Family Business Matters

 

December 14, 2011

December 18, 2013


Does exiting a family business mean failure?

In the autumn 2011 issue of Family Business magazine, there were several articles that competed for my attention. The front cover featured a wonderful photo of Gert Boyle (a spunky 87) and her son, Tim Boyle (62). The feature article on the Boyles relayed how Gert Boyle and her son overcame some tough obstacles and had to have “durable outerwear themselves” to become leaders of publicly traded Columbia Sportswear.

Also in this issue were the results from the magazine’s summer online anonymous poll of American family-owned businesses, which contained interesting statistics on succession planning, stock redemption plans, formal dividend policies, and leadership formats in family businesses.

The third interesting item was “The Family Business 100: America’s largest family companies.” This 2011 roster ranked America’s oldest family businesses that have been continuously owned by the same family for 155 years or more.

It was not surprising that the No. 1 company on the list was Wal-Mart (revenues of $421.85 billion). Day & Zimmermann, an industrial and defense services and staffing company in Philadelphia (revenues of $2.2 billion), was listed as No. 100. (There were eight California family businesses listed as well: Bechtel Group (9); The Gap Inc. (20); Qualcomm Inc. (30); Franklin Resources (48); Levi Strauss & Co. (60); Raley’s Inc. (77); E.&J. Gallo Winery (tied for No. 80); and J.F. Shea Co. Inc coming in at No. 99.)

However, the item that was most intriguing was written by the editor-in-chief of the magazine, Barbara Spector. In her column, “Family business longevity examined in a new light,” Spector comments on the list mentioned above and asks a great question: “Why is business longevity so often viewed as the only meaningful measure of an enterprising family’s success?”

Spector goes on to discuss the “Family Firm Institute/Goodman Longevity Study” completed in 2010. This was a three-year study aimed to “reframe the view of family enterprise from a focus on operating companies to an assessment of value creation over time.”

The researchers looked again at an often quoted statistic from John Ward’s 1987 study on family business, which said that only 30 percent of family companies survive through the second generation, and only 13 percent make it through the third.

The researchers posit that Ward’s findings should be matched with the longevity statistics of companies in general, not only family-owned enterprises. They looked at U.S. census data on startups founded in 2000 — family-owned and non-family businesses — and found that 50-60 percent of all businesses failed in the first five years, and only 25 percent lasted a full decade. Thus, they claimed that Ward’s survival statistics were “low, out of context and not generalizable.”

The research team received 541 responses to its online questionnaire sent to senior family business executives and narrowed them to a study field of 118. The majority of respondents were from the United States, the annual revenues of the study’s participants ranged from $1 million to $3 billion, and the mean age of the enterprises was 60 years.

The main findings of the study revealed that 90 percent of the family businesses represented in the survey owned more than one business and that shutting down one family-owned company didn’t equate to the end of those families’ wealth-creating activity. As one of the researchers stated: "They’re divesting underperforming assets and redeploying them.”

The crux of this new research seems to be that most successful families have business failures in their history, but that doesn’t spell disaster or permanent demise. As the researchers state, “The key wealth creation vehicle is not the firm but the family.” The researchers stated that prior studies haven’t measured the impact of innovation and risk taking on family businesses and how they contribute to the family firm’s entrepreneurship and longevity.

Another missing component in prior studies is what they call “transgenerational entrepreneurial orientation,” or “decision making with the success of the next generation in mind.” This reminded me of an Indian tribe’s guidance for their chiefs to follow — when any decision is made, consider the effect the decision will have on the seventh generation to come.

The researchers’ comments were validated by a quote from a Family Business Review article (15(3):223-238m 2002) authored by researchers Timothy G. Habbershon and Joseph Pistrui, who wrote, “Families committed to transgenerational wealth must understand that markets inevitably change and that all asset-dependent advantages erode over time. … Transgenerational wealth, therefore, embodies an implicit assumption that the family ownership group will develop entrepreneurial change capabilities in line with the inevitable need to shed or redeploy assets once its value-creating properties approach exhaustion.”

In other words, family business owners and their advisers should focus on the sustainability of the family’s wealth, not on the longevity of a particular operating company.

If the founders look at their legacy broadly and continue to model an entrepreneurial can-do spirit, emphasize attention to the market/customers/vendors, and engender a sense of stewardship among members of successive generations, the odds increase that the family will continue to prosper — no matter what kind of wealth-creating entities are formed.

As an example, a family might divest themselves of one or two operating businesses that have become cumbersome to run or bogged down with too many regulations. This same family, however, most likely holds commercial and residential real estate in family controlled and operated LLCs. Thus, they can refocus on family wealth creation from rental income and real estate development efforts. They are still a family, and they still own assets together — just in a different format.

Is one of your 2012 resolutions to examine which businesses make sense for your family to still own and operate 10 or 20 years from now? Remember, as Spector wrote about this study, “The findings suggest longevity of the business family, not of an operational entity, is what matters.”

Eddy, CFP, is president of San Diego-based Creative Capital Management Inc. and co-founder of the Family Business Forum at USD. She can be reached at peggy.eddy@sddt.com. Comments may be published as Letters to the Editor.


 

December 14, 2011

December 18, 2013


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