Your Impact on the Economy

Most research on family businesses is less than 10 years old. There are few quantitative studies on how many family firms exist in the United States or their impact onthe U.S. economy. The lack of substantial data is not surprising, given that until recently familiesin business were not regarded as a distinct business entity with unique concerns and issues. Becausemost of these businesses are privately owned, accurate information about them is not readilyavailable.

Nevertheless, one often hears or reads statistics about family businesses that are repeated so oftenthat they are accepted as scientific verities. The most commonly cited figures claim that familybusinesses represent 90 to 98 percent of U.S. businesses, generate 40 to 60 percent of the grossdomestic product, and create over half of all new jobs. Are these statistics reliable? Do they havesupport in the research literature? Or are they simply examples of the adage: “If you say anythingenough times, people begin to believe it?”

The issues are not just of academic interest. The influence of family businesses on publicpolicy—especially tax policy—may hinge on answers to these elusive questions.

We conducted an extensive investigation of the family business literature in order to assess thereliability of the most frequently quoted numbers. When we attempted to trace each number back to itsorigins, however, we were unable to locate primary sources for most of them. We then turned tobusiness data from other sources to see whether we could at least establish a high-and-low range forthe probable numbers of family businesses and for their impact on the economy.

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We sorted the statistics found in the literature into four grades of quality. The largest category waswhat we called Street Lore. The second largest was Educated Estimates by people experienced in thefield. The third consisted of credible Extrapolations from other types of business data. The fourthand smallest category was Family Business Facts.

The first problem we ran into was definitional. In some studies that we found, the definition used toqualify a business as a “family business” was ambiguous, or not even mentioned. When pressed, evenexperts in the field have trouble articulating a precise definition.

We used three definitions of a family business—broad, middle, and narrow—that described varyingdegrees of intensity of the family’s involvement. The three are pictured as three rings of theuniverse below. (Because the narrow definition is represented as the center of the universe doesnot imply that the businesses in it are “better” in any sense than those in the two outer rings; onlythat there are fewer of them because of the stricter criteria in the definition.)

     

  • In the broadest and most inclusive definition, family has an influence over strategy and majorpolicies, and has at least stated the intention of keeping the business in the family. Family membersmay own significant portions of stock and sit on the board, but none necessarily work in thebusiness.

     

     

  • The middle group is defined by the same criteria, plus one other: The founder, or descendants of thefounder, still run the company on a daily basis.

     

     

  • The tightest definition includes only firms in which multiple generations participate; familymembers are involved in daily operations, and more than one of them has significant management responsibilities.

     

 

Family Controlled Public Companies

As already indicated, we found no solid evidence in theliterature for the assertion that 90 to 98 percent of U.S. businesses are family run. To arrive atrough estimates for the number of family businesses using the three definitions, we thus had toextrapolate from available data on public and private corporations, partnerships, and soleproprietorships.

We found only three research studies that examine the number of family businesses in well-known groupsof public companies. These studies have the rare distinction of being Family Business Facts.

The earliest was done by Philip Burch of Rutgers University and published in his “ManagerialRevolution Reassessed” (D.C. Heath & Co., 1972). Burch’s book questioned whether the trend towardseparation of ownership and control was as widespread in U.S. business as the conventional wisdom haslong asserted. In his study, he used the 1965 Fortune 500 list to examine the top 300 manufacturingfirms and the top 59 merchandising, transportation, and commercial banking companies. He found thatclose to half of these publicly held firms (47 percent) were family controlled, and that in most casesthe families had been wielding power for several generations.

In a 1993 study, Dan McConaughy of the University of Cincinnati found that 21 percent of the publiclyheld businesses on the BusinessWeek 1000 list had top managers who were direct descendants of thefounding family. In the third study, Hasnehn Jetha of Loyola University-Chicago showed that 37 percentof public companies on the 1992 Fortune 500 list qualified as family businesses under his definition(a descendant of the founder was an owner, key officer, or director).

We can reasonably conclude from this research that about one-third of the largest public companies arefamily run operations. However, this is not the entire picture. The three studies dealt with only thelargest publicly traded companies. Only 3,000 stocks are traded on the New York and American StockExchanges. Another 50,000 or so are traded on the over-the-counter (OTC) market, which caters tosmaller, closely held companies as well as high-tech and bio-tech startups. It is safe to assume thatfamilies remain in control of many of these smaller companies; they are businesses that have permittedtheir stock to be traded only to get access to needed equity capital. Consequently, we made a rough,conservative estimate that smaller firms add about 30 percent to the proportion of public companiesthat are family-run. Under that assumption, as much as 60 percent of all public companies in theUnited States may be family operated businesses.

