Why are family businesses better at weathering economic downturns?

When it comes to family businesses, evidence suggests that which does not kill them makes them stronger—stronger than other enterprises. Family businesses tend to enter challenging economic times better prepared than others, with a more conservative orientation and far less debt. In a difficult economy, family businesses respond with a multigenerational perspective that informs their decisions, allowing them to survive and thrive, often by flouting conventional wisdom.

Research from family business consultancy Headwaters SC (HWSC) indicates U.S. family businesses with annual revenues of $100 million to $3 billion are statistically less likely to fail during economic downturns than comparable businesses with other forms of ownership. There are roughly 5,900 of these businesses in the 12 broad industry segments that HWSC serves, representing roughly 75% of all Standard Industrial Classification (SIC) codes. Of these, nearly 86% operate in industry segments that have low-to-moderate—as opposed to high-to-very-high—revenue volatility. Even considering all industry segments, including those with high and very high revenue volatility, HWSC found that roughly 73% are in the second to fifth generations of family ownership, indicating that these companies have withstood from 25 to 100 years of economic ups and downs.

"When analyzing the longevity of upper-middle-market, family-controlled businesses, there are also two important capitalization factors worth considering," says James Bly, HWSC founder and CEO. "First, most have lower debt-to-EBITDA ratios than private-equity-backed businesses. The owners typically do not want to place their equity value at risk to excessive debt leverage. Second, they have little structural pressure on the equity side, no market pressure attributable to quarterly earnings results or activist investors, and a longer-term shareholders' perspective that comes from patient capital."

A long-term perspective

Family businesses' long-term outlook distinguishes them from other enterprises. By focusing on resilience, as opposed to short-term gains, these companies are better able to weather economic storms. "As a family business, we don't need to see the return next quarter; we can invest longer-term," says Charles Kittredge, sixth-generation chairman of the board and former CEO of Crane & Co., the paper company founded in 1801. Kittredge further explains that by not "cutting to the bone" in economic downturns, "Crane is better positioned to respond to upticks in the economy." This patience is at odds with the "fail fast" philosophy so prevalent today.

In addition, the family business perspective is often shaped by leaders who have a greater depth of management experience. This is due, in part, to the longer average tenures of family business CEOs—25 to 28 years, compared to four to six years for CEOs in non-family businesses, according to Andrew Keyt, clinical professor at Loyola University Chicago's Quinlan School of Business. And, in family businesses that have survived for two, three or more generations, there is greater institutional knowledge. "They've seen it before," says William Lauder, third-generation executive chairman of The Estée Lauder Companies Inc. (ELC).

Lauder believes "patient capital" and the ability of management to take a longer-term view as to how they invest and manage the business is key to longevity. ELC put its long-term perspective into practice during the mid- to late 1980s, when department stores and other retailers were suffering as a result of their debt structures. In some cases, ELC was the stores' largest trade creditor. The company's reaction was, "Don't panic; think through the options," says Lauder. The company chose to continue selling to the department stores, extending credit terms and maintaining its relationships with them. "The ability to take a longer-term view allowed us to ride through the crisis with the customers," says Lauder.

During the most recent recession, ELC's vendors also suffered. In some cases, the company represented 20% to 30% of the suppliers' businesses. ELC took out a $750 million line of credit as a "rainy day fund" in case it was needed to support the vendors, says Lauder. It next bought back excess inventory from the vendors, taking a write-down. This allowed the vendors to purchase ELC products that would sell better for them. "The short-term sacrifice of buying back and writing down inventory provided better results longer-term," says Lauder.

Protecting the firm's (and family's) reputation

Family businesses' patient approach is partly informed by their view that success or failure attaches not just to the business, but also to the family. This view was evident in the way Toyota Motor Corporation president Akio Toyoda, the grandson of the company's founder, handled the fallout after a U.S. family was killed when their Lexus exploded in 2009. Testifying before Congress, Toyoda said, "[T]he Toyota vehicles bear my name. For me, when the cars are damaged, it is as though I am as well." While Toyoda owns just a small minority of company stock, he remains a stakeholder with significant influence.

When family is involved, not all business decisions are strictly business decisions. Family businesses often focus on survival so they can protect for the long term the benefits they provide their employees, family shareholders, suppliers, customers, the communities in which they work and do business, and the charitable and civic works they value. "We don't exist in a vacuum, but are dependent on others for our success," says Lauder. "We must think about who we are going to affect with what we do."

Family businesses tend to embrace the following key (and interrelated) practices to a greater degree than non-family businesses—and to especially good effect during challenging economic times.

More financial discipline. In general, family businesses are more apt to self-finance, less inclined to carry debt and better able to foster stability—characteristics that help them seize opportunities that often present themselves in times of economic hardship and political instability.

This hesitancy to take on debt can lead to conflict, even when taking on debt would strategically expand the business. For example, in 2000 in order to diversify and remain competitive for the long term, Crane & Co. purchased a paper mill and banknote printing plant in Europe—a move that expanded its services and geographic footprint, as well as its debt. Some members of the family expressed concern about the investment, contending that the family should "stick to their knitting." While Kittredge knew it would take several years to realize a return on the investments, he believed it was riskier not to diversify. Ultimately the shareholders came together and accepted the risk. The move has subsequently proved to be very successful, Kittredge says.

When it comes to C-suite perks, family businesses also have different priorities. While the CEO of a non-family business may demand rewards for achieving short-term profits, for a family CEO the success of the business, and the ability to pass it on to future generations, carries more weight. "I want to make sure the business is as healthy as possible and positioned to last another 100 years," says Kittredge.

Better talent management. Research published in Harvard Business Review indicates family businesses are better able to retain employees—their annual turnover rate is 9%, compared with 11% at non-family companies. The stronger, purpose-driven cultures that characterize family businesses attract employees and keep them engaged and loyal. Family businesses are also less likely than their non-family counterparts to lay off employees during economic downturns. Longer employee tenure, in turn, reinforces the culture, while increasing efficiencies.

Crane & Co., which now focuses on making paper for currency, currency design, banknote printing and anti-counterfeiting technology, demonstrated its loyalty to its employees during the recession of the early 1980s. Many of Crane's business customers stopped buying Crane's watermarked stationery as a cost-cutting move. "A public company would have made drastic reductions in staff and production," says Kittredge. "But the product line was intrinsic to our family values—the brand was culturally important for the company." Crane eventually spun the stationery division out of the company and did an employee buyout, keeping 400 people employed in the process. "This creative solution ensured our people and the surrounding community were cared for," says Kittredge.

More social responsibility. A study published in Harvard Business Review found that family businesses maintain high levels of corporate social responsibility regardless of economic conditions. Further, in a study by EY and Kennesaw State University, 81% of the world's largest family businesses said they are engaging in philanthropy. Corporate social responsibility (CSR) practices are closely linked to a family's legacy, demonstrating a commitment to the family, business and community. Unsurprisingly, this caring attitude results in better business performance—through increased operational efficiency, reduced waste and increased product differentiation.

