Family Businesses - The World's Second Oldest Business Model

By Mary Webber on 4 September 2008 (Updated 26 April 2010) 8 comments
Photo: Tony

Family businesses are the backbone of the American economy.  The Family Firm Institute of Boston cites these figures:  Family businesses account for 78% of all new job creation, support 60% of U.S. employment, and contribute 50% of our annual GDP (Gross Domestic Product).

Family businesses from Wal-Mart to the mom-and-pop store in your neighborhood face unique challenges; after all, they are family and they are business.  

The definition of a "family business" is broad, referring to any two members of the same family, whether blood-related or not, who own or operate a business together.  It might be multi-generational (LL Bean is now 4th generation), or it might be a publicly-traded company (Ford Motor) whose principal stockholders are family members.  

Publicly traded family companies face the possibility of outsiders buying in and taking over, a prospect the Sulzberger family, owners of the New York Times,  confronted with a shareholder clause allowing only intra-family sales of family-held stock.

Family members working together is one of the world's oldest business models, but enduring operation is more elusive.   While the average life cycle of a family business is 27 years, there are exceptions.   Zildjian Cymbal Company of Norwell MA is America's oldest family business in continuous operation, having gotten its start in Turkey in 1623. For the first time it its history, the company is now run by two women, cousins descended from the original patriarch.  

The Seaside Inn and Cottages in Kennebunk Maine, 4th oldest family business in the US, received their original land grant from King George, and the business is now run by the 12th generation of the founding family.  Many national firms such as Benjamin Moore Paints and Levi Strauss are also long-term family success stories.

Here in Maine, 80% of businesses are family owned and many have world-wide cachet including LL Bean, Tom's of Maine (now owned by Colgate-Palmolive), Thos. Mosher Cabinetmakers, and even the Wyeths, whose family members produce and promote three generations of acclaimed artwork.

What are the unique challenges facing a family-owned business?  

According to Tom Juenemann, Director of the Institute for Family-Owned Business in Portland Maine, the number one challenge is succession, a hand-off that is often particularly difficult for the founding generation.  Figures from a Mass Mutual/Arthur Anderson study document that:  Only 30% of family businesses are run by the second generation, 9% by the 3rd and 4% beyond that.  

Founders are often deeply, personally, invested in the company they've created, and relinquishing control, especially to the kid they once diapered (even if he is now 50) is agonizing.  Too, there may not be second (or third) generation family members who want to assume the company mantle.     

Tom's of Maine,  which essentially started and built the market for natural personal care products, exemplifies a classic solution to this dilemma.  The company has always been known as a strong family business with deeply-held beliefs about its workers, products and its role in the community; but, running this highly successful business was becoming all-enveloping for the founding family.  

An offer from Colgate-Palmolive definitively answered "Yes" to the two biggest concerns of selling any family firm:  Would a conglomerate keep the essence of the small family business and the integrity of its brand reputation intact, and would this sale allow all family members to benefit.  

The second major challenge for family businesses is sibling rivalry. According to Juenemann, the issues might be ones of birth order, gender, family roles (the prankster, the smart one), or even just a magnification of the childhood slights everyone suffers.  When money and power are involved, old family issues are more likely to play out.  

Dealing with the dynamics of control, equality, and affirmation issues as well as coping with boundaries, in-laws, and simple pettiness within a family business can require substantial time, energy, and sensitivity, all while trying to address the more pragmatic concerns of running any business.

Does it get any easier the more successful a business becomes?  Not likely, as evidenced by an October 2007 article in Forbes Magazine.  10 Billionaire Family Feuds details the many ways in which "nuclear" really applies to the family whose business interests collide.

The third major issue that family businesses confront is that those companies are by their very nature, closed concerns.  Most families have unspoken rules about not airing dirty laundry in public; that magnifies ten-fold in a family business where family members sometimes feel as those all their quirks and quandries are unique to their family, their company.  Not true,  so while loyalty is perceived as crucial, have a place to air grievances is also critical.  

By far the most touchy family business situation occurs when it becomes clear that, for whatever reason, outside expertise is needed.  This is particularly wrenching when the business is okay, and the family isn't.  This is where a well-functioning board of directors, which should include some outsiders, is invaluable.  

LL Bean demonstrated the long, hard thought that must go into a smooth, successful management transition when the company reins were handed on from Bean family heir Leon Gorman to Chris McCormick, now the company's first non-family CEO.

But what about the rewards of being part of a family business?   A successful company can be an institutionalized reflection of the personal values of the founding family.  While not always easy, it can be a privilege to both honor a legacy and expand a vision.

And family members, especially siblings who work and succeed together, often outgrow old family patterns and come to view and value each other as competent adults, a transition that is often seen as the most enduring benefit of a family business.

Where to find help with Family Business struggles? 

