SCORE: The successes and obstacles of the family business

SCORE recently put together a very interesting infographic on the family business. Of the 28.8 million small businesses in America, 19 percent are owned by families.

SCORE recently put together a very interesting infographic on the family business. I can relate to this because of the 28.8 million small businesses in America, 19 percent are owned by families.

I have not found a commonly accepted fixed definition of a family business. Some consider it a family business if more than one member of the owner’s family works there, or if a single family wields a dominant influence. Others consider it a family business if the business itself says it is.

However, SCORE data narrowed the definition to "any business in which two or more family members operate the company, and the majority of ownership or control lies within a family." It examines the achievements and challenges for American family businesses.

Are family businesses successful?

• Family-owned businesses employ 60 percent of the US workforce and create 78 percent of all new jobs.


• Family businesses generate 64 percent of America’s gross domestic product.

Family-owned businesses range in size:

• 1.2 million of family-owned small businesses are run by a husband and wife.

• They can range from two people to thousands in a Fortune 500 company.

Challenges family businesses face:

• 30 percent of family businesses survive the transition from first- to second-generation ownership.

• 12 percent survive the transition from second- to third-generation ownership.

• Only 13 percent of family businesses remain in the family more than 60 years.


• And 47 percent of family business owners expecting to retire in five years do not have a successor.

My experience suggests family businesses face unique problems in remaining family businesses. That is, with the opportunity comes challenges. How do family businesses survive?

• Good governance: 94 percent of family-owned firms are controlled by supervisory or advisory boards.

• Focus on the next generation: More than 40 percent of companies included younger family members on boards and committees to nurture business and management skills.

• Customer and employee-oriented: 74 percent of family-owned firms report stronger work values and culture.

Daniel Lehrer is founder and managing director of BizBest Media Corp. In a recent article on the "Six Secrets of Family Business Success" he shares an example and his suggestions:

Henry Hutcheson, founder and president of Family Business USA, grew up working for his family’s business — Olan Mills Portrait Studios. In 2011, the company was sold after about 80 years of family ownership. Now, Hutcheson helps other family businesses improve operations, plan for transition and strengthen family relationships.

With decades of family business experience, Hutcheson identified the key strategies that have helped the best family businesses survive and thrive.


Here are six keys to making that happen:

1. Focus on professionalism:Some families forget any business must operate effectively and professionally in order to survive. In the early stages, many family businesses operate more loosely. The operating "rules," for example, simply might be in Mom’s or Dad’s head. But as it grows, the business needs to be more professional. It must hire and promote employees (family members or not), hold regular meetings, produce accurate financial statements and have some sort of outside, nonfamily advisory board.

2. Open and regular communication:Family businesses often implode because of poor communications. At a minimum, Hutcheson said, every family business needs to hold regular business meetings, practice active listening and develop its own family business code of conduct. Meetings should be proactive, and cover topics such as business performance and transition. Many multigeneration family businesses consider communication the single most important ingredient for success.

3. Clearly assigned roles and responsibilities:Family members often feel a natural tendency to be involved in everything. But "everything" is not an appropriate responsibility. Without clearly defined roles, family members can duplicate efforts and cause friction. Make sure each person knows which decisions he or she is responsible for, and which things require more collaborative action by the family as a whole.

4. Accurate and transparent financial records:A lack of solid data or accurate financial information has been the downfall of many a family business. It’s especially vital if the business needs to raise capital or operates in a fast-growing industry. Accurate financial data and revenue projections are vital for planning purposes. Otherwise, you don’t know if the business will have money to invest — or needs to go on a spending diet. Says Hutcheson, "Good financial data is like a clean windshield: It lets you see exactly where you are."

5. Market-based compensation for family members:Family businesses must avoid over-paying family members. Market-based compensation is fundamental to long-term success. But parents in a family business tend to either over-pay the next generation, or simply pay the same, regardless of responsibilities. Both are bad practices. Unfair compensation practices also can cause discontent among nonfamily employees and are harder to correct the longer they persist.

6. Business-based hiring practices:The basic rule is this: Don’t hire relatives unless they are qualified for the job. Competence is the key, said Hutcheson. The remedy for unqualified family members is to get them trained, move them to a role that matches their skills, or have them leave.

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