"One of the amazing things our research shows is that families that prize CSR are healthier, and the businesses they own perform better," says Joe Astrachan, Family Business Chair, Kennesaw State University.

Additionally, the EY and KSU study found by taking steps to safeguard the future, family businesses show commitment to the future, their shareholders and their employees. A family business's focus on CSR was found to simultaneously reinforce a family business's financial discipline and talent management.

"We hold ourselves to a higher standard," says Fisk Johnson, CEO of S.C. Johnson & Son. "We work hard at nurturing a culture of caring and doing the right thing for the long term." The benefits of a sustained focus on corporate social responsibility become even more important during uncertain economic times, when consumers place a greater premium on trust.

Taking the long view

Family businesses that have weathered dozens of economic cycles offer a blueprint for enduring success that begins with a long-term perspective. These businesses see themselves as cohesive family units with a responsibility to engage the next generation and carry on their philanthropic legacy. With these perspectives, they prioritize financial discipline and loyalty to their employees, customers, suppliers and communities. These choices also serve to carry them through challenging economic times.

For family businesses, the stakes are simply higher. They include the family's identity, reputation and ability to provide for future generations. With so much on the line, options that might appeal to other enterprises, such as selling or extreme cost-cutting measures, seem unthinkable—even if they make short-term business sense.

Carrie Hall is Americas Family Business Leader at EY. Follow her @CarrieGHall.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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January/February 2014 Openers

Is there a future for family owned newspapers? Will newspapers even exist in the future?

These questions come to mind when one considers the difficult environment in which family newspapers operate today. In recent months our industry has experienced dramatic shifts. Family-owned Advance Publications decreased the print publication schedule of its newspapers in Alabama, New Orleans, Portland, Ore., and Cleveland. Times-Shamrock, a family media company based in Pennsylvania, sold some of its newspapers. And two of the nation’s most famous family-controlled newspapers, The Washington Post and The Boston Globe, have been sold. A new breed of newspaper owners has emerged, led by Warren Buffett, Jeff Bezos and John Henry.

With these changes in mind, how would I answer the questions above? I believe that there is a future for family-owned newspapers. I also believe that newspapers will continue to exist well into the future, but there will be continued change, disruption and uncertainty. And the outcome—good or bad—will be profoundly affected by government action and political will.

These are vital concerns not just for family media and journalism businesses but also for all Americans. The outcome will have much to do with the survival of our 200-plus-year experiment in self-government, and whether we can rebuild a healthy economy and vibrant middle class.

Throughout history, almost always government and cultures fail from within. This is where we are today in our country—on the brink of the abyss.

The consolidation of the newspaper business, once dominated by local family ownership, and the disinvestment in newsgathering has coalesced with the evisceration of Main Street by faceless financial mercenaries and is one of America’s greatest dangers.

Historical context

We all know the foundation of the American dream is our elegant Constitution, including the Bill of Rights and the amendments. But many Americans are unfamiliar with the history of the two other essential foundational pieces put in place by our nation’s early leaders. Those two additional elements, which are absolutely essential in order for our democratic self-government experiment to work, are newspapers and public education.

The gathering and reporting of news is protected and nurtured by the federal government. The First Amendment guarantees the rights to free speech and freedom of the press. The U.S. Postal Service, the first federal agency, was created to support ubiquitous free distribution of newspapers because early leaders understood that for self-government to work, the general populace, not just the elites, must have access to high-quality information. Public education was nurtured by the federal government’s Common Schools Act of 1871 and was premised upon the understanding that democracy required its citizens to be educated, regardless of status or class. These two truly egalitarian actions helped America achieve the highest literacy rate in the world.

The path back to prosperity

Today, America faces a crisis of unequal opportunity for all: a widening wealth gap, a terrible education achievement gap and a shrinking middle class.

The lack of quality, accessible education and the loss of a once diverse and robust system of independent newspapers are the key drivers of our wealth and opportunity gaps. Our Founding Fathers understood that all citizens must feel a part of the American dream; otherwise, self-government could not be -sustained.

The path back to economic prosperity and opportunity for all begins with radical changes in our calcified and decaying public education system and in our newspaper and media ownership structure.

About 60 years ago, noted journalist Walter Lippmann said he was secure in his belief that American democracy would endure. “… [T]here is, I believe, a fundamental reason why the American press is strong enough to remain free,” Lippmann said. “That reason is that the American newspapers, large and small, and without exception, belong to a town, a city, at the most to a region.”

The secret of a truly free press, Lippmann said, is “that it should consist of many newspapers decentralized in their ownership and their management, and dependent for their support upon the communities where they are written, where they are edited and where they are read.”

Lippmann concluded by saying, “There is safety in numbers, and in diversity, and in being spread out, and in having deep roots in many places. Only in variety is there freedom.”

This was still our newspaper world when I began my career in 1968. Forty-five years later the state of the newspaper industry is Lippmann’s worst nightmare. Approximately 80% of all newspaper revenue and circulation is now controlled by absentee public corporations and profit-driven investors.

This dangerous level of control exists throughout our entire system, from content creation to distribution and control of access. It encompasses newspapers, radio, TV, the Internet, books, Hollywood and phones.

The Seattle Times is the largest of only five locally owned family newspapers left in the top 50 markets. We have had to concede our former standing as the largest privately held newspaper in the country to our Seattle neighbor Jeff Bezos, who now owns the venerable Washington Post.

Newspapers must contend with a new reality that includes the challenges of integrating print and digital platforms, digital subscribers as part of the revenue mix and dramatic demographic and technological changes. But the basics of good journalism, independence and community connection will still be needed. Newspapers’ role as a watchdog will remain critical.

A ray of optimism

Since I first spoke out against newspaper and media consolidations in 1988, there has been a steady erosion of diverse and local ownership. With ever-increasing consolidation and decreased emphasis on journalism, we have become a less informed and less engaged society.

Cheap-to-produce celebrity gossip and uninformed talk shows have replaced real news. All too often, this form of “information” supplants public acumen and engagement on important issues.

The peak of destruction for our once robust newspaper and media system came with the 2008 financial collapse and the bankruptcy of many of the media consolidators.

Hope of a return to enlightened and diverse ownership was dashed as investor groups swooped into bankruptcy proceedings to buy media companies as “distressed assets,” aided and abetted once again by a sleeping Federal Communications Commission and Department of Justice.

But suddenly, something new is beginning to happen. Warren Buffett started to buy newspapers for their public service value; he now owns well over 100. Jeff Bezos bought The Washington Post and, in doing so, took it out of the public financial markets knowing it is a special place and requires public service stewardship. Bezos’ insights on the digital world and his winning efforts in e-commerce could be groundbreaking contributors to an industry challenged by rapid and demanding changes. John Henry bought The Boston Globe undoubtedly for business synergies with the Boston Red Sox and New England Cable Network. At the same time, this transaction is cause for hope that Henry’s New England roots will provide local stewardship and as much attention being paid to journalism and community service as he paid to winning a World Series. They all have different reasons for making their acquisitions, but all bring the hope that public interest stewardship may be returning, and with it a renewal of local family newspaper ownership.