We know, however, that public companies represent less than 2 percent of all U.S. companies. In orderto get a valid picture of the family business universe, we need to look at how many private companiesare family controlled.

 

Private Corporations Broadly Defined

We estimated the total number of privately held familybusinesses from data on business tax returns filed with the IRS in 1991. The IRS divides privatelyheld businesses into sole proprietorships, partnerships, and private corporations. From the data onthese three types, we made reasonable projections of the number likely to be included under the broad,middle, and narrow definitions described earlier. Again, the definitions vary according to whetherthere is a high or low family involvement in the business.

A broad definition would include all 17 million sole proprietorships that filed tax returns in 1991.Although a single proprietor is running these businesses, other family members are likely to help outfrom time to time, and “family dynamics” thus come into play as they do in other family businesses.That is a reasonable assumption, since a study in 1987 showed that smaller businesses very often useunpaid family labor, especially when first starting out. (There are 1.7 million farmers among the 17million sole proprietors; we included them because farms have traditionally been family runenterprises.)

Partnerships made up 1.5 million of total business tax returns in 1991. Partnerships, too, are oftensmall businesses that are likely to have unpaid family labor assisting the owners. In the same year, 3.8 million private corporations filed tax returns. By almost any definition, both these groupscontain numerous family businesses. Nevertheless, ballpark estimates of how many fit our definitionsare difficult, because there’s no way to judge the degree of family involvement in a privatecorporation.

Both partnerships and private corporations are somewhat less likely than sole proprietorships to havea high level of direct family involvement. The numbers for both types, we assumed, would be closer tothe figure for public companies. We therefore estimated that 60 percent of partnerships and privatecorporations fit the broad definition of a family business. This is a very conservative estimate,based on years of experience working with the two types.

Adding up the numbers of public companies and private businesses with a low level of familyinvolvement, we derived an estimate for the total that qualify as family businesses under the broaddefinition—the outermost ring of the universe diagram below. By this method, we estimated thereare roughly 20.3 million family enterprises in the U.S., or 92 percent of all businesses. Thisapproximation is quite close to the Street Lore range of 90 to 98 percent of all businesses.

 

Family Businesses Narrowly Defined

The stricter criteria for defining a family business exclude amajority of the 20.3 million businesses that qualify under the broader definition.

To begin with, out of the 17.1 million sole proprietors who filed tax returns in 1991, the businesswas the “principal occupation” for only about half of them, or 8.6 million. That means the other 8.5million did not have the business as the family’s primary source of income. It would be unlikely tofind that more than one family member has “significant managerial responsibility” in these part-timebusinesses, as the narrow definition requires.

In addition, the narrow definition requires involvement in the business of multiple generations. Somestudies suggest that only about a third of the remaining 8.6 million sole proprietors would belikely to have multiple generations working in them. For example, John Ward of LoyolaUniversity-Chicago examined records of post-startup businesses and found that only about one-thirdreached a second generation of ownership. The national survey done for the Massachusetts Mutual LifeInsurance Co. in 1994 confirmed the one-third figure; of the 1,002 companies surveyed, 35 percent hadmore than one generation working in the business.

If only 35 percent of the 8.6 million sole proprietorships meet this qualification, we are left with3.01 million in this group that could reasonably be considered probable family businesses.

The same logic can be applied to partnerships, private companies, and public companies. If we assumethat only 35 percent of these businesses meet the requirement of multiple generational involvement,that would leave a total of 1.1 million of likely family run partnerships and private corporations and11,340 companies with publicly traded stock that are family-operated.

Tallying up the numbers for the three types of business, we come up with only 4.1 million that meetthe narrower criteria—multiple-generational involvement and more than one family member withsignificant managerial responsibility. The difference between the 20.3 million that qualify under thebroader definition and the 4.1 million left under the narrow definition is thus appreciable: a totalof 16.2 million.

Even though these estimates are just that—approximations—they do suggest two conclusions: First,calculations of the number of family businesses in the U.S. can vary tremendously, depending on how afamily business is defined. And, second, the often-quoted Street Lore figures—90 to 98 percent of allbusinesses in the U.S.—very likely include a great many that have little or no direct familyinvolvement.

 

What About Jobs and GDP?

There is really no way to directly calculate the exact amountthat any type of business contributes to the gross domestic product. Many factors unrelated tobusiness output go into calculations of GDP: personal consumption + private investments + governmentspending + net exports. However, we can estimate the contribution of family businesses to GDP fromdata on total output of goods and services generated by each type of business.

The Department of Commerce reports that government spending accounts for about 36 percent of GDP. TheSmall Business Administration estimates that 38 percent of GDP is generated by small businesses (fewerthan 500 employees). We can therefore assume that big businesses (500-plus employees) generate theremaining 26 percent.

