Family businesses constitute 95% of all businesses and contribute half the GDP and a majority of all new jobs. Their importance as a stabilizing element of the economy has been underscored in recent times by the unsettling challenges facing many public companies.
At the same time, the mortality rate of family businesses is alarming. Fully 70% do not survive the transition from the first to the second generation of the family. And only 15% survive into the third generation. Given their importance, this vulnerability is of concern not only to the owning families themselves, but also to the communities to which they contribute.
In my experience as a family business consultant, accountants most often serve as the client’s key professional confidant and counselor. Whether they be internal CFOs or external business advisers, they play an important role in helping family owned businesses address the challenge of survival. Effectively assisting clients meet this challenge begins with an understanding of the common pitfalls facing family businesses.
Contrary to the popular view in the media, the challenge of family business is not solely the product of family relationships overlapping onto the business. There are, of course, often overlap issues to deal with, including the senior generation’s willingness to let go; identification of a successor leader among the next generation; the significance of birth order and gender in that process; personal and working relationships among family members; and, focusing on the capability and readiness of the next generation to lead.
But the “drama” of the family issues often obscures the other major—and equally challenging--contributing factor to the failure rate: the evolution of the business itself from its entrepreneurial origins. As depicted in the diagram below, this evolutionary process can be divided into three distinct stages:
The Entrepreneurial Stage: This is an unavoidable and critically necessary stage of virtually every business. The fledgling enterprise is energized and driven by the personal vision and goals of the entrepreneur, around whom it is centered. Its development is characterized by an opportunistic and intuitive trial-and-error pursuit of the founder’s “dream.” And the founder, who is at the center of everything, is an incredibly hard worker who expects others to work hard and loyally follow.
The Managerial Stage: As the business survives its start-up challenges and demonstrates its potential for growth, the limitations of the entrepreneurial stage become increasingly evident. The key ingredients in the creation and survival of the business in its initial stage—the founder’s passionate hands-on, controlling, intuitive involvement in all aspects of the business—often become obstacles to building on its success. After an initial period of frustration, the entrepreneur (often reluctantly) will recruit outside expertise to assist with the next stage of growth. The first step in this process is almost always the hiring of a CFO (often recruited from the company’s accounting firm) to begin the process of bringing financial discipline and administrative structure to the enterprise. As a post-entrepreneurial environment begins to emerge, the founder both appreciates its value to the business and chafes personally under its constraints. The ability of the founder and CFO to manage this ongoing cultural tension, and to value and encourage what each has to offer, is key to the continued success of the business.
The Professional Stage: Not every family business proceeds beyond the managerial stage, either by choice or by reason of limited potential. However, many successful family businesses do have the potential for much greater growth and profitability, and their owners (now often including members of the second generation) have a strong desire to exploit that potential. Doing so requires the company to take a more “professional” approach to the future, in effect following the lead of the most successful public companies. This begins with market-driven strategic planning and goal setting. Successful execution of such plans depends on sound and adequate internal structures and systems. And, most importantly, leadership and management must be based primarily on capability, character and commitment rather than family ties. The absolute necessity for family members to conform to such a professional culture is often a source of tension.
I do not suggest that any of us can know what stage any of our family business clients should aspire to. That is ultimately a decision for the owning family. But they are much less likely to arrive at their desired destination without informed and experienced professional guidance.
Thus, the challenge of helping family business clients navigate this evolutionary process provides both a professional opportunity and a professional challenge.
As key business advisers, accountants can be helpful to their clients in some very specific ways:
(1)Assuring the clients that their experience is a normal and predictable byproduct of their success. Since entrepreneurs are often reluctant to share their struggles, the clients may mistakenly assume that their situation is unique. It is comforting to the entrepreneur to be reassured that these challenges are inherent in the growth of the business, and are not an indication of personal inadequacy or failure.
(2)Helping the clients understand the typical overlap of family issues onto the business, and assisting them in separating out and addressing those issues. This is an area where collaboration between the accountant and a family business consultant can have a very positive impact. Having the benefit of both professional perspectives in determining the uniquely proper balance between family and business is quite beneficial.
(3)Guiding them through the stage-to-stage evolution of the business beyond its entrepreneurial roots to the success the entrepreneur so badly wants to achieve and leave as his/her legacy. This entails working closely with the clients both to develop written plans to guide the business and, of equal importance, to discipline themselves to implement the results of such planning. Given the entrepreneur’s natural tendency to deal with the unanticipated daily challenges of the business, it is important to have a trusted advisor periodically refocus the client’s attention on the future.
Successfully performing these tasks requires an understanding of the complex challenges facing family owned businesses and comfort in dealing with both the concrete business planning issues and the more elusive family issues. This framework is offered with the hope it will be of value to those professionals whose role and function it is to support the success and survival of this crucial element of our economy.
