Recently in Family Business Category

James Barood with the Rothman Institute of Entrepreneurship at Fairleigh Dickinson University's Silberman College of Business offers some rather harsh words for family business patriarchs in a column at Business Insider:

There are millions of Hosni Mubaraks. Most lead family businesses, not nations. Mubarak ruled over 80 million people, while these business founders may preside over dozens, hundreds, or even thousands. Collectively, though, they may hurt as many millions as Mubarak did - and in many of the same ways.

Ouch!  Read on to see how professor Barood compares these family business founders to Mubarak.

I wrote a review on Erik Wesner's book, Success Made Simple, back in May.  After reading his book about the success of Amish business owners we decided to get him to our campus.

Wesner spoke to a group of students and people from the community this past week here at Belmont University.

Beyond the remarkable five year business survival rate of about 90%, Wesner offered some wonderful insights into the Amish culture and how it shapes their entrepreneurial nature.

Like many entrepreneurs, the Amish look at entrepreneurial success in ways that go well beyond financial success.  Owning a business allows the Amish to have more time with family, as most of the businesses employ family members.  Time with family is at the core of their culture, so using business ownership as a tool to maximize that time is paramount.

Success is also tied to legacy.  Amish entrepreneurs hope to be able to pass down their businesses to the next generation.

The ability to give back to their community through mentorships, supporting missions, and financial contribution to those in need is also at the core of how they view success.

It is clear that their culture is behind much of their ability to build sustainable businesses.  A strong work ethic is at the core of their culture.  And if a business falters, the community rallies to offer help with the struggling business, including acting as trustees if necessary.

Wesner offered three business lessons that he learned from the Amish that he believes are transferable to any entrepreneur:

1. Humble leadership -- never expect employees to do anything you won't do yourself.
2. Husbandry of resources -- there is very little waste in Amish businesses.  They find ways to use waste for new functions whenever possible.
3. Appreciation for small scale -- bigger is not better to the Amish.  Their schools are kept small, their churches are small, and they limit the growth of their businesses.  They believe that too much growth can lead to arrogance and pride.  Small scale also keeps time for family.  The virtue of temperance is definitely evident with the Amish.

Hearing Wesner speak about Amish entrepreneurs brings home the fundamental role of culture in shaping entrepreneurship in an economy.

The odds of successful family business succession goes down with each generation.  There are challenges with even making it to even the second generation of family business ownership, and by the third the odds become rather steep against successful succession.

The key is succession planning.  Dave Specht, an adjunct instructor at the University of Nebraska, has a very practical and entertaining overview of the challenges of succession and some of the ways to overcome them in a new article published in Family Business Magazine.  From the article:

Family business owners are re mark able people, yet the sobering truth is that they are mortal human beings.  When it comes to preparing for the inevitable--business continuity planning--there are four reasonably predictable ways that most business owners' attitudes can be characterized. Their thoughts and behaviors are represented here by four superheroes: Captain Immortal, Dr. Shhhh, Oblivious Man and Ms. Reality.

My column in today's Tennessean looks at the challenges of taking financing from family:

In good economic times, 85 percent to 90 percent of capital for small businesses comes from friends, family and the entrepreneur's own funds.

But during times of tight credit or recession, family members may be one of the few sources of funding for most startup entrepreneurs.

When taking funding for a business from family members, it's critical that everyone involved fully understands what they are getting into.

Family members provide funding for many reasons. Some are motivated by altruism -- they just want to help the entrepreneur get started and be successful. Others can be driven by greed -- they see the investment as a way to ride on the entrepreneur's coattails to fortune and fame.

But no matter what the reason for a willingness to provide financial assistance, defined boundaries and clear expectations must be clearly established.

Here are some rules of the startup road:

• Never take money for a business from a family member as a "gift." It should be treated either as a formal loan or investment.

Present the interested family member with a formal business plan, which should be discussed in full detail.

• Any loan from a family member should have a formal loan agreement that defines interest rate and payment terms. To help the entrepreneur, payments can be delayed, but interest should accrue during this time and eventually must be repaid.

