Family-owned businesses: Fast-growing, facing challenges

It’s often said that small business is the engine of the U.S. economy. If so, family businesses are of the high-performance, whisper-quiet, finely tuned kind, humming along at an impressive clip — even if there might be a few bumps ahead. But to stay on track and avoid breakdowns, family businesses would do well to schedule regular tune-ups with their financial professionals.That’s the snapshot of today’s family businesses that emerges from the 2007 Family Business Survey conducted by Massachusetts Mutual Life Insurance Co. in conjunction with the Family Firm Institute, and the Cox Family Enterprise Center at the Kennesaw State University Coles College of Business.

The survey — which is conducted every five years — found that family-owned businesses are growing both in terms of revenues and jobs, and their leaders are optimistic about their prospects for robust growth.

Increasingly, those leaders are women; there has been an almost five-fold increase in the number of women leaders in family businesses since 1997, and almost a third of family firms indicate that they may have a female as their top successor.

But as impressive as their prospects are, family businesses face some important challenges, particularly those stemming from a lack of formal succession planning and preparation, as well as attention to personal financial issues, according to the study. The most important red flags: Many family business owners have not adequately prepared for managerial and ownership succession, nor have they prepared a personal estate plan to ensure an efficient transfer of wealth to heirs.

To ensure continuity and future growth and security, family business owners need to focus attention on succession, estate planning and other family business and financial issues. And to address those issues effectively, family business owners need the guidance of financial professionals who understand the unique issues, needs and challenges they face.

The survey canvassed more than 1,000 family-owned, predominantly closely held businesses to gauge their strengths, challenges and changes since the last survey in 2002.

Below are 10 important points from the study’s findings:

1. Some 24 percent of the businesses surveyed have a female chief executive or president. In 2002 that number was only 10 percent. The rate at which women hold leadership positions in family businesses is much higher than that of their counterparts in primarily non-family firms in the Fortune 1000, of which only 2.5 percent are currently led by women.

2. The prevalence of women in leadership positions carries through the organization even when moving down the organization chart. On average, the family businesses in our sample each employ nearly five family members, of whom 60 percent are men and fully 40 percent are women, only slightly behind the nearly 60 percent (57.2 percent) of all firms that have women in top management team positions.

3. Nearly three out of four firms reported increased revenues over the past three years, with more than one third reporting increases in excess of 11 percent. Looking forward, 22 percent expect double-digit growth and more than half expect an increase in sales revenues up to 10 percent. More than one third expected to add employees.

4. Many family businesses report growing faster (27.1 percent), and only 15.4 percent report growing slower, than their competitors, suggesting that family businesses have a sustainable competitive advantage.

5. Most family businesses (60 percent) believe that their ethical standards are more stringent than competing firms’. More than one third (37 percent) have written ethics codes, and discussions about ethics with employees, customers and partners are frequent.

6. Despite perceptions that family businesses are less rigorous planners, significant percentages of family businesses use traditional business tools and processes, such as strategic plans, buy-sell agreements, and regular formal valuations, and have active boards.

7. Family unity and cohesion are critical to family business success, according to respondents. Eighty-seven percent say that family members share values and 83 percent reported unity on ownership matters such as strategy and management. Eighty-five percent report that the family shares similar values with employees and customers.

8. When considering their top three most trusted advisors, business owners ranked their accountants first, their spouses second, and their lawyers third.

9. Among family business owners who expect to retire in five years, fewer than half have selected a successor; of those expecting to retire in six to 11 years, less than a third have done so. Nearly a third had no estate plan beyond a will, nearly double the number of those surveyed in 2002. And only 54 percent report a clear understanding of the impact of estate taxes, which can jeopardize future generations’ ability to continue the business.

10. Almost a third (30.5 percent) said that they had no plans to ever retire; and nearly another third (29.2 percent) reported that retirement is more than 11 years away. Since the median age of the current leaders is 51, this means that many people plan to die in office, which is not beneficial to the family, the firm, its employees and its clients.

Despite the warning signs of potential future troubles, the most recent news from the family business front is impressively good, raising prospects for continued growth for this critical sector of the economy.

However, to ensure long-term, multi-generational success, family business owners and the financial professionals who guide them need to keep one eye on the present and one eye on the future. Building a winning family business is an impressive achievement, and ensuring its efficient transfer to the next generation of leaders ensures that the achievement will have lasting impact for the owners, their successors and their clients.

Bethany A. Wood is marketing director for business owner advocacy in the U.S. Insurance Group of MassMutual Life Insurance Co. For more information, visit www.massmutual.com/familybusiness.

For reprint and licensing requests for this article, click here.
Financial planning Accounting education Financial reporting Wealth management Estate planning
MORE FROM ACCOUNTING TODAY