BY DAVID R. YORK & TINA LOVEJOY

Rivers have a strong role throughout world history. They serve as means of transportation, they provide sustenance and enjoyment, and they create natural borders for states and nations around the globe. Some rivers twist and flow on a solitary path before meeting another river.

The junction of the two is known as a confluence. A confluence can inherit several new characteristics from the joining of the rivers, such as rough waters, changes in color, and differences in the speed of water flow and biological makeup. There are many picturesque confluences which serve as stunning examples of what can happen when rivers merge. One such scene is in Passau, Germany, where the Danube, Ilz, and Inn Rivers form a confluence which, although it is one body of water, has three distinct stripes, each a different shade of blue or green.

The Family Business as the Confluence of Rivers

106 10 S outh J o rdan Ga t ewa y , Sui t e 200 S outh J o rdan, UT 8 409 5 Ent rus t edPl anning. c om A family business resembles a confluence of two rivers. In a family business, one can think of the family unit as one river, and the business as another. Both are distinct and have their own characteristics, but they can create a beautiful and unique result at the confluence of the two – the family business.

Just like joining rivers, though, the juncture of a family and a business can also be turbulent. It can create rough, choppy waters and may be difficult to navigate at first. Over time, however, the rivers can adjust to the flow and the rocky terrain underneath the water will be smoothed little by little. The hardships and growing pains the family may experience in the early days of running a business will eventually calm and produce a beautiful confluence like those in nature. Even better, the family can lean on each other for support during this time and enjoy the profits of their work as a team.

Family Businesses are Unique and Special

A family business is defined as a business actively owned and/or managed by more than one member of the same family. When the average person thinks of a family business, they envision a “Mom and Pop” outfit, such as a small grocery store, a bakery, a small law firm, or other like businesses. The reality is that family businesses are king in several markets. Market giants, such as Wal-Mart, Mars, Comcast, Ford, Motorola, are family owned and operated. One third of companies in the S&P 500 index are defined as family businesses, and the top ten family businesses generated $1.3 trillion in revenue and employed more than 3.6 million people in 2017.

Family Businesses and Job Creation Family owned businesses are the single biggest job creator in our economy, employing 60% of the U.S. workforce. They are responsible for 78% of all new jobs created in the U.S., and they generate a whopping 64% of the Gross Domestic Product. [1] 90% of American businesses are family-owned or controlled. [2] The message is clear: family businesses are a crucial part of the American market and with dedication and hard work, emerging family businesses can look forward to becoming a successful enterprise.

The Culture of Family Businesses

Beyond the numbers, there are numerous reasons why family businesses deserve the description of ‘unique and special.’ For example, family businesses enjoy captive capital. While publicly traded companies and non-family owned business grapple with the vision of shareholders and CEOs that are interested in bottom lines over culture, family businesses have the advantage of investing their money in a way that promotes longevity and fosters the desired culture of the business. By contrast, a 2005 survey conducted by the Journal of Accounting and Economics found that 78% of CFOs of publicly traded companies admitted that they would be willing to make decisions that destroy value in order to achieve their quarterly earnings targets.

C-Suite executives of publicly traded companies certainly understand the value of the family business model, with 84% of CEOs stating that it would be easier to manage their company if it were private. [3] While some may be inclined to believe that these sacrifices made by publicly traded companies equal greater profit margins, that is not necessarily true. Family businesses, on average, enjoy greater returns on investment than S&P 500 companies. [4] One of the primary assets of a family business is its ability to maintain an excellent workplace culture. Family businesses by nature seem to be more people-oriented, and their company values are oftentimes stronger than those of publicly traded companies, with 74% of family businesses reporting that they believe they have stronger cultures and values than non-family firms. [5] Family businesses are less likely to lay off employees, even when facing difficult times financially, and an overall 20% less annual turnover when compared to non-family controlled businesses. [6] The reason for this refreshing culture is simple: family businesses share a strong support network from family members. Values and ethics shared between family members are reported as the most important advantages of the family business model. [7]

Family Businesses Look at the Long Term In addition to the incredible monetary performance and strong culture of family businesses, they also have an advantage in longevity. The model most family businesses follow adopts more long-term oriented strategies than their non-family counterparts. They prefer to use the excess cash-flows to finance their investment projects rather than distributing them as dividends to family shareholders who would benefit from them on a short-term basis. [8] The more the family is in control of the business, the less the dividends are distributed to shareholders. [9] As a result of these prudent choices, family businesses tend to be less indebted than non-family businesses. [10]

Family Businesses Face Significant Risks

While there are many positive aspects of family businesses, there are perhaps just as many risks and potential pitfalls for those who are not careful when it comes to planning, executing, and maintaining the business.