The Internal Revenue Service publishes the current minimum interest rates at its Web site, www.irs.gov/ (just enter "interest rate" into their search feature).

• Do not structure any loan without interest. There can be tax consequences for all involved if such a loan is not set up with acceptable interest charges.

• If the money comes in as an investment, the family member is now the entrepreneur's partner. This means they have certain rights that any shareholder has in a privately held business, which can include approving certain major decisions, such as the sale of the business.

Send reports

All investors should be provided with complete financial data at least once a year.

If the business makes a profit, they probably will owe taxes on this profit. All of this must be made clear before any investment funds are accepted.

Whether the money is treated as a loan or an investment, the entrepreneur should regularly communicate good and bad news. Provide regular quarterly or even monthly summaries that include any significant accomplishments, challenges and major events.

All of these steps will help keep issues that are business related as strictly business, and issues that are family as family matters. After all, Thanksgiving comes every year. Don't let a business deal spoil the family dinner.

There is a good article on the importance of succession planning in family business at KraftCPA's on-line newsletter:

Succession planning is important in any business, but it's sometimes overlooked in family-owned operations. This is a big mistake. There are numerous former family-run companies that no longer exist due to poor or no succession plan.

The plan needs to be well thought out and discussed with everyone affected. Don't just assume that a son or daughter will want to carry on the family business. Even if your children say they will take over, they may not have the true desire required to continue a successful operation.

We see a lot of these issues in students who are considering, and being considered for, taking over family businesses. There is often a communication breakdown, with lots of unrealistic or inaccurate assumptions by parents and children. This type of planning requires long-term, open, honest conversations about what the future will hold for all involved.

You can find the full article here.

Rising property taxes can often squeeze homeowners out of neighborhoods that they have lived in for years. And they can also force small business owners to sell their businesses. Such is the case of a 117 year old family owned amusement park outside of Washington, DC. From the Washington Post via Cato-at-Liberty:

For 117 summers, generations of children have frolicked through Trimper's Rides on this beach resort town's signature boardwalk. But this Memorial Day weekend might begin the last summer they circle the antique wooden carousel, fling around the Tilt-a-Whirl and loop through the Tidal Wave roller coaster.

The Trimpers say they are considering closing the amusement park and arcade this year.

As Ocean City has exploded into a megaresort, property taxes have soared for Trimper's, which operates on the last chunk of undeveloped land on the town's three-mile boardwalk. In the past three years, family members said, their assessed property value has tripled, from $21 million to $65 million.

So the family is now torn over the possibility of having to sell the business because they just can't generate enough revenue to pay for the property taxes. I know, I know. Don't cry for them -- after all they now own land that is worth $65 million. But, if you read the rest of the story, you will hear a message that I hear over and over -- it just isn't all about the money. This is a century old family business. They take joy and pride in providing good family entertainment and good jobs.

Yet another example of public policy that is blind to our entrepreneurial economy.

(Thanks to Bill Hobbs for passing this along).

Professor Frank Hoy from the University of Texas at El Paso has published an excellent article which has a critically important lesson for family businesses (note: you can get access to an abstract, but need to pay for the full article). He argues that, like any mature business, family firms must find ways to innovate and even redefine their businesses if they are to continue to survive in the marketplace.

Does family matter in corporate venturing? Converting the question, can a family firm survive without corporate venturing? Life cycle theory contends that it is normal for an organization to form, grow, mature, decline, and die. Long-term survival, especially through multiple generations, would require renewal through innovation to avoid decay and death. Strategic corporate venturing may be the answer for many family firms. To innovate and prosper, a family enterprise must contend with multiple life cycles, rarely synchronized, any one of which may be in a decline stage at any point in time.

The business model that created the initial success for the founder in all probability will not allow the business to survive over the long term in a dynamic market. Some of the same processes of innovation that created the business in the first generation may need to be repeated by subsequent generations.

