At Wilchins Cosentino & Novins LLP, we work with leaders and owners of many privately held businesses, including family-owned businesses. We assist from formation through exit planning, working often with the board of directors, leadership team and family members on a wide array of legal matters.
Family businesses play an important role in our economy. It is estimated that 90% of all businesses in the United States are family-owned or family-controlled businesses.
Are you considering a new career or launching a business that would be family-owned?
We developed this article to highlight the benefits of a family business.
Benefits of a Family Business
While the notion of mixing business and family may be frightening, a well-run family business can provide long-term financial stability while strengthening generational bonds.
A hallmark of a family business is the value derived from having control and independence from external shareholders and the freedom to pursue business initiatives that align with the family’s vision. This often allows business owners to evaluate different approaches, take more measured risks, and pursue more innovative strategies. When prudently adopted, these opportunities can be exceptionally rewarding to both the business and the extended family.
A family-owned business can take many forms from a small, across-the-table LLC involving entrepreneurs, spouses and children to a multi-billion-dollar, global enterprise (think Samsung and Walmart) with thousands of employees and layers of professional management. While smaller family businesses tend to be run by owners directly involved with day-to-day operations, those on the large end of the spectrum look more like traditional companies.
This article will focus on the smaller family-owned businesses.
Family businesses often develop out of efforts to grow an entrepreneur’s commercial venture without losing control of the business. Successful family businesses are characterized by a shared vision, common sets of values and close working relationships.
Developing and building a family business confers a variety of benefits to owners and employees, particularly when compared with traditional corporate enterprises. A family business can be a successful, multi-generational enterprise, provided the owners understand how to leverage key advantages and effectively manage the corresponding challenges.
Shared Values and Vision
One thing that sets family businesses apart from traditional corporate organizations is the ability to leverage the shared values and vision that typically exist among family members.
In traditional corporate environments, employees and their managers often have different (and sometimes competing) priorities. Family businesses often have a singular vision of what to pursue and how best to pursue it. Strategic alignment, coupled with an appreciation of each other’s strength, weaknesses and motivations, can optimize decision making and help keep the business on a positive path.
Successful family companies benefit from an ingrained business culture recognized by existing and potential employees across generations, and even by customers and vendors.
In traditional corporate settings, stakeholders seek to balance sets of conflicting goals involving growth, profitability, sustainability, community engagement and employee satisfaction. In family businesses with proactive communication channels, the interests of employees, customers, community members and owners tend to align. It’s like increasing engine efficiency in a moving vehicle by reducing drag.
Family dynamics often invite conflict which, if left unchecked, can undermine the health and well-being of the business. Successful, multi-generational family businesses build solid foundations of shared values, supported by proactive communication across
generations. Family councils can play a key role in managing interactions amongst family members, reinforcing key values, and minimizing conflicts.
Relation-driven Business Culture
Successful family enterprises are often characterized by a robust, positive culture that leverages family connections. Families who run a business together have a strong association with the company and working together to advance a shared vision can be a unifying force that yields stronger relationships across family generations.
Family business employees typically have invested substantial effort helping advance the business; they are highly motivated to drive its success and thus may be more inclined to make sacrifices to support the business. When performance impacts the family’s wellbeing, employees often adopt a high sense of responsibility. Having a vested interest in the company’s success helps drive positive business outcomes while also sending a strong message to the next generation.
When family members are in business together, their shared personal history and aligned values allow the business to operate with a clear focus on business goals. This intimacy of family history often makes managers and co-workers well-aware of mutual strengths and weaknesses, helping ensure that employees are properly deployed within the business operation. This is not always the case in traditional corporate environments.
As a business grows, the employee ranks will often extend beyond the immediate family. But even outside hires are often considered an extension of the family, and in contrast to most companies in the corporate world, family businesses tend to take good care of their employees. In a family business, it is rare for an employee to feel like an anonymous number on the payroll.
An important intangible within family businesses is the opportunity for employees to provide each other with emotional support… a benefit not typically available in traditional corporate environments. This unique form of support can help employees power the company through a variety of business challenges.
A well-structured family business can:
- Neutralize many of the dynamics that can drive conflict
- Build mutual respect among family members
- Leverage the considerable knowledge and insights of more experienced members
- Capitalize on the fresh ideas offered by the next generation and
- Mentor younger members waiting in the wings.
For families with active community engagement, business success can strengthen local fabrics, enhance reputation and build customer loyalty. Positive relationships can be the glue that binds a well-run family business. Strong interpersonal connections, together with cultures that value teamwork, respect and trust, are key to building worker engagement and satisfaction. These relationships can also translate across the sales channel, such that customers often feel like ‘family’. They can also cushion behaviors that might prove counterproductive in a typical corporate setting.
Business Integrity and Agility
The glue that binds a family provides employees with a strong sense of commitment to the business and higher levels of accountability than are typically found in public companies.
Stable management, combined with lower employee turnover, the absence of public shareholders, and a focus on long term performance, provides family businesses with a degree of operational insulation typically missing from large corporations.
When customers interact with business owners and see a family standing behind the company, they often perceive a higher commitment to product and service integrity.
In a family-owned business, employees and managers benefit from being able to bypass organizational hurdles that are endemic in the corporate world. This can expedite product development, speed time-to-market and allow the company to be more responsive to customer needs. It also makes it possible for managers to effectively address employee needs and concerns.
Blending Perspectives
It can be unsettling to sit down with family members spanning three or more generations to compare their views of the world and their consumer habits. Yet these different perspectives offer a wealth of insights that, when properly managed, yield significant benefits to a family business.