Succession

Family businesses are exposed to great risks by failing to have a succession plan in place. Only 16% of family firms have discussed and documented such plans. [11] Even more surprising, 47% of family business owners who anticipate retiring within the next five years do not have a successor. [12] While 70% of family businesses desire the business to transition to the next generation, only 30% succeed in doing so. The statistics dwindle from there – 10% make it to the third generation, and barely 5% make it to the fourth. [13]

Perception of Risk

Family business owners are only somewhat aware of these risks. When asked what they believe will hurt their business, just 7% believed it would be family dynamics and relationships, while 41% stated estate and financial planning risks, 36% responded economy, business, and financial market risks, and 16% responded political and tax risks. [14] These fears, however, are different from the reality. When asked what actually harmed their business, 3% of family business owners responded that it was failures in financial and estate planning, taxes and investments, 37% responded that it was due to unprepared successors, and a surprising 60% responded that the harm was due to lack of communication and trust in family members. [15] The very thing that business owners thought was the least of their worries ended up causing the most amount of harm to their businesses.

Research shows that an honest discussion about values construct, a solid succession guide, and clear expectations about the future of the family business are key to long-term success. Without these elements, a promising family business can be torn apart.

The Six Types of Family Businesses

Before a succession plan can be adopted, the family business model should be identified and understood. There are six unique types of family businesses, each with their own distinguishable traits and risks.

  1. The Siloed Family Business The Siloed Family business is rare and difficult to maintain. In this model, family and business are completely separate. It is hard to imagine a family devoting their collective time and resources to a business, only to return home after the workday is complete and avoid talking about anything related to the business.
  2. The Overlapping Family Business The Overlapping Family Business is much more common than the Siloed Family Business model. These types of family businesses attempt to keep home life and business matters separate, but the two naturally intersect. For example, the family may discuss upcoming work schedules over dinner, bring up new ideas for the business in casual conversation, or attend seminars or other businessimprovement activities together during their leisure time.
  3. The Overreaching Family Business The Overreaching Family Business is one in which the lines between family and business often become blurred. An example of this model can be seen in TLC’s hit television series “The Cake Boss”. The patriarch of the family, Carlo, runs the business (a successful bakery) and many other immediate and extended family members work for the bakery in various capacities. Those who don’t work for the business often assist from time to time on big projects or during busy seasons. Though some members of the family do not work in the shop, and the family members all make it a point to enjoy time together outside of work, the bakery is often the focus of the conversation.
  4. The Business is the Family and the Family is the Business Family Business In this model, there is no separation between the family and the business. The two are completely intertwined, and a conversation or activity which is focused on business may easily transition to family and vice versa. This situation could easily arise if a family is running a busy home business, such as a dispatching service, or if they live at or very near their place of work. Imagine a family which owns a hotel and lives in one of the suites. The food they eat is prepared by the hotel, the hotel staff does their laundry and cleans their living areas, and they are at their place of business for the majority of their free time. In a situation such as this, it would be very difficult to distinguish a home family life which is separate and distinct from the business.
  5. The His, Hers, and Ours Family Business While this type of business can resemble the previous four examples, it is unique in the sense that not all family members are involved in the operation of the business. A family business model of this type could happen easily in a professional services company. For example, in a family of five, if only three family members are lawyers and they decide to open a firm together, the remaining two nonlawyers would likely not participate in the family business.
  6. The In-N-Out Family Business The family members who are part of the In-N-Out Family Business feel included. Those who are not part of the family business feel isolated, almost as if they are not part of the family. This is a common structure for many family businesses. This type of family business could occur when one potential successor expresses a desire to do something other than be a part of the family business. If the family runs a successful restaurant, for example, where all of the family members work, and the eldest child explains that she would like to join the medical field after graduation and therefore no longer wishes to assist in the restaurant, this may cause a rift between the daughter and all the other family members. In assessing which model a family business fits into, the critical question is not what type of family business one has, but rather, what kind of family business does the family think it has. The family member who is most invested in the business may have a completely different view of the family business dynamic than her family members and coworkers, and understanding their point of view can help guide the business leaders in to making beneficial changes to the business structure.

The Four Types of Family Business Successors

One of the most crucial aspects of family business continuity is having a clear plan for succession. Selecting the right successor is crucial. In order to make the right choice in succession, the family business owner should understand the four types of business successors and consider their strengths and weaknesses and they can best serve the future of the family business.

CONSUMERS

The most common type of successor is the consumer. Consumers are those who live in the moment and can’t or won’t focus on the long-term goals and visions of the family business. They invest little to nothing in the business, they expect great return with little to no hard work, and they feel entitled to reap the benefits of the business due to their status as a member of the family. The pitfalls of the Consumer’s mindset are the reason that the average lifespan of an inheritance is only 18 months, and it is also why only 30% of family businesses make it into the next generation.

DREAMERS

Dreamers are less common. They don’t usually invest in the business, either because they are simply unwilling or they don’t have the funds to do so.

