The Challenges and Benefits of Owning a Family Business
Family-owned enterprises are the backbone of the American economy.
Studies have shown about 35% of Fortune 500 companies are family controlled and represent the full spectrum of American companies from small business to major corporation, according to the Conway Center for Family Business.
There are approximately 156,000 family-owned businesses in Michigan, according to data extrapolated from the U.S. census.
The decision alone to start a family-owned business involves a great deal of faith, both in the overall economy and in how marketable the product or service will be.
“While there are many challenges that will face those brave enough to venture forth and risk it all by going into business, there are some major hurdles that are common to all family-owned businesses,” said Charles Owens, Michigan state director for the National Federation of Independent Business.
“The first is the idea. Is the dream real in terms of a market for a good or service? It sounds simple, but often an idea does not survive the rough and tumble realities of the market and free enterprise,” said Owens, who has more than 30 years of experience dealing with small and family-owned businesses
Those who have the dream and decide to take the dive into a family-owned enterprise often do so for the ability to make choices on their own, without having to go through layers of oversight.
“Most small- and family-owned business owners make the move to go into business for themselves because it gives them the independence and freedom to make their own decisions,” Owens explained. “They also know that this makes them totally responsible for the success or failure of their endeavor, and this is a risk they are willing to take.”
Owens said entrepreneurs need to do more than set up an office and hope profits materialize.
“The second (requirement) is a solid financial plan and capitalization. If everything is checked off on the ‘to do’ list of going into business except this one, success is unlikely,” he said.
“The third is the family dynamic. Working together as an effective team is challenging enough for any business,” Owens noted. “When you add the unique nature of family relationships in the mix it often gets more complicated.”
No. 4 is having a grasp of the regulatory requirements for the business, which Owens explained is more of an issue today than it has ever been.
“Ignoring or violating local, state and federal regulations on small and family-owned businesses can make or break the company,” he said. “It is not uncommon for many entrepreneurs to reconsider a specific idea or proposed venture when the legal and regulatory obstacles are thoroughly examined.”
Not only does the owner of a family business have to consider the here and now, the future of the business after the owner is no longer involved has to come into play. More than 30% of all family-owned businesses make the transition into the second generation, according to the Family Business Alliance. Just 12% will still be viable into the third generation, with only 3% of all family businesses operating at the fourth-generation level and beyond.
A succession plan has to be in place even before the first customer walks through the door.
“Family dynamics, including lack of a formal succession plan, have been attributed by numerous studies as the primary reason why most family-owned businesses fail or are sold before the second generation,” Owens explained.
Another consideration is a mix of family and non-family employees, and the need to define the job description of each employee to avoid the appearance of nepotism.
“Much has been written on this subject,” Owens said. “The most concise answer to the question is that the expectations and roles of family and non-family members should be made clear up front to all concerned. If circumstances warrant a change in these roles and expectations, it must be communicated quickly and clearly to everyone involved in the enterprise.”