Frank A. Blethen is publisher and CEO of The Seattle Times Company. He is a fourth-generation member of the Blethen family, which founded The Seattle Times in 1896.







Copyright 2013 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact








Tribute to a former family owner


This plaque was placed outside the elevator at the headquarters of the Washington Post to honor Donald Graham, chairman of the Washington Post Co., which was renamed Graham Holdings Co. on November 29, nearly two months after the Graham family sold the historic newspaper to Amazon co-founder Jeffrey Bezos.

Graham Holdings agreed to sell the building to Carr Properties, a family enterprise, for $159 million. The Post will rent space in the building until it finds a new headquarters.


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Sowing the seeds of sustainability

Even as the “green” movement and obesity prevention campaigns have renewed public interest in farming and gardening, family-owned agricultural businesses in the U.S. continue to face daunting challenges. Giant agricultural conglomerates and mega-markets have encroached on their niche, the specter of estate taxes looms large, and Mother Nature periodically wreaks havoc on the land.

Understandably, many later-generation owners of farms and nurseries have opted to exit the business and sell their property to a developer. According to the Farmland Information Center, more than 4 million acres of farmland were developed between 2002 and 2007.

Last summer, siblings Will, Lucy and Becky Tuttle, 11th-generation owners of America’s oldest continuously operating family farm—the Tuttle Farm in Dover, N.H., founded in 1632—put 134 acres up for sale. But they preserved the property as open space; a conservation restriction prohibits it from being developed. Will Tuttle and his wife, Michelle, told the Boston Globe that they hoped the new owners would maintain it as a working farm. Even so, the Tuttles told the Globe, the economic downturn has made operating a small farm even more difficult.

Despite these pressures, some two dozen farms, nurseries and orchards remain on Family Business Magazine’s list of America’s oldest family businesses. Family Business talked to several multigenerational agricultural families about their legacies and what keeps them tilling the soil.

Preserving their heritage

The 27-acre Westcroft Gardens in Grosse Ile, Mich., founded in 1776, is the oldest family-run farm in the state. “It’s been harder and harder to make ends meet—and a little harder since the recession,” says seventh-generation owner Denise de Beausset, 55. “We’re hanging on because of our history.”

Her niece Erica Mesedahl, 26, moved to Michigan after graduating from college and worked on the farm full-time for three years. However, de Beausset encouraged Mesedahl to explore other positions focusing on her interest in environmental protection. For the past two years, she has worked at an alternative energy engineering company in Troy, Mich., as an office manager; she also assists in analyzing regulations and policies on alternative energy and automotive standards. She plans to participate in a local conservation stewardship certification program and a master gardener program.

“I can see myself taking over when Denise decides to retire, which may be in ten years—this is, of course, assuming that the land/business is not sold,” Mesedahl writes in an e-mail to Family Business. “If I am to take over, I would rejoin her full-time there at least one to two years in advance of her retirement to make sure that I understand all of her responsibilities.”

Mesedahl currently works on Saturdays in Westcroft’s plant nursery, botanical garden, woods and petting farm. “I have yet to find work more rewarding than the work I have done on the farm, and I look forward to the chance to be the next-generation [owner] with great anticipation,” she writes.

Founded in 1853, the 24-acre Hicks Nurseries in Westbury, N.Y., is the oldest nursery and garden center on Long Island. It has 75 employees; in the peak season, that number increases to as much as 150. The nursery has hosted a flower and garden show for 21 years. Sixth-generation member Stephen Hicks, 38, manages the business with his sister Karen, 43. They hope that someone in the seventh generation—now ranging in age from two to 12—will one day succeed them.

“We’re not immune to the economic winds blowing,” Stephen Hicks notes. In order to maintain sales, he says, he is offering different products—such as pond supplies, gardening ornaments and café items—and reining in expenses. “We’re working harder just to stay in place,” he says.

The 1,100-acre Lyman Orchards in Middlefield, Conn., established in 1741, today has 50 year-round employees and up to 200 workers in the peak season. “We’ve always been fortunate that someone in the next generation was interested in being an active participant,” says eighth-generation executive vice president John Lyman III, 53. “Our core resource is stewardship of the land…. We need to use the land wisely and build for the next generation.” As a young man, Lyman worked summers at the orchards; today his son, two daughters, nieces and nephews do. Non-family member Steve Ciskowski serves as president and CEO of Lyman Farms Inc. Other Lyman family members serve on the board and have investments in the business.

To sell, or not to sell?

“Sheer determination has kept the business going over the years,” says Linda Concklin Hill, 63, who runs the Orchards of Concklin in Pomona, N.Y., with her son Scott Hill, 40, and her brother Richard Concklin, 60. The family has been farming in New York’s Rockland County since 1712.

After struggling with severe financial problems during the 1980s and 1990s, Concklin Hill’s family sold most of their land to the county. They are now tenant farmers, with a long-term lease that permits them to plant trees and make capital improvements such as installing deer fencing. The family still owns a five-acre parcel with greenhouses.

Throughout the years, others have also considered selling their land. “The economy is so terrible in Michigan that we would have to give it away, and we can’t,” says Westcroft Gardens’ de Beausset.

In the mid-1960s, the Lymans were approached about selling a couple hundred acres of their property for a golf course. The financing fell through, but the family decided to pursue this plan on their own. Their first course, designed by renowned architect Robert Trent Jones, opened in 1969; a second course, created by golfer and designer Gary Player, opened in 1994.

“That was one of the best business decisions we made,” John Lyman says. “Unexpected change leads to opportunity. We can’t pick up and move away—that’s not an option. So we needed to figure out how to make the business a success.”

Coping with pressures

Hicks Nurseries weathered a particularly stormy period from the 1930s to the 1960s. After surviving the Depression, the nursery confronted a changing environment, as Long Island grew less rural and more suburban. Stephen Hicks’ father, Alfred (Fred) Hicks, who had an MBA from Cornell University, infused the enterprise with new ideas and energy; he shifted the focus of the enterprise from landscaping to a retail garden center. Stephen credits his father’s “strong commitment to the business” in the mid-1960s. “I think it would have been sold if not for my dad,” he says. “We needed to innovate continually, offer relevant products and maintain high standards.”

Linda Concklin Hill responded to economic pressures by expanding the Orchards of Concklin’s bakery, adding cookies to a line of fruit pies. She also began offering special items like heirloom tomatoes and Fuji apples to provide her produce customers with more choices. “We need to stay ahead of the curve and make the right decisions, and market what customers want,” she says.

The Lyman family has been diversifying their operations throughout the history of their enterprise, John Lyman notes. In 1917-18, a frost destroyed 500 acres of peach trees that the family had grown since the 1890s; the family adapted by planting hardier apple trees.

“In agriculture, there is a dose of reality that many things are beyond our control, which requires humility,” Lyman says, referring to the forces of nature. “We respect rather than fight that.”

In the 1960s and ’70s, the Lyman family transformed their agricultural operation from a wholesale to retail business and phased out dairy operations. They added a bakery, which is not weather-dependent. “The pie business is growing rapidly through my father’s vision to be creative,” Lyman says.