OWNERS

An Owner is an individual who will take charge immediately and build the business. While their impact is significant, they are not interested in maintaining the business for the long term. They hope to make it profitable and successful, then move on to the next project once they have regained their investment plus some.

STEWARDS

The Steward is the type of successor every family business owner hopes for when it comes to succession. Stewards dedicate themselves fully to the family business and its purpose. They make a profound impact on the business and remain loyal to the business for life. The Steward will become synonymous with the business itself, much like Steve Jobs was to Apple or Elon Musk to Tesla.

How to Build a Succession Plan

Once the business model and successor type are identified, the family business owner must decide the best course of action for the succession plan. Considering the traits of each type of successor, the following recommendations are likely to be in the best interest of both the family and the business.

Successor Selection

For those that have Consumers as successors, the best choice is to sell the business. The sale can happen before the Consumer takes over while the business is worth more, or it can pass down to the Consumer who can make the sale after the value has decreased. For those with Dreamers, the business should be separated. Rather than entrust a Dreamer with the whole business, put them in charge of the culture and purpose, and hire operators to handle the day to day tasks of the business.

For those who have Owners, it is safe to put them in charge of the business. They will treat it as a business transaction and make good decisions about the future of the business. For those lucky enough to have Stewards, the succession plan should begin immediately. Stewards should be introduced to the business at an early age so they can be groomed to take over with ease once the time comes.

Building Blocks of Stewardship: Purpose and Culture

Stewards are the ideal successors. To groom Stewards to take over the family business, business owners should focus on purpose and culture.

Purpose

Purpose is the reason for which something is done or created or for which something exists. It is the overall goal or aim of a family business. Having a clearly defined purpose improves both productivity and profit. Employees who are inspired by where they work are more satisfied, more productive, and less likely to think about leaving. [16] The University of Michigan operated a call center wherein students contacted alumni of the university and seeking donations for scholarships. The rejection rate for donations was 93%. The call center leaders put a plan of purpose into action and began inviting scholarship recipients to come to the call center for five minutes and share two things: Where they came from and what the money raised meant to them. After application of this practice, the time students spent calling alumni increased by 142% and weekly revenues increased by 172%. The best part? This shift of focus did not cost the company anything, and no changes needed to be made to the structure or operations of the company. The only thing that changed was the infusion of purpose. Culture Culture is defined as the attitudes and behavior characteristics of a certain group. Cultural norms define what is encouraged, discouraged, accepted or rejected within a group. There are four attributes of culture: (a) it is shared between a group, (b) it permeates multiple levels of an organization or society and it applies very broadly in an organization, (c) it lasts long term, and (d) while it is subliminal, people are effectively hardwired to recognize and respond to culture instinctively. The strength of a company’s culture, as defined by the degree of agreement on cultural characteristics, correlates with subsequent financial performance. [17]

When leaders are perceived as mentors and as strong advocates for employee development: the odds of employees feeling like their organization and work have purpose are increased by 433% and the odds of employees being engaged in their work increases by 837%.

Four Levers for Evolving a Culture

Family business owners should follow four steps to create a positive and lasting culture for their business. First, they should articulate the aspiration. This involves understanding the current culture and identifying the type of culture that is in the business’s best interest. Second, leaders should exemplify the desired culture. Management and leader selection should focus on whether the candidates align with the target culture of the business. Third, leaders should discuss culture with their employees and ensure they understand the importance of change and what is necessary in order to achieve it. Fourth, the leaders should reinforce the desired changes through organizational design. All processes should align with the desired culture and strategy of the business. Change cannot be complete if it is only implemented at the top, it must be curated from the ground up.

Steps Toward Stewarded Succession

Once the family business has an established culture and purpose, the focus should shift on developing stewards to take over the business. Stewards should be focused on culture over strategy, be adequately compensated, be given age-appropriate responsibilities, and be held accountable for their actions toward the family business, whether positive or negative. The family business leaders should focus on instilling belonging, purpose, transcendence and story throughout their business, and pass those elements along to the steward. Family businesses can achieve a culture of belonging by focusing on relationships of mutual care and having frequent pleasant interactions.

In some businesses, employees can work for years in an office or warehouse floor without even meeting a member of upper management, let alone having a pleasant interaction with one. These employees feel easily replaceable and disassociated from the business. Purpose, as discussed earlier, requires a clear and far-reaching goal which is understood by all members of a family business. Transcendence can be achieved by understanding how the business contributes to the world. Whether the family business is a small C-store or large multistate retailer, it must understand how it fits into the community at large and the effect it has on the population.

Story is important as it meets a basic human need. Our society is built on stories, and human nature always inspires us to seek the story behind a company or person before true loyalty and investment can exist. The family business is encouraged to share its story with the successors and promote its value to achieve a true buy-in from future generations.

