Family Businesses: Insights from Dr. Joe Astrachan
Family Businesses: Insights from Dr. Joe Astrachan
By Jean Creech Avent, Vice President of Marketing & Communication, Georgian Bank
Regularly, Georgian Bank holds special events exclusively for our clients and prospective clients. The intention of these events is to give our network access to and information from thought leaders on topics that will help entrepreneurial businesses grow more effectively, become more efficient, and operate at optimum levels to achieve success.
Dr. Joe Astrachan, a globally recognized authority and scholar on family businesses, honored us recently by giving a stirring talk to a select group of about 40 Georgian Bank clients and prospective clients. This article is derived from content Dr. Astrachan relayed to the group. If you are interested in being invited to these events, please contact me at javent@georgianbank.com.
Definition of Family Business
What distinguishes and defines the term family business? How is a family business distinct from other types of entrepreneurial businesses? Answers to the two questions are fundamentally important because the differences between a family business and a non-family business are mighty – to the point that if the differences are ignored, the family business can fail. Dr. Astrachan offers a two-part definition of the term “family business.”
The first part of the definition explains that a family business is any business where the family can effectively control the strategic direction of the business. “Ford Motor Company is a family business,” said Dr. Astrachan. “Even though it doesn’t have equity control, the Ford family clearly has enough control to impact the direction of the company.” Another example is the Walton family, who still can exercise a significant amount of control over the strategic direction of Wal-Mart.
The second part of the definition for family business is that the family benefits from the business, or derives a significant portion of its wealth, income or identity from the business. “The family relies on the business and the business relies on the family,” stated Dr. Astrachan. Oftentimes, family businesses are advised that they should apply models, communication techniques, and strategies that have been proven through nearly 100 years of study, research, and practice in non-family businesses.
That advice stems from the fact that throughout history much research and many studies have been done on non-family businesses, resulting in more understanding and knowledge of the cause and affects of management styles.
“Non-family businesses tend to be publicly-traded companies and by their very nature have to be more transparent with their data and information,” explained Dr. Astrachan. “So more is known and can be studied and written about public non-family companies.”
The issue is that family businesses don’t organize, communicate, and operate like other entities. According to Dr. Astrachan, research shows that if the CEO of a family business runs it like a non-family business, the family business often suffers. Research on family businesses began in earnest in the early 1980s. The research that has been done on family businesses convincingly shows that, in fact, family businesses out perform non-family businesses in stock market returns, in accounting profitability, and cash flows, so family businesses are the ones that should be studied in addition to non-family businesses, said Dr. Astrachan.
Family businesses manage and operate differently than other types of businesses because the underlying goals, motivation, dynamics of a family business are different than a non-family business. Family businesses, for example, are motivated by family legacy and pride or love of working with family members. As Dr. Astrachan stated, “Why else would you find owners who have a business time horizon of not five or ten years, but 50 to 100 years before they feel an investment needs to pay-off?”
Economic Impact of Family Businesses
The economic impact of family businesses is staggering. In fact, Dr. Astrachan explained that family businesses account for 60 percent of the GDP and nearly 85 percent of the non-governmental GDP. The size and scope of family businesses in the U.S. isn’t often realized. Today in the U.S., using the most inclusive definition, there are 25 million family businesses (publicly and privately held), compared to 8,000 public companies. Of the 25 million family businesses, approximately 500,000 employ 100 or more people. In fact, the largest family business in the U.S. is Koch Industries, a conglomerate headquartered in Wichita, Kansas. It has nearly $100 billion in annual revenues, employs approximately 70,000 people and operates in 60 countries.[1] Also, it is believed that family businesses will be a driving force behind an economic recovery.
Succession Planning
Perhaps one of the most pressing issues with which a family business grapples is passing the company to the next generation. According to Dr. Astrachan, when a family business passes from first to second generation, 30 percent of those businesses survive. When a family business passes from second to third generation, 10 percent of those businesses survive. A family business has less than a one in 100 chance of surviving in the family into the fifth generation. A Google search on succession planning information reveals more than 1.5 million pieces of data about the topic, confirming that while there is a lot of information out there it can be overwhelming to discern the most important information.
While there is a great deal of data on how to create a succession plan, research shows that succession planning has no correlation to successful succession, noted Dr. Astrachan.
That counterintuitive finding begs the question: If planning has no impact on succession success, what does? Dr. Astrachan explained that three tactics have proven to be critical not only to succession success, but also to more profitable companies, faster growing companies and happier families.
The three tactics that family businesses should execute are:
a) Have an outside Board of Directors that meets three t0 six times a year; for publicly held family businesses the ratio of outside directors to family members is 2:1.
b) Hold family meetings three to six times a year. At the meetings, the business of the family, not necessarily the family business should be the topic of discussion.
c) Plan strategically, meaning the family should engage in an ongoing conversation focused on the direction of the company, and how that direction impacts every internal stakeholder and all family members.
Today’s Economy
It is, no doubt, understatement to say that the current economic climate is one of the most challenging in which many managers and business leaders have had to navigate. The direct impact of and managements’ techniques to lead through these troubling times for public companies is obvious because of the activity in the stock market and constant news reports. What is not as obvious, though, is the impact the current economy is having on family businesses.
Dr. Astrachan explained that based on his “reading of the tea leaves” this time – the current economy – is an unprecedented buying opportunity for family businesses. “We may not see this kind of opportunity for the next 50 to 100 years,” explained Dr. Astrachan.
He went on to say that asset values are as low they will ever be and even though in nominal dollar terms the values may seem high, the values are extremely low for the inflationary environment that we’re about to hit. “If you are a family business with borrowing capacity, you might investigate opportunities to expand by buying under valued assets,” said Dr. Astrachan. “You might want to take out loans because inflation will likely take care of how much those loans mean to you.” Family businesses can take advantage of this economy at the macro level by looking for buying opportunities of which the impact could be long-term growth. As mentioned earlier in this article, family businesses and non-family businesses tend to operate differently, and in economies like this one, the differences become clear. Consider the micro-level.
Non-family businesses tend to execute broad-reaching layoffs during difficult times, because a reduction in human resources is one of the quickest ways to see immediate results on the bottom line. However, businesses, regardless whether they are family or non-family businesses are also communities. “When a community is disrupted by layoffs,” Dr. Astrachan said “resentment inside the company tends to bubble up, which leads to reduced commitment by the remaining employees, and reduced motivation, which ultimately negatively impacts productivity, which in turn makes business cycles much harder to get through.”
Family businesses tend to take a no-layoff attitude in difficult times, and instead look for creative ways to cut costs, and keep going. For example, some privately-held family businesses move to a four-day work week, or ask family members to take a pay cut, and then perhaps ask employees to take a pay cut. Family businesses have more flexibility than non-family businesses and that is in their favor in troubling times.
Conclusion
The purpose of this article is to provide the reader with an overview of the importance of family businesses and to discuss some of the issues that are particular to family businesses. For so many people, the family business is their American dream, and in many cases some of our largest companies today started as family businesses, like Disney and Hewlett Packard. The concept of the family business is woven into the fabric of this country and has been and will be a contributing factor to our global presence and influence. It is the good works being done by folks like Dr. Astrachan that help these family businesses thrive.
If you have questions or comments, please contact Dr. Joe Astrachan at jastrach@kennesaw.edu, or me at javent@georgianbank.com.
[1] Source: www.kochind.com
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June 30th, 2009 at 8:14 pm
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