Crop insurance has become more expensive, according to the Orchards of Concklin’s Linda Concklin Hill. “All of our money is in the crop, and there is crop insurance for hailstorms and other acts of Mother Nature,” she explains. “But, like health insurance, it’s becoming more and more expensive. So we need flexibility in dealing with weather challenges and competition. We need to build customer loyalty.”

Even though Westcroft Gardens is just 20 miles from Detroit, owner Denise de Beausset says its location on an isolated island is one the greatest challenges for her business. “Ninety percent of our business is from repeat customers—islanders who already know about us,” she says.

Because of the recession, de Beausset says, she has had to lay off nine employees and is down to one. “I’m growing less stock, keeping less inventory and promoting more ‘agri-tourism,’ such as Halloween hayrides,” she says. But she says that insurance companies, citing liability issues, objected to her effort to develop paint balloon birthday parties.

Lyman says “agri-tainment” allows visitors “to have more experience with the land…. My business focus is to find creative ways to entertain people and build on staff development. We’ve been part of a legacy and have to take care of the land for the next generation.”

Hicks says the “green” and organic movements have helped his business. “We’re educating customers and have the opportunity to discuss these issues,” he says.

“It’s good for ecology and the economy,” Lyman says. “We’re in for the long haul and are looking for ways to be less harsh on the environment and reduce pesticide use.”

While agricultural products are currently in vogue, Hicks says, “Just putting products out for sale won’t work. We need to tailor them to customers’ needs.”

Westcroft Gardens’ de Beausset reports that pricing has been an issue for her business. “People don’t understand that I need to make enough money in the growing time for all year and object when the price of hanging baskets goes up,” she says. “But the profit margin is less each year.”

Mesedahl, her niece, understands that the land might someday be sold. “I will support whatever decision is made,” Mesedahl writes in an e-mail. “It has been discussed and agreed within the family that I should continue to explore all career paths open to me until a final decision is made regarding the farm’s survival, so that I make my own decision for my future.”

Despite the pressures of managing a family farm, the owners of these agribusinesses note that the lifestyle and the connection to family history make the effort worthwhile. Linda Concklin Hill says that she and her son are optimistic that their orchards will survive. “Scott recently planted some fruit trees—a sign of hope for the future,” she says.

Andrea K. Hammer, founder and director of Artsphoria: Arts and Business Vitality (, is a writer, editor and desktop-publishing specialist in Wyncote, Pa.

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Community stalwarts

It isn’t easy to be a small community banker these days. Since the start of the financial crisis in 2008, local banks have failed in record numbers, regulatory red tape has increased and profits have been squeezed —forcing many to sell to big banks or go under.

Small community banks, those with assets of less than $10 billion, make up 98.6% of institutions insured by the Federal Deposit Insurance Corp. The failures have been highest among local banks overexposed to risky commercial real estate, construction and land development loans. More of these institutions will likely vanish in the next few years. They simply have too little capital to cover their operating expenses, let alone comply with costly new regulations and demands to increase capital reserves.

The community banking sector faces strong headwinds in the coming years, but the picture is not all bleak. Some local banks not only have withstood the economic storm but also are well positioned to benefit from the recovery. Among them are Austin Bank in East Texas, Firstrust Bank in Southeastern Pennsylvania and Mechanics Bank in Northern California. These institutions did not take funds from the federal Troubled Asset Relief Program (TARP) during the recent economic crisis.

What enabled these family-controlled banks to survive when others could not? “Community banks that were conservative going into this business cycle, that had solid reserves and stayed focused on their local markets, have fared pretty well in these difficult times,” says Josh Siegel, managing principal and co-founder of StoneCastle Partners LLC. A privately held asset management and financial services firm in New York City, Stone-Castle manages $3 billion invested largely in community banks. “There’s a big difference between local banks in business for the long haul and those that were out for a quick buck,” Siegel says.

‘Local people, local decisions’

In 2009 the Austin family celebrated its centennial anniversary in banking. John F. Austin opened the First State Bank of Frankston (Texas) in 1909. Over the years, the family acquired nine more charter banks. Texas didn’t allow branch banking until late 1989. A decade later, the Austin family collapsed several charter banks into Austin Bank, renamed to honor its founder. In 2010 it merged the original Frankston Bank with Austin Bank. The Austin family still has controlling interest in three other charter banks.

Headquartered in Jacksonville, Texas, Austin Bank has $1.1 billion in assets, 28 branches and 378 employees. Today the bank is led by the third and fourth generations: Jeff Austin, Jr. 72, is the bank’s chairman, and his son, Jeff Austin III, 48, is vice chairman.

Austin Bank maintained healthy profit margins throughout the recession. It had the advantages of doing business in a local economy relatively unaffected by the financial crisis and the Austin’s family’s commitment to a conservative business model. The bank has strong reserves, a well-balanced portfolio and a very low percentage of non-performing loans.

“We’re at the top of our peer group,” says Jeff Austin III, “and we’ve done it by sticking to the core values my grandparents passed down to the family. Our motto is ‘Local people, Local decisions’—good governance, good risk management and knowledge of customers. Those are the keys to successful community banking.”

Over the past two years, the bank has seen promising results from its investments in training employees—the very expense that most businesses cut back on, Austin notes. It hired an outside consultant to work with senior management and altered the bank’s culture to give employees more flexibility and to invite suggestions on improving customer service. Recently, the bank started an Obstacle Removal Taskforce to find out what stands in the way of providing better service. “Austin Bank not only wants to be the bank of choice but also the employer of choice,” Austin says. For the past three years, the Texas Association of Business has named it one of the state’s top 100 companies to work for.

“Customers have choices in banks,” Austin says, “so we have to earn their trust to keep their business. Our philosophy is that if our customers are successful, we’re successful. That means that sometimes saying no is the right thing to do. It would be unethical to put a customer in a loan he couldn’t pay. We live in this community; our employees live here. We may not be the biggest bank in Texas, but we want to be here tomorrow.”

“A president of a local bank probably belongs to the rotary club, backs the football team and goes to the local church,” notes StoneCastle’s Josh Siegel. “If he makes reckless decisions that put depositors at risk, he hurts the people he knows and loses face in his community. Probably the biggest factor contributing to the collapse on Wall Street was the lack of personal connection and the attitude of, ‘Who cares what happens to customers we don’t know?’”

‘Cultivating prosperity’

With $2.3 billion in assets, 385 employees and 24 offices, Firstrust Bank is the largest family-owned and -operated bank in the Philadelphia area. The bank, founded by Samuel Green in 1934, was originally a savings and loan institution. Under the leadership of Samuel’s son, Daniel Green, it was converted to a commercial bank in 1987. Today, Daniel’s son, Richard, 58, is the CEO. In 2007, Timothy Abell was named the bank’s first non-family president.

Recognized by major credit rating agencies as one of the strongest FDIC-insured banks in the country, Firstrust has an impressive record of 76 years of profitability. A December 2010 article in the Philadelphia Inquirer noted that the bank has more capital than it had five years ago, in part because the Green family did not take dividends in all but two quarters during the period from summer 2007 through the first quarter of 2010.

