Family businesses can drive economic recovery — with some help

by Dr. Mark Green

AS lawmakers struggle to reverse the worst American economic recession in decades, they are pouring resources into corporate America through corporate bailouts, new taxes and stimulus packages. Unfortunately, these efforts ignore the fact that family businesses are the true foundation of our economy and hold the keys for our nation's economic recovery. For true economic growth, lawmakers must change tactics and actively support this forgotten sector of our economy.

Family business assistance programs are suffering. There is an immediate need for government and society to send a clear message in support of family businesses, their impact on the business community, and the economy as a whole. Unless and until this happens, family businesses will exercise caution when investing in new jobs, equipment and plants, thereby slowing down our nation's economic recovery.

Family-owned and -operated businesses represent more than 70 percent of all U.S. businesses and approximately 40 percent of the Fortune 500. They built this nation's economy and they will be instrumental in transforming the current economic climate. With personal and professional dedication rarely witnessed in corporations, family businesses have what is needed to get our nation back on track. They stimulate the economy by hiring locally, buying locally, and giving back to local communities.

The Pacific Northwest is fortunate to have many such family-owned businesses, including Bartell Drugs, Columbia Sportswear, Les Schwab, Nike, Nordstrom and Reser's Fine Foods.

Family businesses possess five unique qualities that are sorely needed to get our economy back on track.

First, family businesses are guided by a long-term outlook that protects the interests of past and future generations. Instead of seeking quick money, traditional family businesses seek sustainable, long-lasting business models that can bring in a steady stream of revenue for succeeding generations.

Second, many of the strategies developed and implemented by family businesses are contrary to the widely accepted business practices of corporate America. For example, family businesses have a lower cost of capital and lower administrative costs, because they tend to have lower CEO compensation and less investment in financial systems and controls. In addition, family-owned businesses are better able to take advantage of opportunities that lead to quick innovation, whereas hierarchy and protocol often interfere with the ability of large corporations to seize new opportunities.

Third, family-business owners tend to be fiercely independent, relying on their own ideas, strengths and resources. They rarely seek external financial assistance or bailouts, and the informal investments of friends and family in startup companies far outweigh formal investment.

According to a 2002 study by the Kauffman Center for Entrepreneurial Leadership and Babson College, venture capitalists had provided less than one-quarter of the equity for new ventures launched since the mid-1990s. The independent nature of family businesses leads to sustainable business models.

Fourth, within family businesses, each new generation observes the dedication and commitment required for business success. Members of the succeeding generation incorporate these values into their own work. Most family businesses also highly value their communities, supporting philanthropic activities and volunteering their time far more than their corporate counterparts.

Finally, family businesses excel at striking the right balance. They struggle to weigh the needs of the family against those of the business. Inevitably, they accept that it is impossible to strike the perfect balance, instead finding solutions that favor one set of interests for a period of time before that balance shifts. In this way, they remain flexible enough to adapt to changing economic conditions.

Because of these five unique qualities, the return on investments in family businesses will be much greater than the return on similar investments in corporate America. However, for this to become a reality, family businesses need the confidence and reassurance of a solid government commitment to their success.

Mark T. Green is a principal of The Family Business Consulting Group, Inc., and a clinical professor in family business at the Seattle University Albers School of Business and Economics.

Achieving Success in Succession

by Dr. Mark Green

Any number of problems – some obvious, some not so apparent – can prevent smooth transitions from one generation of family business ownership to the next. Though there are infinite possible trouble spots, we can boil them down to two primary ailments of succession: poor communication and lack of planning.

Poor communication
Poor communication is arguably the biggest culprit. It takes many forms, but as succession involves many of life’s unpleasant conversation topics (death and money, for example), it also requires wrestling with such charged issues as power, control and – perhaps the most unsettling for all of us – change. Add emotional relatives and assorted family dynamics to the mix and you invite communication breakdowns.

A family business that discusses these issues straight on, with open and honest communication, can do a better job with succession. If both the controlling generation and the succeeding generation participate in open dialogue and discuss their ideas about the future, the path should be smoother.

To improve communication, a family business must have a system in place to provide an open forum for discussion of sensitive or tough issues. One of the best ways to do this is to develop a governance structure that fits the needs of the business and the family in business. For the business, a family needs a board of directors or other governing board that addresses the issues of the business.

Like any business organization, the family needs a governance structure to guide it, such as family meetings or councils, to chart a course for the concerns of the family. How formal such a structure should be is up to the family to decide, but the governance structure should be the forum to discuss even the most contentious issues openly and honestly. Having this infrastructure in place does not guarantee success, but it can greatly improve and enhance communication, thus improving the chances of the family and the business succeeding into the future.

Planning
Even the clearest communication can’t make up for a lack of planning for succession. The dictionary defines succession as “the sequence of people or things in order one after another.” You can either plan for succession or have it happen to you. Succession is going to occur whether you like it or not, so why not take control and tackle it head-on? Ironically, some of the most control-oriented leaders of family businesses (usually the founders) are often the ones who must relinquish control to secure the future of the business they created. The leader’s failure to play the end game often is his or her lasting legacy to the family and the business. Often, these founders see the succession process as a threat to their power, while in truth, succession only solidifies their long-term influence.

With good succession planning, we must tackle all the dark issues that we don’t like to talk about – money, power, control, change and taxes – to better the chances of our company lasting long into the future. This means spending time, money and energy up front to save spending more time, money and energy later – with greater risk and emotional cost to the family and the business.

Remember that a plan is not a plan unless it is in writing. Too often, family businesses fail to put things on paper; instead, much of the planning process is retained in a key person’s head. If that key person is not around, then neither is the plan.