Maine's Institute for Family-Owned Business like other family business centers nationwide,  supports and strengthens family businesses though consulting, mediation, estate planning, many topical conferences, and especially by facilitating networking among member companies.

While there are over 100 Family Business Centers in the US, they are not in every state.  Websites such as those at UMASS Amherst Family Business Center, Loyola University Chicago Family Business Center or Kennesaw State University Cox Family Business Center can refer you to your nearest center, or google  "Family Business Center" to find one near you.

Recommended books include Perpetuating the Family Business (John L. Ward), Love, Power and Money (Fowler, Edquist) and When Your Parents Sign the Paychecks (Greg McCann).

From the smallest, local, family-owned business to the Waltons who founded Wal-Mart, family businesses help strengthen the American economy, and those businesses offer founding families both unique challenges and unlimited possibilities.  After all, they are family and they are business.

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Guest's picture

Thank you, Mary, for such a well-written and insightful post! You could say my dad realized the American dream b/c he came to this country with no education, no skills, no money (except for $50 after selling everything we had), a wife, and three little girls (with a fourth shortly afterwards), and not a word of English amongst us. Twenty years later, thanks to a little welding business he started from scratch, he had $1.2 million! (See "How Dad Turned $50 into $1.2 Million" at http://shanelyang.com/2007/11/15/how-dad-turned-50-into-12-million/ ) It takes hard work, but the American Dream is alive and well for family-run businesses! : )

Guest's picture
Marcus

Excellent article. We do quite a bit of work with family businesses and you've captured the essence very well. We often struggle to deal with "founderitis" - when a business outgrows the founder or ability of the founding family to cope with the new complexity. The challenge is always to help them let go and see how they can potentially constrain their own business, unless they bring in and trust external expertise.

Guest's picture
Paula

Excellent article, very well-written. It's amazing how many family-owned businesses of every size are thriving in Maine!

Guest's picture
Nancy Forrest

Just an anecdote regarding small family owned businesses. Emphasis on small...and family. My father, in a small town in Maine late in the forties, started a small jobshop printing business in what used to be two horse stalls at the back of our garage. There went my dream of owning a pony! My mother did whatever mimeographing jobs which came into the shop. After our father taught us the letter case and showed us how to set type, my sister and I contributed to some jobs that way, but mostly we fed the press....repetitive, and with baseball games blaring from WHDH on the radio, conducive to daydreaming and learning how to block out unwanted noise. One day, when I was around 10, my father brought into the house a bunch of stamped envelopes (3 cents!!) and asked me to address them and stuff them with his advertising flyer. He was appalled to discover, later, that I, a bigtime Zane Gray reader, had concluded his spelling on the list of targets was wrong, and all the beauty salons were transformed into beauty saloons.....So much for independent thinking.......

Guest's picture
Guest

Mary it is indeed refreshing to read a well written and persuasive article.

One of the great myths about celebrating family business as a form of economic union is to focus on the longevity of the firm as the ultimate measure of its success.

In my new book, Every Family Business, I argue that gifting operating business to family is one of the greatest wealth destroying and family destroying ideas. When a founder denies their children or other family members the experience of risking their own capital to buy the business at market value they deny them the ultimate gift. By skipping this step a founder of a closely-held business will plant the seeds of wealth destruction. Businesses that are gifted to the next generation seldom succeed at driving innovation -- always difficult to change something that has been gifted. Its even harder to sell a gift and this is preceisely how generational wealth is destroyed. The most successful family dynasties have understood that knowing when to exit a business is as important as knowing when to start or invest in one. Pursuing the longevity of a business is fools gold.

Thomas William Deans Ph.D.
Author, Every Family's Business

www.ProtectingFamilyBusinessWealth.com

Guest's picture
Anne Guest

This is a great article on Family Business, Mary. I found it informative and interesting. My own business, a family one, only survived for twelve years, but it did include two generations working in it. It was a good experience for our son when he went on to his next position. Keep up the good work, Mary!

Guest's picture

I spent over 10 years working in my father's company. He is an amazing man and accomplished some amazing things, but then he lost his mind. I say this, partly joking, but it seemed (and still sometimes seems) true. The idea of turning over control of his empire to his children was beyond anything he could grasp. As a result, his businesses now struggle and no children are involved in the upper management of the businesses.

Guest's picture

Thanks for the great article. I am trying to do the same with my family and have made some progress. I started my business that specializes in processing mortgage insurance refunds for people. The fun part is that they usually do not even know that they have a refund due them.

It is successful due to my family's involvement. The opportunity was far greater than I expected and I needed them to step in and help my manage all aspects of the business. After we decided to offer others a chance to get involved for no upfront money and work from their home, either part time or full time, our labor problems were solved.

I have always wanted to help others find ways to earn a living while having personal time with family and friends.

Thanks again. Click on my name listed above if you have any comments or questions.

Jim