Yet, even for a community bank in such good standing, the past few years have been difficult. “The economic downturn has affected every aspect of our business,” Richard Green says. “Although we showed a profit in 2009, it was nowhere near what we had earned in previous years. But we consider ourselves fortunate. We’ve come through this recession with our capital intact—in fact, a bit better than before, and without having to sell off any assets or take on unwanted partners. And we didn’t take any TARP money. We didn’t need it, and the conditions attached to taking it weren’t to our liking.”

Firstrust’s diverse portfolio—divided about equally among consumer loans, commercial and industrial loans, real estate and investments—reflects the bank’s conservative approach to lending and has served the bank well over the years. “The good news,” says Green, “is that our portfolio is unchanged; the bad news is that we were hit across all sectors.”

The economy in Southeastern Pennsylvania did not escape the fallout from the financial crisis. Unemployment in the area hovers around 9% and real estate values have fallen, but the region was spared from the devastating effects of the housing collapse elsewhere in the U.S. “Throughout the recession, we never stopped lending, never changed our underwriting and never stopped supporting our customers and the communities where we have branches,” Green says. “There’s still plenty of uncertainty in the economy and certainly in commercial real estate, but a lot of excess has been wrung out of the system. For those of us left, there’s a chance it will turn out to be beneficial.”

Included in Firstrust’s mission is the goal of “cultivating prosperity for customers, employees and the communities it serves.” In 1997 and 2001, two banner years for profits, Green shared the bank’s success with employees; he awarded 45% bonuses across the board, from top executives to tellers.

Firstrust has also been a generous supporter of health, education, nutrition and housing projects in the community. Recently, the bank and the Daniel and Florence Green Family Foundation donated $3 million to build an affordable housing complex for low-income seniors in Philadelphia.

For the future, Firstrust is concentrating on updating and improving services. It recently hired a specialist in branch banking to improve delivery of services through its branch system, and it’s making an even bigger investment in non-branch delivery services such as electronic and Web-based banking. “We value our long-term relationships with our customers,” Green says. “We’ve known some families over generations, and we want to offer them the best services.”

“The single most important factor that makes banks successful is knowing their customers,” comments Stone-Castle’s Siegel. “They know the people they’re lending to, their businesses, what they can afford, what their kids need. As big banks get even bigger through consolidations, their personal service will suffer. The market will be ripe for well-run community banks to win customers by offering excellent service, customized products and the hand-holding that big banks don’t have time for.”

‘Commitment to service’

E.M. Downer founded Mechanics Bank in Richmond, Calif., in 1905. Downer’s great-granddaughter Dianne Daiss Felton, 54, was elected board chairwoman in 2010; her second cousin E. Michael Downer, 45, is vice chairman. One of the country’s largest community banks, Mechanics has $3 billion in assets, 33 offices in six counties and 670 employees.

Mechanics’ unusual name came from its earliest customers. Richmond was the home of the Santa Fe Railroad, and the local railroad workers, called “mechanics,” cashed their paychecks at Downer’s bank. Everyone referred to it as the mechanics’ bank, and the name stuck.

During World War II, Kaiser Shipbuilding moved to Richmond, bringing 70,000 new residents. After the war ended, tens of thousands of workers were unemployed. E.M. Downer Jr., who had succeed his father, published a pledge in the local newspaper that no homeowners would lose their houses, and he worked with borrowers to avoid foreclosure. That legacy of relationship banking continues today, Felton says.

“We’ve been in business for 105 years,” she says. “We know our customers, and we take the time to do the right thing for them in big and small ways. Just the other day, one of our branch managers helped out a customer by taking her dog to the kennel. That kind of commitment to service starts at the top.”

Mechanics Bank’s prudent business model saved the bank from the reckless lending practices that destroyed so many community banks after the real estate bubble burst. “We got a lot of pressure from non-family shareholders to make subprime loans,” says Felton, “but it didn’t make any sense to us as a sustainable business model. Other banks were growing faster than we were, but we stuck with our conservative portfolio and banking approach.”

The bank has continued lending throughout the recession. Its portfolio has been flat the past few years, but Felton is confident that as outstanding loans are paid down, profits will return. “Our good customers aren’t borrowing now and probably won’t for a while,” she says. “But we’re still lending to small businesses and making some residential loans.” Like Firstrust and Austin Bank, Mechanics Bank turned down TARP funds.

Mechanics Bank was a beneficiary of the Move Your Money campaign started by Huffington Post founder Arianna Huffington and friends in 2010. The campaign, which protested taxpayer support for the too-big-to-fail banks that caused havoc in the financial markets, urged individuals to move their money from big banks to reliable local banks that invest in their communities.

Despite the lingering recession, Felton sees a sunny future for Mechanics. “We’re in a sweet spot,” she says. “We can compete with the big banks successfully because we’re big enough to comply with the new regulations and still grow, and yet small enough to be closely involved with our customers. We see great opportunities in the future to acquire smaller banks that can’t handle the compliance burden.”

StoneCastle’s Josh Siegel says the strongest local banks will survive the current challenges. “Well-run community banks have reason to be optimistic,” he says. “This is historically a great time for banks sitting on strong capital reserves or [that] have access to capital. They’re sitting in the catbird seat to acquire more market share without risking growth or having to pay a lot to grow.”

Deanne Stone is a business writer based in Berkeley, Calif.

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Banking on family ownership

Like so many other U.S. industries, banks have turned to consolidation to remain competitive. Many family-owned banks have been swallowed up amid the “merger mania” that has swept the banking industry over the past decade. But executives at family banks that have withstood various pressures—often internal as well as external—say their institutions’ personalized service and ability to relate to family business clients in their communities have helped them differentiate themselves from their larger rivals.

Richard J. Green, 56, CEO of Firstrust Bank in Philadelphia, says he has no intention of selling. He represents the third generation of his family to lead the bank, which has assets of more than $2.2 billion and offers retail and commercial services in 25 branch offices in eastern Pennsylvania and southern New Jersey.

Firstrust’s origins are representative of the hard work and strong relationships that are needed to build a family bank. Samuel A. Green, Richard’s grandfather, was a teenager when he emigrated from Hungary. Samuel was a go-getter who taught himself how to read English in the city library and sold insurance, real estate, shoes—whatever it took — to make a living. Samuel was also a member of a building and loan association, a precursor to savings and loans, and eventually rose to bank director. But he wanted to start his own bank, which required $7,500 in customer deposits at the height of the Depression. Relying on his reputation for trustworthiness, Samuel offered to match whatever friends and colleagues would invest. He raised the cash and in 1934 realized his dream when he founded Pennsylvania’s first federally chartered savings and loan.

Richard Green is philosophical about the kinds of pressures that family-owned banks have confronted in the last few years. “There’s the challenge of being a family-owned business of any kind, and then there are the challenges facing the banking industry,” he says. To be successful, he suggests, “You need the mindset that this is something you want to do, and you need to be willing to invest in people, infrastructure and assets to provide a long-term future for the business. But it has to start with the willingness to lead and to adapt to changes in the environment to keep your business model vital.”