My experience with family businesses is that there can be two sources of resistance to innovation (or what Prof. Hoy calls willingness to change) in family firms. I often see resistance from the first generation, where the founder may bristle at any suggestions about "doing things differently than we have done them all along." But resistance to change may also come from subsequent generations, who may not have the entrepreneurial passion of the founder.

However, this article also got me thinking again about how we define entrepreneurship. The type of innovation Prof. Hoy refers to is sometimes called corporate venturing or corporate entrepreneurship. The argument for calling innovation in established businesses entrepreneurship is that it is the same basic process. And since we define entrepreneurship as a set of processes rather than in terms of a type of person, entrepreneurship can take place in a variety of different settings and contexts.

My concern is that this rather broad use of the term has led to the loss of any clear meaning to the word entrepreneurship. From a previous post in which I look at the issue of a definition:

Entrepreneurship has become sort of a generic term that describes all sorts of behaviors that involve being creative, being mischievous, being sneaky, breaking rules, not wanting to follow rules, and so forth. An example involving rules can be heard every day in large corporations. "I wish they would leave me alone. I am just being entrepreneurial." These people are not starting any businesses; they just use the term as cover for not wanting to follow corporate policy. I actually heard a criminal described on a newscast as being entrepreneurial because he was somewhat clever and creative in his crime. At least in American culture, the term entrepreneurship has become blurred into any one of a large collection of basically anti-social behaviors. But, I suspect from conversations I have had with friends and colleagues from around the world that is not uniquely an American issue. In some cultures they avoid the use of entrepreneur, because it has developed the connotation of a sleazy, cunning con-man.

This is what can happen when terms take on a more generic meaning. The term loses specificity and really begins to have no clear definition. Entrepreneurship has become a trendy term that can mean almost anything you want it to in many contexts.

I do not mean to diminish the importance of the lesson for family businesses in Prof. Hoy's article. The need for innovation and corporate venturing cannot be overstated for most aging family firms. But I do wish all of us would be more careful and narrow in our use of the term entrepreneurship. Let's keep entrepreneurship as the process of business formation by privately held ventures.

Impact Lab summarizes a study that appears in the June issue of Family Business Review in which the author finds that family businesses experience better financial performance than non-family firms.

Professor Jim Lee said family firms tend to experience higher employment and revenue growth and are, overall, more profitable than non-family businesses. He says his study suggests the average profit margin for family firms was 10 percent, 2 percent higher than non-family companies.

Most of us think of family businesses as being Mom, Dad, sister Sally, and cousin Fred. Prof. Lee looked at a very different type of "family business." His sample was Fortune 500 businesses that still have the founding family having a significant presence in the company. I know, I know, this is a blog about entrepreneurship, not corporate America. But, the study does raise an interesting issue that is relevant for all businesses from small to gigantic.

I wondered why these businesses would have better performance. Were they smarter business people? Not likely. Were they in certain types of businesses that performed better? No, because he controlled for those other variables.

Then I started thinking about the chapter I just sent to my co-author earlier this week. It was about the virtue of prudence in entrepreneurship. We argue that prudent entrepreneurs are those who understand that their role as a business leader is one of stewardship. From a theological position, we are all stewards continuing God's creation here on earth. From a more pragmatic perspective, we are stewards of the resources we have pulled together from a variety of sources: money from investors and/or lenders, labor from our workers, time away from our families, space from a landlord, materials from our vendors, and so forth. As entrepreneurs, all of these folks trust us to use the resources given to us wisely and effectively.

You will often hear entrepreneurs talk about the heavy responsibility they feel when an investor hands them a check. It is no longer just the entrepreneur's money to lose, but now someone else has said, "I trust you to use this money to build a successful venture."

By being good stewards, by being prudent, we think twice about how we use this precious resource that we have been given to build our business. We think long and hard about whether what we are spending will really build sales and profits. Good stewards are good bootstrappers. We look to be effective, but by spending the least amount of money that we can.

