Magazine article The CPA Journal

Consulting with Family-Owned Businesses

Magazine article The CPA Journal

Consulting with Family-Owned Businesses

Article excerpt

More than 90% of U.S. businesses are owned and managed by members of a single family. Yet, most family-owned businesses do not survive the second generation. The average life expectancy of such businesses is roughly 25 years. These factors contrive to make management succession within a family-owned and operated business a very difficult issue.

The following guidelines can be used to stimulate discussion with clients and guide their planning in this critical area.

Require that family members gain full-time experience elsewhere before they work full-time for the family business Part-time or summer jobs in the family business may motivate and orient teenage family members, but full-time employment without at least two to five years' substantial postcollege experience elsewhere is usually a mistake. Let the younger generation prove themselves to someone else. Let them taste success without wondering whether they earned it, and let them taste failure without their parents standing by. If they begin to succeed elsewhere and still want to join the family business, bring them back. If they begin to succeed elsewhere and prefer to stay away, let them-they will probably be healthier and happier. If they fail elsewhere, do not bring them into the family business. No business can afford to be a haven for unsuccessful relatives.

When younger family members work full-time, give them line responsibility and the freedom to make mistakes. People learn by doing and by making mistakes. Placing younger family members in "safe" jobs, where they cannot fail or do much damage, is shortsighted and virtually guarantees their eventual failure as well as damage to the family business.

Successful entrepreneurs are usually individuals who know how to produce a product, provide a service, or sell either. Their line management skills are a critical element of their success. Assisting parents by managing the office or keeping the books will not cultivate these skills.

Prospective successors must prove themselves worthy of leadership by assuming responsibility for one or more key line management areas of their family business. For instance, a family owns a small chain of retail stores and assigns a young family member as a store manager, as early as possible in her career. She is given as much as or more autonomy than nonfamily managers and is encouraged to experiment. If she succeeds, the family assigns additional stores. If she fails, she damages only one unit, probably only temporarily, and the farm ly reevaluates its succession plan.

Equally important, however, the customer base, production, operations, and marketing/sales areas must remain under family control. Owning all or a majority of the shares is not enough. Otherwise, talented and aggressive employees can leave, taking the essence of the business with them.

Most family businesses that survive and flourish well beyond the typical quartercentury life cycle have been reinvented periodically, usually by new generations of management. Many successful succession programs involve allowing key young family members to create and launch a new product line, service, marketing strategy, or business model.

Avoid management responsibility overlap among family members. Much of the discord in family-owned busi nesses arises when family members second-guess their relatives and resent taking suggestions or orders from them. If work assignments overlap, friction and serious problems are likely. A clear separation of responsibilities and authority goes a long way toward reducing tension and promoting harmony in the family and the business.

As early as possible, each family member should have near-total autonomy on a day-to-day basis in her particular area, subject to review by the senior member of the management team. …

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