In 1987, for example, Firstrust evolved from a savings and loan to a commercial bank in an effort to better serve customers in the region, Green says. “We strove to keep all that was good and to layer in the new businesses that would continue to keep us relevant in the marketplace.”

The change in Firstrust’s business model, Green explains, required “literally dozens” of adjustments. The bank invested in information technology and new processes, lured away commercial bankers from competitors in the region, and shifted its assets to a mix of business loans, commercial real estate, construction loans and consumer loans.

Timothy Abell, 47, the first non-family member to serve as president of Firstrust, says there are significant advantages to being privately held. “We don’t have a broad investor base that may have varying interests or time horizons; we have what we like to think of as ‘patient’ investors,” Abell says. Executives at public banks, he explains, are pressured to sell when times are good because investors believe the maximum value can be obtained. “On the other hand, if you’re not doing well, there’s some pressure to sell because people want the sale premiums. Investors may not think you can earn your way to the same returns.”

Abell notes that he and Green don’t have to spend their time fielding questions from institutional investors who have opinions about what the bank should be doing to maximize short-term earnings and drive the stock price up, nor do they have to weather proxy battles for a directorship. “We can stay focused on our customers, employees and communities and what we think is best long-term,” he says.

Abell, who was hired as COO in 2004, was promoted to president last year. His ascension points up one of the main issues family-owned banks must address—their succession plan. Richard Green’s three children are only in their teens. If Green wants to retire in the next ten years or so, there will be a gap in leadership until they mature and can take over the business, should their desire and talent permit. Abell, who has more than 20 years of banking experience, is helping to bridge that gap while at the same time bringing a fresh perspective and strategic skills to Firstrust.

Capital: A primary concern

The need for capital is a concern for any bank but has special considerations for family-owned banks. “Regulators mandate how much capital we need to have,” says Bob Vogel, 56, CEO of Market Bancorporation and New Market Bank in New Market, Minn. “Unlike other businesses, banks need to keep a certain amount in retained earnings as a percentage of assets.” Non-family-owned banks can sell stock if they need to raise capital to service debt, for example, but that’s not an option for bank owners who want to keep the stock in the family. Another issue for family bank owners, Vogel adds, is whether to pay dividends to family members or leave assets in the bank so it can grow.

When he bought New Market from his father in the 1970s, it was small, with assets of less than $4 million. (In 2006, by contrast, the bank, which has four branches, had revenue of $6 million and total assets of $80 million.) Vogel’s three siblings weren’t interested in joining him and didn’t mind that their father transferred the bank to him. But that would likely not happen in most banks today, he says, because families are usually dealing with a larger asset and the siblings pursuing other interests would likely want a share.

So many families wrestle with these concerns that Vogel and Glenn Ayres, a family business adviser with Doud Hausner & Associates, based in Glendale, Calif., joined with a third partner, executive David Watrud, to start the Family Held Bank Institute, an educational program integrating the needs of a family-held business into the community bank environment.

A disturbing percentage of family-owned banks are simply not positioned to keep their asset in the family, laments Vogel, whose two daughters work in the New Market bank. If a banking family starts distributing capital to siblings who want to cash out, Vogel explains, they could be in danger of defaulting on debt payments. Another problem, Vogel says, is that a bank can outgrow the managerial ability in the family. “It’s good to grow,” he says, “but you have to know where you’re going so that you have the resources in place when you get there.”

The pressure to sell

A succession plan is “the sword over the leader’s head,” asserts family business adviser Glenn Ayers. “Banks traditionally have been entrepreneurial-based, with one general manager passing the baton to another,” Ayres says. “As they’ve gotten bigger, however, especially in the last 50 years, there’s been a natural pressure to broaden the shareholder base to include all of their children. Usually they’ve done quite well and have a great deal of pride in what they’ve accomplished.” But the paradigm has changed, Ayres notes. “There’s no way the children are going to be able to buy their parents out in every case, as in past generations. It’s too much money.”

The temptation to sell a family-owned bank for a substantial profit may be attractive, Ayres adds, but it also means the loss of the franchise. In his experience, few bank leaders consider this alternative until an offer is on the table. He advises bank owners to be clear with members of the next generation about potential plans so children who were expecting to work in the bank are not surprised by a sudden announcement of a sale.

Paula Fasseas, who heads the Metrobankgroup holding company in Chicago with her husband, Peter, says that while she and her husband are highly involved in the banking enterprise they have built, she is realistic about the possibility that her children—or their children—may eventually want to sell. Their daughter, Alexis, 27, works in operations at the bank while studying in the J.D./MBA program at Northwestern University’s Kellogg School of Management. Their son, Drew, 26, is a Metrobankgroup loan officer.

“When we bought our first bank in 1978, Illinois regulations stipulated that banks could only have one branch. There were hundreds of small community banks in the state,” Paula Fasseas recalls. “We second-mortgaged our condo, bought a 25% stake and sold stock to anyone we could find.” Every time the state legislature would allow it, the couple would scout locations and open another branch to serve a specific community.

Today Metrobankgroup consists of 11 independent banks with 106 branches. “As we added more banks to our group, we kept them separate,” Fasseas explains. “We wanted to stay true to our mission and not become a big bank. Each bank has a separate president with separate boards of directors, and we hire employees from each community. We’ve got our market share, we’re very service-oriented and we’ve got a good reputation.” In 2007 Metrobankgroup had $3.3 billion in assets.

The cost of compliance

Metrobankgroup’s structure helps to avoid some pressure, Fasseas says. Data processing, marketing, finance, human resources, information technology and training are centralized and the charges are spread over the 11 banks, which keeps costs down.

“We have the advantage of the big banks’ resources and centralization, but we still have the separate banking units,” Fasseas adds. “Even if we have to take a bump in the road, we’re going to be here long-term.”

For small family-owned banks, regulatory compliance costs are a big issue, says Vogel. “The smaller you are, the more difficult the burden,” he notes. A $500 million bank with 100 employees might be able to afford an employee who works exclusively on compliance issues, he says, but an $80 million bank with 25 employees can’t, nor can it recover the cost. For smaller banks, report filing and other compliance activities must be chalked up to the cost of doing business.

Next-generation challenges

John Johnson, a membership recruitment consultant for the Independent Community Bankers of Minnesota, an association dedicated to keeping community banks competitive, says pressure to sell often comes from the younger generation.

Johnson was the majority owner and CEO of Owatonna State Bank in Minnesota for almost 20 years and also worked for the Resolution Trust Corporation, a government-owned asset management company that liquidated the assets of insolvent banks during the savings and loan collapse in the 1980s.

He recalls one family-owned bank in which one sibling did all the work after the parents retired, while the other did little but approve bad loans. The first sibling pushed hard for the bank to be sold and succeeded. In another family-owned bank, Johnson says, two brothers who didn’t work in the business resented the third sibling, who managed the bank. Eventually, the two inactive shareholders forced a sale. Instead of selling, Johnson notes, the siblings in the latter case could have arranged a buyout agreement. By pledging the bank’s stock as collateral, the sibling managing the bank could have borrowed funds from another bank to buy the other siblings out.