In today's public corporation there is not just a separation of ownership and management, there is a total disconnect. We see CEOs from public companies spending money like drunken sailors. If fact, some might argue that they are spending money like politicians in Washington! A million dollars here, a billion dollars there. But who's counting? My co-author Mike Naughton talks about the disconnectedness between capital and communities in today's culture as a contributing factor to this absence of stewardship and prudent actions in business.

But, maybe in the public firms in this study, where there is still a large presence of the family still associated with the business, there is a stronger sense of stewardship. Money is not some commodity that comes flowing in from people they will never meet nor be personally responsible or accountable to: it is still in large part the family's money they are spending.

This study at least hints that good stewardship in business is not only a morally good act, but financially good, as well.

Once in while there are some interesting findings that come out of academia. The National Dialogue on Entrepreneurship reports on a new study sponsored by the Census Bureau (I thought the constitution says they were only supposed to count us every ten years to figure out representation in the House....) that looks at the impact of a family business background on entrepreneurial success. Does it make a difference if an entrepreneur grew up in a family business environment? The study finds that it does improve success for the entrepreneur, but only if the entrepreneur actually worked in the family business.

That is not an earth-shattering finding to any of us who have some family business in our history. I learned a lot of lessons from the successes and mistakes by working in the businesses that my Dad started and bought. I see the same thing in some of my students who come from family businesses and have had experience working in them.

So the conclusion I would draw from this is that if you want your kid to have a slightly better chance for success should she decide to become an entrepreneur, which is much more likely in today's economy, then let her work in your business while she is growing up. (A note of caution: Read this post if you live in Washington state before you start your kids doing any work in your business). I would also conclude that with the explosion of entrepreneurs in the economy, our future is bright if we heed Crosby, Stills, Nash, & Young and teach our children well. (For you younger readers, this is a group from the 60s and 70s, not a law firm from Manhattan).

But the authors of the study, both from California I might add, make one of those incredible leaps in logic that only a hard-core fan of socialized entrepreneurship can make. They conclude that these findings show that we need more public sector "governmental programs providing mentorship, internships, or apprentice-type training (to) help the historical inequalities in business ownership patterns." That's right, it is not fair that my father (who did not go to college and was the classic self-made man from the WWII generation) took the risk to start and buy businesses and gave me the chance to learn by working in several of these businesses. Why, that gave me some marginal benefit in the economic game of life.

I have been warning of government creeping into the world of entrepreneurship. The more important it becomes in our economy, the more we will see them trying to meddle by trying to pick market winners, getting their fingers into angel financing, trying to set standards for training entrepreneurs, etc., etc. And this is not just a concern within the US. As entrepreneurship expands economies around the globe, agencies like the UN are also trying to get their hands into the process with proposals like the World Tax and other programs to redistribute wealth and pick market winners to establish new businesses in specific economies of their choosing.

For our economy to continue to grow over the coming decades it will require continued entrepreneurial development, which requires free markets, not socialized entrepreneurship.

On St. Valentine's it only seems fitting to look at the growing trend of couples going into business together. From IndyStar.com:

"Copreneurs," as they're called, are a rapidly growing segment of business partnerships. The number of husband-wife companies has more than tripled since 1990, topping 3.6 million, according to the U.S. Census. Glenn Muske, co-author of a 2002 study titled "Copreneurs as Family Businesses," believes the number of copreneur firms is "greatly underestimated." He said couples are leaving corporate jobs and opening businesses, but for reasons beyond the bottom line.

Family and lifestyle considerations are among the main reasons couples are tying a double knot and becoming both life and business partners. Although it can get rather complicated and for some couple overwhelming, it can work.

And that is the key word: work. A good marriage takes hard work and a good business partnership takes hard work. Putting the two together and making them both work creates the need for a tremendous amount of effort and planning. It rarely just "happens."

Think it through very carefully. An article from Inc.com quotes an expert who estimated that only 5% of couples can make a combined business and marriage partnership work.

The challenges of being both types of partners at once are not just twice as many; the challenges can feel like they go up exponentially. That is why I like to refer to it as a partnership squared, rather than a simple double partnership.

But to all of you couples giving it a try, Godspeed and Happy St. Valentine's Day!