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The Myths and Realities of Family Businesses are Worth Noting (and Celebrating)

image for rick segal pieceLet’s start by defining a family business. The classic definition is a business where a single-family lineage has ownership control, is active in management and involves multiple generations.

But some of those boundaries have become blurred. What about blended families? How about publicly traded companies? Would siblings who used “family money” for startup capital fit? What if the organization is now so far away from its origin in terms of service or product, but the ownership remains under family control? Would a team of spouses fit if they were continuing a lineage from one of those two families? Obviously, the definition needs to be flexible with the situation.

There are two tests I like to use as defining points—one being more about individual perception. In short, if you think you are a family business, then you are.

The second test comes after asking whether the ownership system prevents “outsiders” from gaining control.

One other caveat would be when ownership makes a conscious decision that this business is NOT for sale, but rather will be passed on to future generations, with that decision coming ahead of a next generation becoming involved.

Statistics about family business are difficult to find, and many of those commonly used are ancient or of unknown origin. So, I will ask for your forgiveness and request that you follow the thoughts and not the missing footnotes.

Myths
One common myth is that family businesses are small mom and pops like the corner party store, gas station or dry cleaners. The truth is that 35 percent of Fortune 500 firms would be considered family businesses. A few larger examples that fit the category: Walmart, Ford, Mars, Comcast, Motorola, Bechtel and Little Caesars, which is owned by Michigan’s Illitch family.

A second myth is that family businesses underperform their non-family counterparts. Again, wrong. In fact, they usually outperform their parallel counterparts by 5-10 percent in long term profitability and sustainability.

Third on the list of myths is that family firms don’t endure. It has been said that an estimated 50 percent of family firms will make it to a second generation, with 3-4 percent surviving a third generation, meaning that a business surviving to a second generation would be about 20-25 years old, and surviving through a third generation would mean it has lasted 60-75 years.

But consider that 50 percent of startups don’t last two years and it’s clear that family firms do exceptionally well from an endurance standpoint.

And, by the way, that was the intended conclusion when that 50 percent statistic was first observed.

Since then it has been twisted to become a negative instead of a positive. We often forget how young a country we are, especially considering that family firms in Europe and Asia date back generations and even centuries.

A fourth myth is that family businesses lack business acumen and professionalization.

While startups might need to find their sea legs, like all businesses that aspire to be sustainable, they need to provide competitive quality products and services. If they fail to do so, they can’t survive.

The concept that a business is a family-owned enterprise can be both a marketing and an organizational strength. More and more family businesses are using “family-owned” as a selling point in their marketing tag line. The family concept offers the perception of a more caring customer-service oriented approach. After all, the family name is on the door and Grandpa’s portrait is in the lobby.

Realities
Family businesses have the advantage of “patient capital.” Decision making in family firms becomes long-term instead of focused on quarterly returns. The focus becomes for the common good and for future generations, the decisions tend to be stronger and the business is more sustainable.

Wall Street has marveled at the speed at which family business can make decisions and then act on those decisions. There seems to be much less necessity to create “buy-in.” When a group of owner/managers are of like-minded thinking, creating change for the betterment of all is so much easier and quicker.

Trust is the fabric of a family business. Businesses hire to provide needed functionality, either to expand or to replace exiting employees. If you can hire someone you trust to have your best interest at heart, then so much the better. If you can trust them to “have your back,” even better yet. If you create a culture of trust and loyalty in your company, it goes a long way toward employee satisfaction, and that almost always transfers to the bottom line.

The common good is another theme in family businesses that makes them more competitive. If what’s good for the family is good for the business, and vice versa, then the core group can all be pushing in the same direction and that makes climbing any hill more achievable. Self-sacrifice for that common good becomes easier because of the belief that the payback is inevitable instead of questionable.

We look to create balance in our lives. In family businesses, creating that balance tends to be more achievable because of the “common good” doctrine. If everyone is driving for all to be successful and happy, then creating balance needs to be part of the mix.

Here is another reality: family business is the most common business structure in the world – estimated to be as much as 80 percent of business entities in the U.S.

Family firms tend to be community supporters and philanthropic. They should be celebrated.

Richard Segal

Rick Segal is the principal at Segal Consulting. He holds an Advanced Certificate in Family Business Advising with a Fellows status from the Family Firm Institute. Rick is the founder of the Family Business Council and its affiliated study group. Reach Rick at [email protected] or by visiting www.segalconsulting.biz