees. They develop access to capital. They emphasize business and product development. They stay abreast of changes in government policy. And above all, they keep an eye on their competition.
The CFO of a family-owned business recently told me he loved working for the family because it was such a close group and great team. I am betting complacency is not in their vocabulary.
So how can business owners guard against complacency and the ills that follow?
- Review Compensation for Family Members – The company needs to establish a compensation model that matches the value each family member brings to the business. Easier said than done I know, but there are a lot of resources available for an independent assessment of salaries versus performance.
- Review Compensation for Non-Family Members – We also need to make sure we are taking care of the key team members who are not related by blood but are often “just like family.” Too many times, I’ve heard non-family members say, “I’ll never be an ‘insert family name.’” They conclude that because they aren’t family members they will never see a big payoff, even if the value they bring is high. These days, employees are not as focused on staying with one employer throughout their career as they once were, and you might think about awarding a small ownership percentage to critical employees to retain their loyalty and service.
- Review Shareholder Agreements – If the business does not already have a shareholder agreement, this is a must. If there is a shareholder agreement in place, chances are the agreement needs to be revisited for changes in the business.
- Ensure a Well-Balanced Board of Directors – Adding independent members to your board of directors could have the single largest positive impact on your company’s health. In case you are wondering, your best friend from college does not qualify as an independent director. Involving someone who understands the goals of the company and has an objective view can pay huge dividends.
Family-owned businesses are very important to all of us, and we need them to be successful. Let us know how we can play a part in continuing your success.
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