It’s no surprise that if a family has held on to a bank for years, selling can be quite profitable, Johnson says. “By the time the family has gotten to the third or fourth generation, depending on state regulations, there can be an insurance agency and a real estate firm as well as the bank,” he adds. Sometimes an insurance agency can be even more profitable than the bank, he notes.

“I tell bankers that you can sell a bank almost any day you want, but you only get to do it once,” Johnson says. That message, he notes, gets their attention.

Client relationships

Family-owned banks can relate better than other banks to their family-owned business clients, Vogel says. “We understand their limited resources as well as the family dynamics,” he says. “It gets down to balancing the merit-based culture of a business with the emotion-based culture of a family.”

Family-owned banks can help their clients balance the two by, for example, offering advice on what they must do to be creditworthy and what return the business should be making. “But we can also understand there’s an emotional culture behind the business that doesn’t exist in a non-family business,” Vogel says.

Patricia Olsen is a New Jersey writer whose work has appeared in the New York Times, On Wall Street, USA Weekend, Hemispheres and other publications.

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Social entrepreneurship

The 124-year-old Wente Vineyards—a continuously operated family-owned winery said to be the oldest of its kind in the U.S.—has endured Prohibition, periodic droughts, urban development, changing tastes and, for the past two decades, stiff competition. As each challenge has arisen, the Wente family has responded with bold entrepreneurship, developing a multiplicity of ventures aimed at promoting its core businesses: growing grapes and making fine wines.

Located 47 miles east of San Francisco in Livermore Valley, the Wente Estate is a California historical landmark. Wente, one of the top 30 U.S. wineries in winemaking capacity, is also the largest global exporter, on a percentage basis, of any American family-owned winery. Today, its 3,000 acres of estate vineyards are managed by the fourth and fifth generations of winegrowers.

The original family winemaker was C.H. Wente, a German immigrant who learned winemaking from Charles Krug in Napa Valley. In 1883, C.H.—who was known by his initials—ventured off on his own, buying 48 acres in Livermore Valley. The region’s warm days, cool nights and gravelly soil, he realized, were ideal for growing grapes. His seven children owned shares of the winery but only sons Ernest and Herman worked in the business. Ernest managed the vineyards, and Herman was the winemaker. The brothers saw themselves as stewards of the land and passed on a respect for the land to future generations.

“Part of being a family business is keeping a long perspective,” says Karl Wente, the fifth-generation winemaker. “If we hadn’t been using sustainable farming practices all these years, we wouldn’t still be here.”

The Wentes are proud of the vineyard’s long history, and fourth-generation winegrower Carolyn Wente, the former company president, has a reservoir of stories about the family business. “When my grandfather Ernest was a student at UC Davis,” says Carolyn, 51, “he had a professor from France who wondered why California wineries didn’t grow Chardonnay plants. The professor’s brother owned a nursery in France, and he offered to bring Ernest some cuttings. Ernest planted the first of those cuttings in 1916 and continued to farm them during Prohibition.” Today, Chardonnay is the most planted grape in California.

Determined to hold onto its vineyards during 13 years of Prohibition, the family supported itself by ranching cattle, raising hogs, and doing hay and grain farming. Prohibition put many vineyards out of business but, thanks to the Catholic Church, Wente continued producing white wine for the sacrament, according to Carolyn. When Prohibition was repealed in 1933, Wente was one of the few wineries and vineyards still in operation.

To distinguish Wente wines from the more common blended wines, Ernest and Herman developed varietal labels that identified wines by the grape variety from which they came. According to the family, the brothers were the first American winemakers to label Sauvignon Blanc and Chardonnay. Wente’s Sauvignon Blanc won the Grand Prix at the Paris Exhibition in 1939.

In 1949, Ernest’s only son, Karl, joined the business. By 1960, he was named president; his father and uncle served as advisers. A year later Herman, who was childless, died, leaving his shares in the business to Karl.

By the 1950s, development had taken off in Livermore Valley. Agricultural land was taxed for its real estate value, threatening farmers’ survival. In 1963, Wente bought 250 acres in Monterey, becoming the first to farm grapes in that area. The family once considered moving its entire operation to Salinas Valley but, after successfully lobbying the state legislature in 1964 to reform the tax code to permit agricultural land to be taxed on crop value, it kept its major operation in Livermore.

Meanwhile, Karl continued to modernize the Wente operation, bringing in overhead sprinkler irrigation, mechanical harvesting of grapes and a centrifuge to remove solids from wine. “My father was always on the cutting edge of technology,” says Carolyn.

After Karl died at age 49 in 1977, his three children— Eric, Philip and Carolyn, then in their 20s—took charge. Eric, groomed as a winemaker by Herman, headed production and exporting; Philip, who had learned farming alongside his father and grandfather, oversaw the vineyards; and Carolyn, who had been working as a bank financial analyst, stepped into sales and marketing.

Immersed in running the business, the fourth generation was caught off-guard by the changing California wine industry. Napa and Sonoma counties had exploded as major tourist stops, leaving Livermore Valley lagging behind. “We went back to basics, “says Carolyn. “We eliminated the low-end wines and refocused on the varietals, Sauvignon Blanc and Chardonnay, we were originally known for.”

The strategy worked, but they didn’t stop there. To counter competition from Napa and Sonoma, the family encouraged new grape growers to establish themselves in Livermore Valley. To attract visitors, in 1986 Carolyn launched the first of Wente’s “lifestyle ventures:” The Restaurant at Wente Vineyards and a summer concert series featuring jazz, country and rock music.

“Many family businesses become insular over time,” says Ann Dugan, assistant dean at the University of Pittsburgh’s Katz Graduate School of Business, “but the Wentes looked beyond their particular interests and saw the bigger picture. They could help themselves by developing Livermore as a premier grape-growing area. Today we call that kind of community development ‘social entrepreneurship.’”

Capitalizing on the restaurant’s location on estate grounds, Carolyn—an accomplished cook, gardener and coauthor of two cookbooks—relied primarily on food grown on the estate. Today, the chefs still pick the vegetables and herbs daily. The restaurant has repeatedly won the Distinguished Restaurant of North America award for excellence and has been cited by Wine Spectator magazine for its wine list.

The veranda of the restaurant faces out to a large lawn surrounded by gardens, vineyards and rows of sycamore and oak trees, the setting for the concerts Wente has hosted for the past 21 years. Some 25,000 music lovers come every summer to hear top talent and to dine at the restaurant. The restaurant and lawn serve as settings for weddings, banquets and corporate events catered by the restaurant. Also on the property are two tasting rooms where guests sample Wente wines and food products, including its estate-grown olive oil sold only in the Wente tasting rooms or online. This year Wente has expanded its catering services to homes in the Livermore area.

