Family Values and Family Businesses: Distantly Related?

The son-in-law interrupted, “I hate factories. I can’t stand the noise.”

“I see,” replied the father-in-law. “Well, then you'll work in the office and take charge of some of the operations.”

“I hate office work,” said the son-in-law. “I can't stand being stuck behind a desk all day.”

“Wait a minute,” said the father-in-law. “I just made you half-owner of a moneymaking organization, but you don't like factories and won’t work in an office. What am I going to do with you?”

“Easy,” said the young man. “Buy me out.”

Okay, so it’s not exactly a side-splitter. Still, this old joke is a good reminder of why we continue to find the drama and the dynamics of family-owned businesses so fascinating.

But it’s not just the reality-TV aspect of family businesses that makes it urgent to understand what they are and how they work. They’re the bedrock of the American economy. More than one-third of Fortune 500 companies are family-controlled. Family businesses account for half of U.S. gross domestic product, provide six of every ten jobs, and account for more than three-quarters of all new job creation.

Family businesses are much in the news these days as the nation looks to its closely held firms for momentum to lift the economy out of recession. But in good times and bad, the contributions of family businesses often come at a grueling cost. A recent article in Inc. magazine notes that fewer than 30% of family businesses survive to the second generation. Just 10% make it to the third—proof that family solidarity provides no guarantee of business longevity.

Family ties—the very bonds that give these firms their underlying strengths—can impede their progress as profitmaking entities. For instance, says consultant Dominick Celantano, there’s “triangulation”: the sticky situation that arises when two business-owning family members can’t communicate and require the intermediation of a third. Celentano, who teaches the subject at Fairleigh Dickinson University, has posted a helpful online slide presentation that walks through the key concepts of family business management.

Business writers in the general media are sympathetic to the concerns of family firms, but they’re also frank about the difficulties that these companies sometimes make for themselves. Jay Goltz, a small-business owner who blogs for The New York Times, has been following the fortunes of a company he is mentoring, a Chicago printing firm that has become well known in the industry for its green practices. But the family members running it, he writes, have become mired in detail: “The company is stuck in a slow growth mode because the key people are always working on the small picture. This is known as working in the business instead of on the business.”

Goltz says he confronted the family with the proposition that the company might not be the right place for all of them. The reaction: “Everyone sat silently.” He also warned them against enabling counterproductive behavior by employees who happen also to be relatives—a “disservice to the business as well as to other employees,” writes Goltz.

An article in The Wall Street Journal notes that in times like these, a family firm couldn’t afford to enable a weak player even if it wanted to. It advises that family members who can’t pull their weight shouldn’t be hired, just as relatives who are on the payroll shouldn’t be additionally compensated just because their last names are the same as the owner’s. Think twice before creating a job for a family member who asks for one, the writer warns, adding that “if a family member is an underperforming worker the best thing for the business is to get rid of them.”

The always-looming issues of exiting a business and transferring ownership to heirs get equally blunt treatment. As this piece in the mobile edition of the Los Angeles Times points out, “Transitions cost money, and many family firms are less valuable now than just two years ago. That has made it harder for founders to sell for enough money to support themselves in retirement as they had planned.” And for those who are planning not to sell but to hand down, the road can be no less rocky. In fact, writes consultant John Warrilow in a column for The Wall Street Journal, the owner who transfers a family business to his or her children could be putting it into the hands of precisely the wrong people.

“The drive to succeed comes from wanting something you don’t have,” Warrilow says. “Many business owners have done a great job giving their kids everything—except the hunger they need to scratch and claw their way to building a successful business.” The preferable alternative: “Sell your business, and if you still want to give your kids something, give them money in your estate to start a business. Not only will your kids be better adjusted; you won't sabotage your business.”

Faced with obstacles likes these, what can owners of family businesses do? Get help, and take heart.

“If your business is thriving, but members of the family are weighed down by innumerous responsibilities, then it's time to hire outside help,” says Inc. Consider hiring a seasoned manager with real expertise in an area where you are currently lacking.” (Suggestion: Google “family business centers.”)

Even in the worst of times, this article goes on to say, businesses that are run by teams of family members have better odds of survival than those that are not. This also is the theme of a report in The Guardian about new research into small-business issues in the UK.

"The emotional dynamics of a family have a massive impact on the running of the business,” the person conducting the research is quoted as saying. “These firms usually have a close and strong organisational culture—there are shared goals and objectives, making it easier to respond to dramatic changes.

"It is easier for family-owned firms to react to changes in their environment and they react faster—and can be more successful—as a result.”