Procedures vital in resolving family conflict

Published in The News & Observer January 30, 2011

The statistics available on family businesses are rather scant.

Part of the problem is that you can’t just look them up in the phone book or Google, or find them under an SIC code. Our firm gathers a lot of data on the various dynamics of family businesses, but there are a few global companies who perform significant research.

PricewaterhouseCoopers began surveying its customers in 2007 and just issued the 2010/2011 Family Business Survey last week. Lennie Austin with PwC in Raleigh says the firm loves this kind of research because family businesses are such an important part of the economy.

The survey is one of the most comprehensive of its kind: Interviews were conducted with owners and top managers at more than 1,600 small and mid-size family businesses from 35 countries. Most of them have been in business more than 20 years and almost half have been operating for 50 years or longer. A good portion come from manufacturing, retail, construction, and consumer goods. About 66 percent of the businesses are in the second generation or later, so they have experienced at least one succession.

At the highest level the questions revolve around how they are dealing with the current economic situation, what challenges they are facing, and, most important, what they are doing to prepare for the future.

On the economic front, 67 percent think being in a family business has helped them manage to cope with the current economic downturn. At the same time, 50 percent believe the top determinants of their business’ success is either due to some aspect of their product or service such as design, quality, range, etc., or the strong brand or market presence of their company or product.

Looking forward, the top areas singled out for future investment include human resources development and training, and sales and marketing activities.

Looking more closely at the internal intentions of the family businesses, more than 50 percent have plans to pass the business to a family member. This statistic is interesting as about 50 percent have no succession plans, 60 percent have no plans for the sudden illness or death of a key manager, and about 70 percent are not planning a succession for over five years.

It is also interesting to compare these data to the historically known statistic that two-thirds of family businesses do not make it to the next generation.

Getting deeper, the top two issues that were causing dissent in the family business were discussions about the future strategy of the business and, surprise, the performance of family members in the business. As you might expect, 64 percent hire relatives without requiring them to compete for their jobs on the open market, with North American companies and small companies showing a high degree of preferential treatment of family members.

And sadly, more than 70 percent of family businesses do not have any procedures for dealing with conflicts between family members. Of those that do have a way to manage conflicts, the top methods include shareholder agreements, a family council, and getting a third party involved to help.

The study does a good job in referring to the now-famous Tagiuri & Davis family business system Venn diagram of business, ownership, and family, and astutely points out that those family businesses that perform best over the long haul establish clear boundaries between each of those different segments of the family business. For example, keeping family and ownership issues outside of the boardroom and ensuring that provisions are made for those heirs who are not part of the business.

“This is particularly important when economic conditions are difficult, as they are for many companies right now,” the survey states.

From our years of experience with family businesses, those that begin thinking early about transitioning leadership and that proactively work at it are the ones that survive and thrive in the next generation. Keeping abreast of the latest data and information regarding family businesses, like the PwC study, is all part of this preparation.

Coming in two weeks: a spotlight on a Raleigh family business, Logan Trading Co.

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