There iswonderful diversity in the business sector we call familybusiness—huge enterprises like Cargill and local grocery stores, first- and fourth-generationcompanies, firms run by patriarchs and cousins. But the field lacks a typology, which could be usefulto everyone from consultants and direct marketers to owners trying to analyze their firms.
Now, the Massachusetts Mutual Life Insurance Co., of Springfield, Massachusetts, has defined sevendistinct types of family businesses. The groups are defined by differences in how strategic decisionsare made; who among the owners, successors, and outsiders constitutes the decision-making group; andhow owners have approached succession (or not). The breakdown comes from six family business expertswho analyzed the results of MassMutual’s third annual survey. Responses were received from 1,029owners of family businesses nationwide, selected at random from commercial business listings. Thesurvey was conducted by Mathew Greenwald & Associates of Washington, D.C.
The experts used a statistical technique called cluster analysis to sort the respondents into typesaccording to the frequency with which they answered certain questions in the same way. Questionsprobed such issues as who was in the company’s strategic decision-making group, whether the members ofthe group trusted each other, how differences were resolved, and which family members were likely tocontrol decisions in the future. By combining the results with demographic data, the experts outlinedseven distinct family business types.
While there are commonalities, “the types indicate major differences in issues that must beconfronted,” says François de Visscher of de Visscher & Co., a consulting firm in Greenwich,Connecticut.
For example, he explains, successful succession in a firm run by cousins is driven by opendeliberation between various branches of the family, whereas in a “mom and pop” company successdepends on picking the most qualified child and deciding how to train him or her.
The typologies should also help owners who interact with consultants. “Many advisors think they canhandle any family business case, because they see family businesses as a homogeneous group,” deVisscher says. “The types show that is not the case.”
The seven types (and their frequency) are described below. While there is some overlap, thedesignations are a first attempt by the survey’s advisory team. De Visscher says the team will refinethe categories, and probe to see which issues are unique to each type and which transcendboudaries.
Reliance on Outsiders (33%)
Family businesses in which the owner makes the key decisionswith more assistance from outsiders than the family comprise the largest of the seven groups. Even ifthe owner’s sibling or in-law, say, holds a high position in the company, the owner places criticalreliance on a small number of trusted outsiders, such as a longstanding lawyer or accountant.
The average age of the CEO in these firms is 49. Half are first-generation companies and one-quarterare second-generation. The firms average 67 full-time employees, somewhat fewer than the average of 74for the overall survey group.
The size of the average decision-making group is small (the mean in 3.1 persons), and a majority ofthe firms have between one and three outsiders or nonfamily employees in the decision-making group.Family members accept the role played by external advisors in making key decisions; the survey revealsa high level of family trust in the decision-making group, despite the presence of nonfamily.
Mom and Pop (17%)
A spousal team runs these firms. However, the keydecision-making group is not necessarily limited to the spousal pair; in a fourth of the firms, one ofthe couple’s children participates in the group. Typically, one or two nonfamily members alsoparticipate.
The average age of owners is 52. Three-quarters of the firms are in the first generation. Thecompanies tend to be smaller than average, with more than half having revenues under $5 million. Theaverage number of full-time employees is 48.
Awaiting Transition (16%)
Owners of these firms have their children involved, but have yetto pass on control. One or more children are in the decision-making group, and are usually employed asa vice-president or other top officer. Two-thirds of the families have a written succession plan,which is prudent since the owners’ ages average 62.
In half of these companies there are no nonfamily members in the key decision-making group. Trust runsstrong across the generations, with 76 percent indicating members of the decision-making group“always” trust each other. Decisions are reached by consensus in 59 percent of these firms; unlike inother groups, conflict among generations over the strategic direction of the company has yet toemerge.
These firms tend to be larger than the sample average, with 83 employees. More than 60 percentgenerate annual revenues in excess of $5 million.
Parental Oversight (13%)
These firms are in various stages of transition from onegeneration to another; virtually all are second or third generation. The older generation has passedon its primary responsibility, but retains some equity and exercises some oversight. Co-owners existat 68 percent of the firms, and their average age is 37.
At least one parent of the owner or co-owner, and in some cases both parents, are involved in the keydecision-making group. For one-third, a sibling also participates in decision-making. Half have nononfamily members involved.
Inter-generational disagreements over capital investment and the strategic direction of the companyare more frequent for this type of company than the other six types, probably reflecting resistanceto change or caution on the part of the older generation. Similarly, participants are less likely tosay that members of the decision-making group “always” share common goals (30 percent compared with 43percent overall).
