The family business

By Grant Robinson

The success rate of businesses passed on through families can be both envied and improved upon

Every At the recent inaugural meeting of the Toronto chapter of the Family Firm Institute, which represents the southern Ontario group of family business advisers, David Simpson from the Richard Ivey School of Business at the University of Western Ontario shared some perspectives on family businesses. His comments brought into focus the real issues accounting firms are facing with their clients.

Family businesses are often painted with the statistics of failure. Three out of 10 businesses make it through the second generation, while only one out of 10 makes it through the third generation. Most people interpret such statistics to mean that family businesses are difficult and often fail. Using the same criteria a successful family business would be a 300-batter in major league baseball missing 70% of the at-bats. Simpson put forth the idea that if we looked at the 10% of businesses that make it through three generations, perhaps something useful could be learned from this. Three generations generally means 75 years. How many businesses last for 75 years? Simpson asked. How many of these are public companies? His point: family businesses outlast public companies.

If we take the position that family businesses have an enviable success rate, we can learn and apply the following:

Family businesses have a history of adaptation. Every entrepreneurial/family business has a story of hitting a wall at some point. Every successful business has a story about how it overcame the business issues working against it.

Entrepreneurial/family businesses have a history of innovation. Some 78% of innovations come from small or medium-sized businesses. Often an entrepreneur or family business is able to focus on a niche market and capitalize on innovation.
The world is focusing on globalization. The marketplace is polarizing. As a business, you will either go global or remain local. Products are being driven by service and brand, but entrepreneurs and family businesses are finding success by focusing on local markets.

Entrepreneurs and family businesses have significant challenges with their formal governance structure. There is often a need for better communication structures to be built, just as the larger public companies have been pushed to not only create these structures but to share the information. Family businesses, on the other hand, reflect the values of the family and have a long-term focus. It’s not surprising they should have more long-term success than public companies. Public companies tend to be more concerned with quarterly reports and are therefore focused on the short term.

Family businesses outperform public companies. A search on Google of “performance S&P 500 and family business” will yield several articles. One such article, written by Joseph Weber, Louis Lavelle, Tom Lawry, Wendy Zellner, Amy Barret and including bureau reports, was published in Business Week November 10, 2003. In “Family, Inc.,” the authors refer to research published in the June 2003 issue of the Journal of Finance that concluded the performance of family companies in the S&P far outstrip that of nonfamily companies.

The article also mentions William Wrigley, Jr. and his company, the US$2.7-billion-a-year family chewing-gum business that bears his name. The company has reported a 20.3% average annual return on assets, outpacing Hershey Foods at 9.8% and the Standard & Poor’s 500-stock index average of 4.5%. “Forget the celebrity CEO,” the authors write. “Look beyond Six Sigma and the latest technology fad. One of the biggest strategic advantages a company can have, it turns out, is blood lines.” The article refers to the family company’s advantage of the long-term focus and managers who have a passion for the business. “The family name is on the door,” Wrigley says. “It’s more than just a job.”

There is something to be learned from the fact that 10% of family businesses survive 75 years. Research and experience indicate that family businesses are adept at innovation; being value based, long-term focused and connected to their customers; marketing to specific niches and learning how to maintain professional management without sacrificing the values upon which the business was founded.

As you approach your entrepreneurial and family business clients it may be appropriate to focus on what works as opposed to what doesn't. A popular school of thought suggests the success rate of businesses being passed through families is something that should be envied and perhaps improved upon. It may be that the percentage of companies that last 50 years — 30% — is adequate.

How can you change your approach to entrepreneurial and family business clients? Simpson mentioned that when he asks MBA students at the beginning of the year why they are taking their MBA, half say they are doing so to be more helpful in the family business, while the other half say they are doing so to get away from the family business. When he asks them whether they have spoken with their parents about their reasons for pursuing their MBA, no one speaks of having had a meaningful discussion with their parents on the subject.

Often, family business owners want to pass the business to their children, with the hope they will have the same passion and commitment to it they have. If the children are going to school to prepare themselves to take over the business, there is a fit. If, however, the children are going to school with the goal of leaving the business, bad decisions will be made on the part of both the parents and the children.

CAs have an important role in ensuring these conversations happen. The facts about the success of family businesses should offer renewed confidence that the conversations are worthwhile.

When working with family businesses, it is important to find out what the individuals want and to align the tactics implemented to take the client to where he or she wants to go. This is a very powerful way of proceeding.

As CAs, we can help the 30% of entrepreneurial and family businesses last 50 years; we are providing a very valuable service to the business community and the families of our clients.

As we work with our entrepreneurial clients it may be time to focus on celebrating that a 300-batter is a good batter and that a 30% success rate of passing a business through two generations is a great success level. We should all learn from this.

Grant C. Robinson, FCA, CFP is a partner with Robinson & Company LLP in Guelph, Ont. He is Technical editor for Business adviser