Bringing various groups together allows for a level of cross-fertilization that is extremely rare in traditional corporations. A successful family business incorporates skills and operational insights from experienced managers and employees with the ability of younger generations to adopt new technologies, discern important marketplace trends and customer attitudes, and connect with wider audiences.
Changes in the global economy and increased purchasing power amongst younger generations have led to more conscientious consumer behavior. Concerns about health, worker conditions and nutrition have led many people to shift their focus to environmentally responsible products and practices. Family businesses often get superior returns on their corporate social responsibility initiatives and may be more willing than traditional corporate enterprises to consider the longer-term effects of these policies and support such investments.
Conservative Financial Management
Compared with public corporations, family businesses are notable for their long-term orientation and conservative operating model designed that minimizes risk across business cycles. Indeed, long-term financial performance tends to be higher for family businesses than for nonfamily businesses.
Family businesses are often focused on resilience, with a financial model designed to set aside reserves during the good times and better position the company during downturns.
Because family businesses lack public shareholders, they can more comfortably invest with a ten- or 20-year horizon as they look ahead to the next generation.
There are several qualities of a conservatively-managed family business.
They’re frugal in good times and bad.
Unlike many public companies, family businesses typically exercise more control over expenses. To ensure success across generations they focus on proper positioning for the long-term, even if it means sacrificing near-term profits. They also tend to enter economic downturns with leaner cost structures, which helps minimize major layoffs. This approach helps stabilize the business across economic downturns.
Careful about capital expenditures
Family businesses typically take a hard look at projects that require significant capex. Because of this conservative approach, family businesses are more likely to pass on ‘borderline’ opportunities during an upcycle so they are better positioned when business conditions soften.
They minimize debt
While financial leverage has become a hallmark of contemporary corporate finance, family businesses generally shy away from taking on large amounts of debt, which increases their risk profile when the economy softens. As a result, debt as a percentage of total capital is typically far less for family business than for public companies.
They’re less acquisitive
For many reasons, family businesses typically shy away from large, transformative acquisitions that require more capital, more management attention and significant resources to integrate the businesses. Such acquisitions also carry higher risk if they’re not a close fit with the core business. For the most part, family businesses expand incrementally, favoring measured, organic growth, and potentially involving joint ventures.
While family businesses undoubtedly miss growth opportunities, this conservative approach helps generate superior returns across the multi-generational life of the enterprise.
They’re surprisingly diversified
While most family companies are focused on their core businesses, a great number of family businesses have become quite diversified, through either organic growth or prudent acquisition. Diversification can fit in well with a conservative family business model, as it has become an effective approach to protecting family wealth across business cycles.
Reduced Turnover
Family businesses are often characterized by a shared vision, longer employee tenures, higher levels of mutual trust, cooperative decision making, promoting from within and familiarity with coworkers’ behaviors. It’s no surprise that they exhibit lower employee turnover. The higher employee retention rate also reflects the strong bonds between family members and less focus on near-term financial performance. Indeed, during soft economic conditions, family businesses are less inclined to scale back their workforce.
And there’s an added benefit: Given the considerable cost of attracting, evaluating and investing in new talent, higher levels of employee retention can help improve financial performance.
Family businesses have a strong commitment to work/life balance, which may allow employees to have more flexibility with work schedules. There is also a tendency for owners and managers to be more tolerant of errors by employees with less experience.
Adaptability, Innovation and Risk
Without the burdens that can hamper traditional corporate decision-making, family businesses can more quickly respond to changing markets, evaluate investment opportunities, adapt to technological changes and adopt innovative processes.
Family businesses often have flat organizations with high levels of shared knowledge and a solid understanding of competitive landscapes. This allows for faster decision making and crisp execution on business strategies.
In a family business, employees may wear several hats. When this is well-managed, the enterprise can benefit from a broader knowledge base, higher levels of teamwork and greater operational flexibility.
The combination of generally lower cost of capital and less focus on near-term financial returns allows family businesses to invest in projects with longer-term horizons. This allows the company to leverage new technologies without chasing instant gratification and the higher risk attendant to technology-driven product development.
Early engagement and learning
Family businesses have a golden opportunity to leverage the considerable knowledge and insights of more experienced members, capitalize on the fresh ideas offered by the next generation, and mentor younger members waiting in the wings. Involving younger family members early on, and supporting this with meaningful communication and perhaps internships, familiarizes the next gen with the enterprise and equips them to quickly add value when they enter the business.
Ensuring Family Business Survival
In a multi-generational family business, ownership dynamics play an outsized role, and it’s critical to maintain clarity regarding roles and responsibilities. Creating a well-defined ownership structure and governance platform supports effective decision making and allows family members to collaborate towards common goals.
Whether they simply serve on the board or are actively engaged in the business, family business owners serve an important function: to codify the vision, values and performance expectations for the business, and to make sure these are acknowledged across the organization.
When a family business becomes multi-generational, it adopts a long-term view, and it is this quality that allows a family-owned enterprise to outperform the traditional corporate entity. Structuring and operating a business that will thrive for generations requires deliberate management and financial conservatism. While family businesses often fail, on average they last longer than private equity-owned businesses and public companies.
The Role of Trust
Successful organizations are built on a foundation of trust and loyalty, and unlike corporate enterprises, one of the great advantages of a family business is that the owners have already earned the trust of family members. As the business evolves across generations, more people assume leadership positions, but even when leaders come from ‘outside’, a well-managed family business builds strong bonds of trust.
As presented, there are many benefits to being a part of a family business. If you are considering joining or launching a family business, our attorneys welcome the opportunity to discuss your venture and assist you.
This article is not legal advice and should not be taken as such or relied upon as legal advice.