Dominant Owner (12%)
The owner is king (89 percent) or queen (11 percent) in thesefirms, averaging age 52. The decision-making group consists of the owner, period, even though familymembers work in the company. The majority are first generation firms, and they are the least likely ofany type to have a board of directors. When there is a board there may be a spouse or child on it, butmost owners in this category did not identify these family members as participants in the keydecision-making group. Although 90 percent have children, fewer than half intend to pass onownership.
Not surprisingly, the dominant way to resolve differences is discussion followed by the owner’sultimate decision. In the eyes of these owners, disagreement among family members is infrequent.
These firms are smaller than average, with 41 employees versus the survey average of 74. Like the Momand Pop companies, a little more than half have revenues of less than $5 million.
Sibling Team (6%)
This type of business is relatively rare, but within it there isquite an array of ownership structures. Sibling co-owners come not only in pairs but triplets, andmore; one firm has six siblings in its key decision-making group. In 35 percent of the cases a parentis also involved in this group. As would be expected, a large majority (76 percent) are past the firstgeneration of ownership.
The role of nonfamily members is limited. For 52 percent of the firms, no outsider holds a keymanagement position; in 28 percent, only one outsider does.
There are often many family factions in these companies. Some 60 percent of sibling teams use ademocratic approach to reach decisions between the factions. In most of the rest, one person makes adecision, for better or worse. Of the seven types, these firms are the most likely to report that thegroup’s needs “always” come before individual concerns. Nevertheless, conflicts within the family overthe roles and qualifications of family members occur with above-average frequency.
Mega Firm (4%)
Unlike the other types of businesses, in which the keydecision-making group usually has three or four members, this type has an unwieldy average of 10people in the decision-making group. The group is a mix of various family members and outsiders. Thereare always nonfamily members in the group, often four or more. Management consists of owners andco-owners, including parents (12 percent), children (28 percent), siblings (28 percent), in-laws (12percent), and extended family members such as aunts, uncles, or cousins (16 percent).
Half of these firms are still first generation; one-fifth are second generation, and the rest arethird generation or beyond. There is a good reason for such inclusive management: The companies tendto be much larger, averaging 347 full-time employees. More than a third report 1994 revenues ofgreater than $25 million. There is also a cost for such large decision-making groups, however: Only 42percent of the firms report that the members “always” trust each other, compared with 69 percentoverall.
Estate taxes prompt action
Now in its third year, the annual MassMutual survey alsoprovides some intriguing insights into changing financial concerns and responses of family firms.
Advocates of reducing tax burdens on business have traditionally emphasized lowering capital gainstaxes. But the survey shows that twice as many owners are more concerned about the negative impactestate taxes have on the financial health of their businesses. Some 28 percent name estate taxes asthe levy of greatest concern, versus 14 percent who cite capital gains taxes. Overall, however, theincome tax remains the greatest burden, perhaps because it has a more immediate impact on theirwallets (see, “The Toughest Taxes,” left).
Given this focus, legislation recently proposed in Congress to reduce family business estate taxeswould appear to be on target (see “Big Guns in Congress Back Estate Tax Reform,” page 11). Owners aretaking a wait-and-see attitude about Congress, however; 31 percent think conditions for familybusinesses will improve because the new Congress supports family business, but 29 percent thinkCongress is anti-family business and so will do little to help. The rest find Congress “neutral,”that is, neither inclined nor disinclined to help family businesses.
The great concern over estate taxes may stem from the fact that most families have large portions oftheir wealth tied up in the business. Nearly one-third of owners report that 75 percent or more oftheir net worth in the firm. Another third report that the business holds between 50 and 74 percent ofthe family’s wealth (see, “Wealth Tied Up in the Firm,” above).
These factors seem to be motivating more owners to take action. The ongoing survey shows a significantincrease in the awareness of tax liabilities and in formal succession planning. The proportion ofowners who report having a “good” idea of their estate tax liability is 58 percent, up from 43 percentin the 1994 survey. This awareness is not limited to owners of larger businesses, either; the numberof owners who have a good idea of their tax liabilities increased for businesses of all sizes. Perhapsthe advice of consultants and educators is sticking.
The number of firms that have engaged in formal succession planning has also risen dramatically in thelast three years. Among owners who say they intend to keep ownership in the family, 44 percent have aformal succession plan. The proportion was only 21 percent in the 1993 survey, and 28 percent lastyear. It is interesting to note that there is little difference between young and old businesses.Owners of first- and third-generation firms are about equally likely to have written plans for passingon control. Size makes no difference at all; the same percentage of owners of businesses with fewerthan 25 employees, and those with more than 100 employees, have written successionplans.
|
Types of Family Businesses
|
 |