Family Business – Impact, Challenges and Prescriptions for Success

Last week my former college roommate Dr. David Hagenbuch and I presented at the Messiah College Business Alumni Association. We called our presentation a “Conversation About Family Business” and the response from the record attendance seemed to confirm the session was value packed.

We started the session with the following statistics about family business: 

80% of all businesses in the US are family owned.
60% of total economy in the US is generated by family owned businesses.
75% of new jobs created in the US are started by a family owned business.

It seemed appropriate to have this session in Lancaster County which is one of our nation’s strongholds for family business. Based on the above statistics, it is not surprising that Lancaster County earned a place on Forbes Magazine’s list as one of the Top 10 Places to Ride out the Recession.

Often business and business leaders are lumped together by politicians and the media as being greedy and part of the problem in our country. We tried to build on these statistics and point out the many ways that these family businesses are the ones giving back to their community. They are often less concerned about short term profits and more concerned about significance and leaving a legacy for their family and the community.

These businesses invest what is often referred to as “patient capital.”  Most big businesses are looking for an immediate return on any investment, while a family business usually has a longer horizon (sometimes a generation) when evaluating a Return on Investment.

Despite all these facts about how impactful family business is to our community and our national economy, only about 33% ever survive to the second generation and less than 20% survive to the third generation. One of the big reasons for this is obviously the economic challenges of keeping a business relevant and competitive. But often a family business has a few other challenges. Things like:

1. Entitlement: Family business members believe that no matter how they act, the business is there to serve them.
2. Nepotism: Hiring or advancing of personnel based solely on family relationships.
3. Founderitis: A founder believes that he/she is the business’s only capable manager, leading to a lack of appreciation for the second generation.
4. Succession: There’s no plan for transferring leadership and/or ownership of the business from one generation to the next.
5. Lack of Strategic Planning, Structure and Governance: Family businesses often start small and stay small because they do not organize themselves for growth.

After doing two lively group case studies with the audience, we closed with what we called our 7 general prescriptions for family business participants:

1. Realize You’re not Alone: Recognize that most of the situations faced are common to other family businesses.
2. Be Self-Aware: Try to view and understand your own role in family business dynamics from an outsider’s perspective.
3. Communicate (early and often): Let other family business members know your concerns and try to understand theirs.
4. Maintain a Sense of Humor: Use laughter to cut the tension that often arises in family business situations.
5. Involve Third-Parties: Utilize individuals who can analyze situations objectively and offer suggestions based on their experience and expertise. A board of advisors or just having an individual advisor is very important.
6. Develop Agreements: Understand that it’s appropriate, even with family members, to have express agreements that clarify responsibilities and establish expectations.
7. Understand the Difference: Are we going to be a family business or a business family. Will we run the business like a family or like a business that is owned by a family?

We also have a couple video clips of me sharing some of these points and if you desire to check out the clips, click on this link.

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by Scott Heintzelman - Scott is a CPA, CMA and CFE living in Pennsylvania. Scott is a partner serving on the executive team at McKonly & Asbury LLP, a regional accounting firm with multiple offices in the Mid-Atlantic. The firm has been an IPA ALL-STAR as well as winning Best Places to Work in Pennsylvania for numerous years.

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