By figuring the proportion of family businesses among the nation’s small and large companies, we wereable to extrapolate the percentage of GDP accounted for by family firms in 1993. Using the broaddefinition, family firms contributed about 49 percent of GDP—or $3.34 trillion of goods and services(1993 dollars). Using the narrow definition, family businesses generated approximately 12 percent oftotal goods and services—or approximately $830.9 billion.

Based on this analysis, the Street Lore claim that family businesses account for 40 to 60 percent ofGDP is probably on the high side. The amount contributed by family businesses is more likely in the20-40 percent range.

As mentioned, the literature in the field often suggests that family businesses employ over half theU.S. workforce. Using our estimates of the number of businesses in the U.S. that are family run, alongwith Department of Labor data on the workforce, we estimated the number of jobs that family businessesmay actually account for.

In 1994, approximately 130 million people were employed in the United States. The U.S. Governmentemployed 19 million of them. Of the remaining 111 million, 54 million worked for smaller businesses(under 500 employees) and 48 million worked for larger businesses (500 or more employees).

Using the broadest definition, family businesses employed 59 percent of the total U.S. workforce, orapproximately 77 million people. Using the stricter definition, family firms employed just 15 percent,or about 20 million people. Once again, the Street Lore estimate—50 percent of jobs—is valid onlyunder the broad definition.

Various researchers have attempted to calculate the number of new jobs created by larger vs. smallerenterprises in the U.S. The procedures for making these calculations are complicated—andcontroversial; some research suggests that big companies create more jobs, but the emerging consensusamong economists is that smaller firms account for most of job growth. That bodes well for familybusinesses.

The Small Business Administration has calculated the share of jobs created by firms of different sizesfor the years 1976 to 1990. By applying our two definitions to these statistics, we were ableextrapolate the number of jobs created by family businesses. Based on the broad definition (low familyinvolvement), family firms accounted for 78 percent of net job creation; using the narrow definition,they created only 19 percent of new jobs. This discrepancy between the two figures reveals once againhow numbers in this field can vary according to how a family business is defined.

 

Unanswered Questions

Family businesses are substantial contributors to the U.S.economy—no doubt about it. We have seen, however, that the key numbers frequently quoted on theirnumber and the size of their contribution are mostly Street Lore. These familiar numbers arereasonable estimates only if one uses a broadly inclusive definition of a family business. Whilecompanies in this larger, loosely defined universe can be, and are, considered legitimate familybusinesses, many practitioners in the field prefer a narrower definition requiring a greater degree offamily involvement. Our research thus sounds a cautionary note: Before accepting any statistics on thenumber of such businesses and their economic impact, people should first define the type of familybusiness they are considering. We also hope our research provides definitional models that will beuseful in future studies.

Future research must address vital questions about the economic effects of the wave of businesstransfers on the horizon.The MassMutual survey in 1994 found that 13 percent of family businesses arerun by senior family members 65 or older. According to the U.S. Department of Health, the lifeexpectancy of a 65-year-old white male is 13 years. Using our broad definition, this meansapproximately 3 million businesses will be facing ownership transfer in the next 10 to 20 years(533,000 under the narrow definition).

How much capital will be pulled out of the business sector in the next two decades in order to payestate taxes? What will be the effects of this “estate tax bubble” on investment and productivity? Howwill it affect the development and perpetuation of smaller family businesses? How many firms will besold or forced to close in order to pay the taxes? How many jobs will be lost? These are disturbingquestions that cannot be answered without reliable data.

 

Family businesses in the U.S. (in thousands)

 

  Broad Middle Narrow
Sole Proprietorships: 17,100 10,055 3,010
Partnerships: 900 608 315
Private Corporations: 2,300 1,549 798
Public Companies: 32 22 11
Range: 20,332 12,234 4,134

 

Source: IRS

 

 

The Family Business Universe

 

The concentric ring diagrams show the degrees of family involvement in broad, middle, and narrow definitions of a family business (top), and the numbers likely included in each (bottom): broad, 20.3 million; middle, 12.2 million; narrow, 4.1 million.

Melissa Carey Shanker is a graduate research fellow at the Family Business Center of LoyolaUniversity-Chicago.

Joseph H. Astrachan is an associate professor of management and entrepreneurshipat the Kennesaw State College in Marietta, GA and a principal in the Family Business Consulting GroupInc.

About the Author(s)

Melissa Carey Shanker


Joseph Astrachan

Joseph H. Astrachan, Ph.D., is a founder of Generation6 and emeritus professor of management at Kennesaw State University He has academic affiliations with Cornell University, Witten/Herdecke University and Jönköping International Business School. He currently serves on the boards of 10 family businesses.


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