Four Common myths of family businesses
By Harry S. Dennis III, for SBT
TEC is in the process of putting the final touches on a new program designed specifically for parents and offspring of family-held businesses. While consulting with experts about future program content, we unraveled a number of "myths" about family businesses. They are the subject of this month’s column.
First, let’s put the myths in some perspective. According to a recent survey done by MassMutual Financial Group/Raymond Institute, 40% of family businesses in the US will see a leadership change in the next five years. That fact has serious implications for four common myths discussed in this article.
Myth No. 1: Most family businesses have clearly defined management succession plans.
To the contrary, this is far from the case, especially in those situations where more than one sibling is active in the business. Here are some typical approaches that TEC members who are in family businesses have taken to resolve this problem:
1. They have hired an outsider to mentor and be responsible for the ultimate determination of who will succeed and perpetuate the family leadership in the business.
2. They have used industrial psychologists to assess an offspring’s potential to become the eventual CEO in the business.
3. They have enrolled the offspring(s) in advanced management training courses.
4. They have created "career profiling" experiences such as so much time in sales, then in manufacturing, accounting, etc.
5. They have created a "co-CEO position," where, for example, two sons or daughters have proven they are equally capable of running the business. (In fact, in the survey mentioned above, this is becoming a common practice, although, I personally see major problems with this alternative.)
6. They have prepared a specific succession timeline, along with action steps to enforce it.
Myth No. 2: Because of the desire to perpetuate the family business for future generations, a strategic business plan is developed and implemented.
Sorry folks, the MassMutual survey found that only a third of their respondents had the faintest clue about what a strategic plan looks like, much less actually having one. It’s not a monster, really, and with a little outside professional guidance, can be accomplished without a lot of fanfare. Here’s what you might find in it:
1. Major ownership objectives for the business
2. Assessment of strengths, weaknesses and opportunities
3. Definition of core competencies
4. Business vision and mission commitment
5. Short- and long-range corporate goals
6. One- and three-year financial pro forma
7. Market segment and key customer analysis
8. Specific action plans: Who does what and by when?
Myth No. 3: Most family businesses have ironclad estate plans, including stock transfer arrangements.
This is so sad. I don’t have the statistic. But the number of family businesses that go down the tubes because of ineffectual estate plans leading to aberrant estate valuations and painful tax consequences is criminal. And totally unnecessary. Please consult a reputable estate counselor. If you have not done so in the past two years, make it a high priority now. Among other items:
1. Is a "family partnership" right for your business?
2. Have you reduced your estate’s value to the minimum?
3. Does voting control go where you want it to go?
4. Have non-active family members been in the communication loop insofar as your estate plan is concerned?
5. Are you certain your company’s working capital or borrowing capacity will not be jeopardized as a result of your death?
6. Have you psychologically accepted the premise that you can relinquish ownership, still maintain control, and still generate income for the lifestyle to which you have become accustomed?
Myth No. 4: Most family businesses recognize that working family members should not be compensated differently than non-family employees.
I wish! Again surveys on the matter tell a different story. In principle, I believe every family business owner supports the underlying premise here. The problem raises its ugly head when there is more than one sibling in the business, with different responsibility levels, and the one with less responsibility feels the need for parity. Some thoughts:
1. Compensation for ALL family employees should be market driven. Period.
2. Paying for "non-work" is a no-no.
3. Special privileges and perks for family employees visible to non-family employees must be avoided (e.g., big office, nice car, space in the parking lot, longer vacations, etc.).
4. Dividends are a separate issue and should not be confused with the business issue of compensation.
5. Dividends can level the playing field for family members who hold stock, whether employed or not.
There are other family business considerations beyond the scope of this article. A family business specialist can help address them:
1. Do you hold regular family meetings to discuss business matters?
2. Do you have a family "mission statement" about the business?
3. Have family members worked elsewhere before joining the family firm?
4. Do you have a process for "firing" a non-performing family member?
5. Is your process for hiring a family employee any different than for hiring a non-family employee?
6. Do you have a process for mediating family disputes about the business?
Well, if you answered yes to these six questions, you are far ahead of the pack. I know they will be high on the list of subjects covered in our new Family TEC program. Until next month, here’s to the perpetuation of America’s strong family enterprise!
Harry S. Dennis III is the president of TEC (The Executive Committee) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at 262-821-3340.
June 13, 2003 Small Business Times, Milwaukee