When should I start?
Yesterday!
Succession should be on the radar screen of every company from day one. The future of any organization is on the line, and without careful consideration of its greatest asset – its human capital – the organization is in jeopardy. Since the future is uncertain and unpredictable, it is only prudent to plan for the “what-ifs?” especially to keep them from becoming “what-nows?” Mark T. Green, Ph.D., is an associate with the Family Business Consulting Group, Inc.® Reprinted with permission of the author from the November 2006 issue of the Family Business Advisor. ©2006 Family Enterprise Publishers, www.efamilybusiness.com. All rights reserved.

Mark T. Green Ph.D. is an associate with the Family Business Consulting Group, Inc.®, based in Portland, Oregon, and can be reached at green[AT]efamilybusiness[DOT]com or by calling 503-510-0591.

Reprinted with permission of the author from the April 2007 issue of the Family Business Advisor. ©2007 Family Enterprise Publishers, www.efamilybusiness.com. All rights reserved.

Fire Drills for Family Business

by Mark Green, Ph.D.

Remember your school days when you were sitting in the classroom and all of a sudden you heard the loud sound of an alarm bell? At first you were startled, but after some quick instructions from your teacher, you lined up and exited the room. You walked across the schoolyard and away from the building and stood outside for the next 10 minutes or so waiting to be told that it was safe for you to head back to your classroom. In the meantime, your teachers did a systematic check to make sure that everyone was out of the building. From your perspective, this little interruption offered welcome relief from time in class working on geometry. Fortunately it was just a fire drill and was not a real emergency. Each year you would practice a few fire drills, and over time it would become a routine for you that someday might end up saving your life in a real emergency situation.

The fire drill serves as an excellent metaphor for the family business when looking at the process of succession planning. In a family business fire drill, we pretend that the leader of the family business failed to show up at work, thus triggering the alarm bell. As morbid as this might sound, the purpose of the drill is to see if the family and the business are ready to handle this crisis in the absence of the leader. The focus of the fire drill is on understanding how the family, management and ownership systems respond to this change and learning the strengths and weaknesses of your succession plan. In conducting a fire drill, we focus on three key areas: the technical aspects of succession planning, communication and continuous learning.

Technical Aspects of Succession Planning

At the core of any disaster plan is the process of planning. Planning requires us to assess and map out our current environment and then develop a process to achieve our goals. In a family business, it is essential for effective succession planning that we know the details of ownership and organizational structures to know how decisions are made and who can make them. From an ownership perspective, we must understand our estate plans and buy/sell agreements. In the business, we must understand reporting relationships and decision-making responsibilities as described by the organizational chart. The purpose of reviewing these documents is to determine how ownership and management decisions will be made in the absence of the leader. In the planning process, we must also make sure that these technical structures not only match our goals but also result in a manageable business. And we need to make sure that the people who will step into new decision-making roles are prepared for the responsibilities they will take on. The fire drill should help us identify areas where future decision makers (on the ownership and leadership fronts) require more information or experience to fulfill their roles. The drill should also help to identify changes in policy or structure that need to be made to ensure that the business can be managed well in a crisis.

Good planning requires a team of professionals that can work together and is willing to revisit the plan on a regular interval in order to keep the plan current. All people who are part of the succession plan should be aware of, and prepared for, the roles they will be asked to play, which leads to the importance of communication.

Communication

At the very core of family business is the importance of open and honest communication. While this is difficult enough to ensure when someone is alive, it is almost impossible if there is no written plan for succession. But putting plans on paper in a family business is not enough; all who are affected by it must understand the plan and how it works. It is surprising how often we find that, in the process of conducting a fire drill, mature family members who are experienced and working in the family business do not clearly understand the plan. Outside of the family, it is also surprising that many nonfamily executives who have worked closely with the founder for many years have never considered that they might someday report to a family member who has not been active in the business. By conducting a fire drill on a regular basis, these assumptions can be addressed, and over time any lingering unknowns can be clarified.

Continuous Learning

Just as with the fire drills in school, there must be opportunities to practice so that we can improve our performance as well as learn more about the subject. In conducting a family business fire drill, we sometimes break down the drill into three components: the first hours, the first week and the first month without the leader. By focusing on these time frames, we can practice the types of decisions and who can make them from the management, ownership and family perspectives. Developing a process and repeating it builds our confidence in case there is a real emergency. At each step of the way, we spend time reviewing and learning what works and what needs to be improved. This is essential, especially when a real disaster strikes, since practical learning guides us during a crisis, especially the emotional loss of a family member. For this reason we suggest that a family business conduct a fire drill perhaps as often as once a year to make sure that everyone understands the process and is comfortable with it.

The family business fire drill is a simple tool that can be a key element of your risk management plan. While the thought of being out of the picture of your family business is a bit unsettling, facing the eventuality is the best way to deal with the difficult issue of succession planning. By conducting a drill on a regular basis, you will learn more about your family business and begin to see how you can improve the odds of survival of the family business by actively planning for the future. To assist you in your quest for improving your odds of survival as a family business, regularly check in with your professional advisors, learn from other family businesses and spend time working on your family business. However, the most important element is to lay out your goals and discuss them with your family. Hopefully, you will never have a real fire. In that case, the real benefit of the fire drill is that members of the business and family are talking about plans for the future and ensuring that processes and structures are in place to support a smooth transition.

Mark T. Green Ph.D. is an associate with the Family Business Consulting Group, Inc.®, based in Portland, Oregon, and can be reached at green[AT]efamilybusiness[DOT]com or by calling 503-510-0591.

Reprinted with permission of the author from the April 2007 issue of the Family Business Advisor. ©2007 Family Enterprise Publishers, www.efamilybusiness.com. All rights reserved.