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Survival of the Fittest: When Business Is A Family Affair

Frank Trotter | May 1, 2017 4 MIN READ

I recently attended the Family Business Symposium at Washington University primarily to connect with a particular speaker, but sitting in the auditorium brought many additional thoughts. The presenters generally represented companies and families who have been extremely successful—revenues and values that used the letter B and minimum deal sizes of $200 million. At the same time they are all dealing with issues that confront almost everyone who owns or operates a family enterprise, even if there are less zeros in your life.

You might think it is hard to determine what impact family business has on the American economy. There are thousands of mom and pop shops—companies of all sizes all the way up to trillion dollar affairs. Some are controlled by a family but are also public companies, like Walmart or Ford Motor Company. The statistics thrown from the stage suggested that a large proportion of global business, as much as 80%, was controlled by families. It seems they were in the right ballpark. The 2015 study by the Center for Family Business of St. Gallen, Switzerland found that family-owned firms comprised 80-90% of firms worldwide. Take a look at their economic impact below.

Workforces Globally Employed by a Family Business

View a larger image here

Core Objectives of Family Businesses

One thing that was crystal clear at the symposiums was that there is a real difference between individuals working for corporations and people operating a family business. When running a firm with unaffiliated shareholders, strategies and tactics typically focus on risk, net revenue, and capital formation. A public company tends to manage to quarterly earnings with some lip service to the long term. Family companies, however, might have a number of different objectives.

  1. Build and sell. This strategy is more common in the modern technology development world although there are many other variations. In banking for example, it used to be popular to form a small community bank, build it for a few years, then sell to the local larger bank.

  2. Scrape by. When driving down any major city artery look left and right. Each micro-business that has been sustained for a while probably builds on some skill the founder/owner has. These entities are unlikely to be sold, or passed down through the generations but they probably provide a good enough living wage so that the owner can make do.

  3. Run the business. Not much thought is put into many family businesses. A senior family member is the head of the company and just operates the business. When they depart or die, other family members scramble to pick up the pieces and go on.

    Based on the three above objectives, it’s easy to see why roughly only 30% of family owned businesses remain in the family into the second generation. Does your business align with one of the above three objectives, or is it more in line with the fourth below?

  4. Manage for the future. Families with a plan to manage the current operation, change with the times, and develop clear plans for an ongoing concern.

Succession Planning

There is always a fine line between the fact that the family owns the firm and can promote whomever they choose, and the more typical meritocracy that is at least a goal in most corporate environments. Bringing a son or daughter into the business seems to involve letting them begin by “sweeping the floors” or another entry-level position and working their way up across the organization.

Businesses that manage for the future will have a clear plan about how succession will take place. Perhaps there is a “hired gun” that acts as the transitional leader while the next generation gains the experience. Should the older generation transfer control early so that they are there to act as mentor to the new commanders? What are the control procedures?

Estate Planning/Geometric Expansion

The final piece that appears for family business and for anyone with means is how to pass things along. I have noted here before that wealth in the form of money or businesses owned, at least in the U.S., dissipates quickly—some say that up to 80% of value is gone by the end of the second generation after creation.

For a family business, the question is often how to allow a next generation family member to leave the enterprise without damaging the capital position of the company. Should they just retain rights to dividends? Should they be bought out? Should they be forced to work in the company to obtain anything at all?

Some family companies realize the generational issue and set financial goals based on the size of each succeeding generation. For example: a founder and their spouse only needed to make enough money for themselves and two children. The two children now need to do the same for four and so on. Larger families compound the problem more rapidly.

In the U.S., estates are mostly divided evenly by the number of people, usually children, remaining after a death. This approach quickly dilutes the value and often power of the family as it stretches further and further.

Another approach, more European in nature, provides each person in the inheritance chain a share of the family wealth, combined with a voting process for extraction of value. There is far more complexity underlying this structure, but I think it does provide for a pathway to retain value over multiple generations.

I hope that this journey through a few concepts for family businesses was helpful. Maybe you’ve dealt with some of the challenges discussed here today. Create the right recipe to deal with succession and estate planning and who knows, maybe your company will have the staying power of BMW or Loews.

Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank has over 35 years of experience in banking and global markets. When not in the office, you might find him speaking on the financial conference circuit, giving an interview on the latest world economic news, or at the nearest ice rink playing pick-up hockey.

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