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Family businesses by the numbers* 64 percent of the U.S. gross domestic product is produced by family businesses* 62 percent of all U.S. jobs are with family businesses* 78 percent of all new jobs are generated by family businesses* 35 percent of Fortune 500 businesses are family controlledSource: Conway Center for Family Business
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Hutcheson’s HallmarksIn his book on Dirty Secrets of Family Businesses, Henry Hutcheson identifies what is key to success in the family and business:Five rules for family business success1. Keep the lines of communication open. It’s important to be proactive: Schedule family meetings to discuss topics such as business transition, business performance and responsibilities. Most of all, don’t let issues fester.2. Assign clear roles and responsibilities. As a family member, there is a tendency to feel everything is my business and without job definitions, family members will be on top of each other working the same problem. But not everything is every family member’s responsibility.3. Keep good financial data. The downfall of many small and family-owned businesses is not having solid data. Accurate and timely financial information is like a clean windshield: It lets you know exactly where you are going.4. Avoid overpaying family members. Parents in family businesses often overpay the next generation, or pay siblings or cousins the same, regardless of their job or contribution. Both are wrong. Market-based compensation of family members, like all employees, is fundamental and essential.5. Don’t hire relatives if they are unqualified. Family businesses are a conundrum: family love is supportive and unconditional but businesses care about performance and profits. Family members are often hired to give them a job, even if they are not qualified. The remedy is to get them trained, move them to a role that matches their skills, or have them leave.
Henry Hutcheson comes from two renowned family businesses — Olan Mills Portrait Studios in Chattanooga on his mother’s side and Peerless Woolen Mill in Rossville, Georgia on his father’s side.
“Both of these businesses went through the typical issues of family businesses and I had a front row seat and was participating in the challenges we faced and got to see how we got through it,” Hutcheson says.
After working at Olan Mills early in his career, Hutcheson left the family business to launch an international management career with UPS, Sumitomo Electric, and IBM. But the Chattanooga native remained fascinated with family-owned businesses, which comprise more than 70 percent of all companies in America and more than 80 percent of the businesses around the rest of the world.
So nearly a decade ago, Hutcheson founded Family Business USA to consult with family-owned businesses around the globe. Hutcheson, who works with just three clients at a time, has worked with nearly 40 family-owned businesses over the years on a variety of leadership, succession and other business challenges.
From his own experiences and work, Hutcheson has authored a book on family businesses — “Dirty Little Secrets of Family Business – How to Successfully Navigate Family Business Conflict and Transition” — which is being published in its second edition this month by Greenleaf Books Publishing.
More than 66 percent of all family businesses do not make it to the next generation. Another 50 percent don’t survive the transition from second to third generation. Less than 5 percent of all family businesses survive to a fourth generation.
Why do some family businesses fare better than others? To find out, Edge talked with Hutcheson about what he has learned working with dozens of family businesses and what he advice he gives for success.
Q. Do family-owned businesses tend to do better or worse than non-family businesses?
A. When family businesses make it from one generation to the next, they tend to exceed the performance of businesses that are not family owned on a number of financial metrics. There tends to be more trust in a good family business, longer employee tenure and more of a long-term focus on the health of the business, rather than just short term quarterly profits. Family businesses also tend to make decisions quicker because they are less bureaucratic than major corporations. But where trust and communication breaks down in a family business, they don’t do as well.
Q. What’s the biggest cause of problems in family-owned businesses?
A. The No. 1 issue of all family businesses is poor communication. Too many simply don’t have the foundation to have the various business, wealth and family discussions that they need to have.
If you are working with someone you love, you don’t want to hurt their feelings and so you don’t want to tell your son or daughter, “Hey, you did that wrong.” Or the son or daughter’s reluctant to challenge the father or other family members at work for fear it might hurt someone’s feelings or their family bond. But a business has different roles than a family and you have to understand that fact.
I asked Steve Forbes (publisher of Forbes magazine) what was the key to his company’s success through multiple generations. He said it was communication among his family members. He said they meet every 60 days for 90 minutes as a family and it’s a mandatory meeting.
McCay Belk, (the third generation president of Belk Department Stores) said you have to have regular communication in a family business — family meetings, a family constitution, a code of conduct and then the training and the understanding to talk about the business and its leadership and succession in a meaningful way.
Q. What do you recommend to ensure adequate communication and direction for a family business?
A. Every business and family is unique and different. But one of the things I have found to be most important for any family business once you reach a certain size is to have a board of directors — either a board of owners or even a board of advisers — with outside people willing to help the company. The board should obviously contain family members, but it should also contain outside, independent board members who are not employees or your attorney or accountant. You might pay these directors a little bit of money, but it is worth it to get an outside, objective perspective on the business and where it is going. The board also helps ensure that there is adequate communication and direction in the business, at least about the really important parts of the business, and the board can be critical in succession planning and picking leaders for the business.
Q. What about the non-family members in a family-owned business? Don’t they feel like they will be overlooked for promotions by other members in the family?
A. As the family-owned business grows, you need to professionalize the business. Make sure you get good financial controls and hire the best people for the jobs you need. If you only bring in family members to top management, your selection pool is very narrow. There is a difference between owning a business and managing a business. Family members may own the business, but that doesn’t necessarily mean they are cut out and the best persons to run the business. If you are the founder of a company and have created this goose that lays golden eggs, you have to realize that your kids are going to inherit this goose someday. If the family wants to enjoy the fruits of these golden eggs, it may be that you’d be better off to pay someone else to manage the goose so that you can keep having these eggs. There’s a difference between being an owner who get to say what is going to happen with the eggs, and the person who tends to the goose.
Q. How do you know when the next generation is ready to take over the family business?
A. Most family businesses begin with a single founder, who either saw an opportunity or simply took action to make ends meet. However, this can quickly evolve into a husband-and-wife team, or two brothers or sisters. Then the next generation comes along, grows up among the hustle and bustle of their parents trying to build a business, helping out where possible, and one day finding that they are working in their parent’s business. Then the kids get married and bring in-laws into the business. Trusted and capable non-family employees are picked up along the way.
What makes it even more difficult is that the company’s hierarchy typically reflects the family’s pecking order regardless of what the organization chart says. Each family member plays the same role inside their company. For example, the bully brother is the same bully in the business forcing everyone to do it his way. Whoever is seen as the head of the household wants to tell everyone else what to do. The peacemaker in the family tries to smooth things over when tempers explode. The mother who controls the budget at home now wants to approve how every dollar is spent at the business.
If you are the founder or CEO of a business trying to turn the business over to the next generation, you need to lay the ground work to get your sons or daughters ready. They need to have a sense of independence. To run a business you need to be able to sit alone in a room and make a decision and live with the consequences. You need to not only know the business, but also be able to communicate effectively and to be able to negotiate and, when necessary, reprimand other employees. You need to be able to understand finances and you need to be able to think strategically for the future about the business. I think anyone who is going to run a family business should spend some time working at another business. If you drop a sense of entitlement on to someone in the next generation, they typically not work.
Remember, that winning is not being president, it is making the business successful and better.