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family business

The importance of the family business to the United States economy continues to grow, and in a striking development, family businesses are beginning to reverse the trend of mega-businesses wiping mom-and-pop stores off the map. The recession of 2008 provided the catalyst for laid-off workers to create home-based businesses using the Internet and a low cost website to create and sell products and services.

Family businesses account for a staggering 50 percent of the gross domestic product of the U.S., and it is not just in small storefronts or website businesses: 35 percent of Fortune 500 companies are private or public companies that are controlled by families.

Consider the role family businesses play in job creation: family companies are responsible for 60 percent of the jobs in America and nearly 80 percent of new jobs created. But according to a recent PWC survey, only 52 percent of them expect that members of the next generation can do it on their own. Uncertainty about whether junior members will have the aptitude and experience for running a company is the leading concern that family businesses have about keeping management in the hands of one or more family members.

Growth and Sustainability

Family businesses often have intimate histories and complex cultures that are hard for outsiders to understand. Families today are often more complicated and less traditional than they once were.

Family businesses have several other issues that work against the successful continuation of the business. Fortunately, with focus and planning, most of these can be easily overcome by paying attention to the details.

Key issues include:

  1. Generational transition. Only a third of all family businesses successfully make the transition to the second generation.
  2. Alignment of family interests. Alignment of interests between current owners and others becomes more pronounced as members retire and turn over the reins to the new generation, while at the same time looking to the company for their retirement income.
  3. Balancing of financial returns. Creating buyout agreements is challenging. When the retiring generation looks to the value of their interest, they sometimes tend to look to a balance sheet number. In fact, the true value of a business should probably be based on an earnings capitalization model, a concept unfamiliar to many smaller family companies.
  4. Interfamily disputes. The interest of one family member may not be aligned with another family member. These situations can become even more difficult where there is, for example, a divorce of a family owner or a death and the surviving spouse is holding stock (and voting rights) but is not involved in the business.
  5. Estate and Inheritance issues. These include taxes and probate delays upon the death of a family owner.

What to Do? A Five-Step Process

By following five key steps relevant to almost all family businesses, the business can create a viable succession plan, provide for the financial independence of the retiring owners, and position the business for continued success and growth.

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About Michael Evans

Michael Evans is Managing Director for the Newport Board Group, a partnership of board directors and senior executive leaders with deep knowledge of business strategy, operations, and capital markets. Previous to Newport, Michael L. Evans had been with Ernst & Young since 1977 and served as a partner since 1984. During his 34 years with the firm, he served as a tax, audit and consulting services partner, specializing in real estate companies and publicly traded entities. Michael served as the firm’s Global Director of the Real Estate and Construction Industry from 1988 to 1998, serving many of the largest international real estate organizations in the U.S. and the world. Michael is a frequent writer on business topics and has authored two books. He can be reached at (415) 990-1844 or via email at mievans@msn.com.