Answering the Tough Questions

After reviewing the types of successors and recommendations, family businesses are always left with questions about their situation. A few of the most common questions posed by family business owners, along with their responses, are offered below.

Q: What if you have a mix of Consumers, Dreamers, Owners, and Stewards?

A: The family business in this situation must decide whether they would like to be governed by the least common denominator (the Consumer). If this family business focuses on equal opportunity and falls into the trap of giving all potential successors equal power, the outcome will be less desirable than the hard choice of dividing the roles and responsibilities between the different successors. The family business must look at fair compensation and ownership for each of the successors and make the choice that will be most beneficial for the business.

Q: What if the next generation isn’t qualified or capable of running the business?

A: Determine whether they can be Stewards of culture while finding new talent to take over operations. While 76% of US family business leaders intend to pass ownership to the next generation, one-quarter plan to enlist outside management to oversee the actual running of the company. [18] There is no harm in joining this majority if it will be in the best interest of the business.

Q: What if some family members are in the business and some family members are not? How should the succession be determined?

A: This is a fairly common situation. Only 60% of business owners think they have enough resources to divide assets fairly, including heirs who don’t work for the company. [19] This family business owner should consider what is proportionate and equitable. Some successors and heirs could be excluded from the business and take their inheritance through other wealth transfer strategies such as life insurance policies and family-owned property or other investments.

 The Four P’s

Family business owners should teach the future successors the four P’s – Purpose, Participation, Preparation, and Perspective – at an early age. Successful children display purpose by knowing who they are and what they believe, and they understand those same things about their family. Participation asks that children are actively participating in providing services as part of the family, and they have age appropriate responsibilities which come with financial incentives. Successful children should also be taught preparation by being provided with meaningful education, tools and resources in order to understand how to manage and oversee the business and its finances. Finally, successful children should learn perspective by experiencing the full spectrum of life in both their communities and around the world, and they should understand their unique position as an individual.

Conclusion

Family businesses serve an important role in commerce across the nation. The benefits of a tight-knit family unit owning and operating a business are many, but this comfort level can also cause the demise of a business without careful planning. Family businesses must focus on long-term strategies and carefully craft succession plans while balancing company culture, family relationships, and business purpose in order to ensure the family business continues to succeed for future generations.

Endnotes

[1] SCORE Association (www.score.org). [2] US Bureau of the Census. [3] Forbes Magazine, 2015. [4] Foundling Family Ownership and Firm Performance, 2003. [5] Family Business Survey, 2016. [6] U.S. Department of Commerce [7] Barclays Wealth and the Economist Intelligence Unit, Barclays Wealth Insights, Volume 8, “Family Business In Safe Hands?” 2009. [8] Gallo, Taples, & Cappuyns, 2004. [9] Calvi Reveyron, 2000. [10] Lyagoubi, 2006. [11] PriceWaterhouseCoopers, 2014 Survey. [12] SCORE Association. [13] PriceWaterhouseCoopers 2014 Survey. [14] Philanthropy Heirs & Values by Roy Williams and Vic Preisser. [15] Id. [16] Bain & Company, 2014. [17] Predicting Corporate Performance, Organizational Culture by George G. Gordon and Nancy DiTomaso. [18] PWC, Playing their hand, US family businesses make their bid for the future, 2012/2013. [19] PWC, Kin in the Game, 2010/11.

David R. York, Esq., CPA, is a Co-Founder and Managing Partner of the Salt Lake City law firm York Howell & Guymon. He has extensive experience in designing and implementing advanced tax and estate planning strategies for high net worth clients, along with non-profit and business planning counsel. He is a Fellow with the American College of Trust and Estate Counsel (ACTEC). Noted for his highly relational speaking style, David speaks regularly around the nation at events including Million Dollar Roundtable, Institute for Family Governance, Valmark Member Summit, Investments and Wealth Institute, and as Dean of Legacy for Purposeful Planning Institute. His articles have appeared in Trusts and Estates Magazine and Investments and Wealth Monitor. David York is the creator of the Rivets™ Core Values card game, co-architect of The Entrusted Planning Process™, and co-author of Entrusted: Building A Legacy That Lasts and Riveted: 44 Values That Change the World.

Tina Lovejoy, Director of Entrusted Planning, is co-architect of The Entrusted Planning Process™, which helps high-capacity families and businesses to discover and define their purpose and culture to align their estate planning and organizational structure. Tina facilitates sessions and workshops to help clients integrate their themes into their charitable giving, succession planning, rising gen development, and team-building efforts. She also develops the licensing side of Entrusted Planning and trains advisory firms to integrate the process into their own business framework. Tina Lovejoy is a panelist at events including The Family Meridian Advocate Summit, Purposeful Planning Institute’s webinar, The Journey of Successful Wealth Transfer, and Southeastern Family Office Forum.