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Family business: a closer look.

Family Business: A Closer Look

Unlike Robert Frost's quotation, family businesses are viewed as businesses which look backward in pride and forward in hope. Family businesses constitute ninety percent of more than fifteen million businesses in the United States. Slightly over one-third of the Fortune 500 Companies are family controlled.

"Tom Peters in his In Search of Excellence stated the following, "I know that the future does not belong to the companies I grew up with, the elephants that used to rule the world and that I used to serve. These wild and woolly times call for a new species of competitor, fast, agile, thriving or change. Welcome to the Age of the Gazelle." (Benson) Peters reflects the growing disillusionment with large corporate settings and values the smaller, more agile businesses. Fritz Schumacher, the German-born British economist felt "small is beautiful" emphasizing the production of goods on a small scale. There is little doubt that operating on a small scale has certain advantages. It is fitting then to explore the advantages and disadvantages of the family business, always started on a small scale to grow or, one day to be ruined.

It is said that the first generation founds the business, the second generation helps to built it and the third generation ruins it (Benan). In actuality, less than three of the ten family businesses last through the second generation. One in ten family businesses survive through the third generation.

It would seem that this type of business is fraught with problems. The very fact that the family is at all involved brings in emotional issues as well as business issues. The family is an emotion-based unit. Business is, or should be unemotionally based. Families are constantly dealing with relationships, ie: grandparents, parents, siblings, in-laws. Businesses are dealing with positions based on hierarchial issues. Hierarchies in families are affected by age, strength (emotional and physical), and ultimately affected by death. Heirship can be a blessing or a disaster dependent upon the abilities and commitment of the heir or heirs. The very complexities inherent in "being a family" are further complicated by the surrounding problems of running a business. A priority situation comes to the fore . . . is it "family first" or "business first"? If Uncle Jack the founder's brother is a "loser" and "gad-about" should he be involved in major decisions? It is perhaps best that he be placed in the Xerox room where no one sees or hears him! Perhaps the chemical vapors in the room can be blamed for his ineptitude! Relationships among family members impinge upon decision making. Positions in family companies call for the "best" qualified. Should the positions traditionally be filled by family or non-family? The priority issue between family and business prevails no matter how small or large the business is.

Additional problems beset the family business. The very life cycle it follows illustrates the stages of growth and development it must suffer.

In the very first stage of life, the family business started by the founder, must find competent employees and he or she must set the stage for a value and belief system which will prevail throughout the life of the company. The company at this stage fights to survive and eventually move to the second stage, growth. Beyond survival, the founder must think of competition and strategies. Once expanded, management functions tend to become paramount, delegating, organizing, staffing, sharing power, training fanily and non-family are some of the necessary functions that must be executed.

Following this stage the issues of estate and wealth must be addressed. Ownership of such businesses have to be passed on to successors. Succession to the next generation occurs usually when the founder wishes to retire. By this time the business has matured and hopefully the successor is just as mature. At this stage, the successor has a rather complex task. As the business has progressed, family and non-family employees have become involved in the business. If the successor moves toward expansion, outside investors may be involved or exorbitant debt may be assumed by the company. Issues of loans, profits, ownership, equity all lead themselves to making the role of successor a different one. The stage of life cycle which follows depends on the next in line of succession, the size of the business, whether or not the business moves to public ownership and whether or not professional management is hired.

The issue of succession is extremely problematical. In fact, this very issue is reflective of some of society's problems today. The problem of sibling rivalry and generational conflict has been evident in some companies in the last few years. Husband and wife teams who have founded businesses together have seen these businesses affected by divorce, separation, and death. On the other hand, some companies have thrived with the addition of a new in-law also, and some in-laws have been named successors to large family-owned businesses.

Three years ago, the Wall Street Journal published an article which was reflective of an original study conducted by John Ward at Loyola University, Chicago. A timely study, since the problem of succession was hitting hard the post-war founders of family businesses, Ward surveyed the succession strategies of family businesses. Of those surveyed, in answer to the question, "Who will take charge?" Thirty-five percent planned to groom one child at an early age to take over. Twenty-five percent planned to let children compete and to choose one successor with help from the Board of Directors. Fifteen percent planned to form an executive committee of two or more children. And ten percent planned to let their children choose a leader or leaders.

The sore issue of succession sometimes leads to a company's demise. Prior to the succession issue it is always best to seek professional and objective help. An outside Board of Directors sometimes helps to preserve the integrity of the company. Long range planning and strategies should be an inherent part of owning a family business. Founders should be ever conscious of the fact that eventually "All things are passing." Such a business always has the element of hope attached to it as long as the sense of "family" prevails.


Benson, Benjamin and Edwin T. Creco, Ronald H. Drucker, "Your Family Business," Homewood, Illinois: Dow Jones-Irwin 1991. Dyer, W. Gibb, Jr. "Cultural Change in Family Firms," San Francisco: Jossey-Bass 1986. Wall Street Journal, "Succession Strategies for Family Firms, "August 4, 1988, p. 23.
COPYRIGHT 1991 St. John's University, College of Business Administration
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Symposium: Family Business
Author:Magee-Egan, Pauline
Publication:Review of Business
Date:Jun 22, 1991
Previous Article:Gasping for air.
Next Article:Family firms are different.

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