In 1996, Wente opened The Course at Wente Vineyards, designed by golfing champion Greg Norman. The 18-hole course runs through the vineyards and rolling hills of Livermore Valley. Wente hosts the Wine Country Championship stop of the PGA’s Nationwide Tour, televised for four days on the Golf Channel.

“The great meal, the outdoor concert, the golf course—all those things tie into our core business of growing grapes and making wines,” says Carolyn. “We learned early on not to rely on one income stream, and that’s given us flexibility to respond to changes in the market and long-term stability.”

Eric’s daughter Christine, 32, had worked in sales and marketing at Gallo Winery for three years before being named Wente’s marketing director in 2000. Two years later, Eric’s son Karl joined the business as a winemaker. Forgoing his dream of becoming a professional basketball player (he’s 6’ 7”), Karl studied chemical engineering at Stanford and earned master’s degrees in horticulture and food sciences at UC Davis. Before joining the family business, he worked at wineries in Sonoma County and in Australia.

Together with his uncle Philip, Karl, now 30, started Wente’s Small Lot winery, a winery within a winery. “This is a competitive business,” says Karl, “and consumers have lots of choices. We asked ourselves, how can we stand out? We decided to experiment by pushing the limits to the Nth degree in growing grapes and making wines.” They set aside 3% of the best vineyard blocks to farm the best wine. The name “Nth Degree” stuck; now Karl’s task is to ensure production meets the growing demand for wines produced under that label.

“It’s unusual for a family to continue to be entrepreneurial into the fifth generation,” says Pittsburgh researcher Ann Dugan. “Typically the second generation implements the vision of the founder and there are some sparks in the third generation, and that’s it. The Wentes seem to have built entrepreneurship into the family brain.”

The Wente family, Dugan comments, has “continued to innovate by thinking creatively about how to maximize their business. That plus instilling values of a strong education, self-development and hard work have served [the business] well.”

By 2003, the fourth generation was ready to hand over more authority to the fifth generation. Carolyn resigned as president, and Wente’s CFO, Peter Chouinaid, was named the first non-family COO. To avoid any awkwardness among family members, the fourth generation preferred that a non-family member evaluate the younger generation. Christine, who had taken a two-year leave to get an MBA at Stanford, returned the following year.

All the family members except Christine, a new mom, live on the property. Living and working closely together on a daily basis, the family has avoided stepping on one another’s toes by carving out distinct areas of responsibilities. Eric, 56, is still a winemaker; his brother, Philip, 54, oversees the vineyards. Carolyn has fewer day-to-day responsibilities now that Christine has taken over as vice president of marketing. “Winemaking is a collaborative effort,” says Karl. “We can’t make great wines without a mutual understanding of our objectives. We all have plenty to do, so no one’s jockeying for more responsibilities. If anything, we’d gladly give up some.”

The family recently redesigned their business cards to give top billing to their generational status. “We identify ourselves first as fourth- or fifth-generation winegrowers and second by our business titles,” says Christine. “We’re all involved in and passionately interested in all aspects of the business, so we decided that honoring the core business was more important than our titles.”

A prime target market is Americans in their 20s and 30s, the fastest-growing demographic group in dollars spent, Christine says. “Wente is perfectly positioned to meet the demand for wines in the $10 to $25 range.”

As a medium-sized winery—larger than most family-owned wineries in California—Wente has the resources and management experience to compete globally. In 2006 Wente sold 350,000 cases under its own label in the U.S. and exported approximately 30% of its production to 50 countries. (By comparison, Rodney Strong Vineyards, which sells 550,000 cases annually, exports only 4% of its production.) Of its four main divisions, grape growing is the most profitable, followed by custom bottling and wine making for other producers; retail sales; and the “lifestyle businesses.”

The family’s efforts to showcase Livermore Valley have paid off. The region now has 38 wineries and, in contrast to Napa and Sonoma, many more acres that can be planted. Moreover, Wente’s lifestyle ventures have made Livermore Valley a popular tourist destination.

“The great thing about our family,” says Carolyn, “is that we’ve always done things together. As kids we helped out with the farm work and entertaining. Our parents didn’t pressure us to join the business, and we aren’t pressuring our kids. The way we’re raised, we know that if we join in the business, we’re expected to grow the business so that it can afford us. We choose to work here because we love it. You have to have that passion in a family business because it’s 24/7, and your family depends on you.”

Deanne Stone is a business writer based in Berkeley, Calif.

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Little stores on the prairie

It's hard to imagine a business facing more pitfalls than Schweser's Stores. The 125-year-old, fourth-generation company operates women's specialty stores in small Midwestern farm towns. Its markets grow at a glacial rate (if at all); its suppliers, with offices in New York and factories on the other side of the world, don't exactly have their fingers on the customer's pulse; and there is at least one Wal-Mart within a couple of miles of every one of Schweser's stores. Despite these obstacles, the company opened its 23rd and 24th stores in 2005.

Why have the descendants of founder George Schweser continued the business he established in 1880? And how have they managed to do it?

Ty Smith, the 33-year-old president of the company, answers the first question somewhat ingenuously. “It's a family business, and it's part of what the family is,” he says. “There is a bit of an obligation to keeping it going.”

The “how” question takes a little longer to answer. Keeping the $12 million (approximate annual sales) company going takes deep customer knowledge, a willingness to change and, above all, frugality. The trick to profitability in these conditions, says Ty, is, “You have to do what you have to do to stay alive.”

A near-genetic thriftiness runs through the company's history. George Schweser, Ty's great-grandfather, walked more than 100 miles from the railroad station rather than rent a horse and buggy to reach David City, Neb., where he purchased the first store with a partner for $700. During the Depression, George's son, Fred, ordered the company's buyers to purchase only “needles and pins” in an effort to limit their spending, an expression Fred's daughter, Barbara Schweser Smith, 69, says is still heard in the company offices. “We try to undersell the competition,” says Barbara, who is Ty's mother. “From a marketing standpoint, we have to be in the market every week looking for deals.”

“We run a pretty tight ship,” Ty explains. “We don't have a whole lot of overhead. That's been one of our keys—not to overgrow our size and keep the costs low.”

The need to keep costs low is one major reason Schweser's stores are located only in small towns. Half of the 24 apparel specialty stores are in Nebraska, with the rest in South Dakota, Minnesota, Iowa, Missouri and Kansas, all within a day's drive of company headquarters in Fremont, Neb. The average population of those towns is just over 20,000, or about the same number of people as work in New York's Empire State Building. Only two of Schweser's stores are in towns larger than 30,000 people. The largest city with a Schweser's store is St. Joseph, Mo., population 73,990; the smallest is Atlantic, Iowa, with 7,257.

Schweser's small-town survival guide

Conventional wisdom holds that small towns like these are dead or dying, but a closer examination reveals that Schweser's location strategy has actually put the chain in some pretty solid markets. As Jim Otto, president of the Nebraska Retail Federation, points out, “Towns under 5,000 people are the ones that are actually shrinking. The towns like Grand Island, Kearney, Columbus and North Platte, they're all growing. People are moving to job centers. The small towns that are shrinking aren't the retail centers.” The towns where Schweser's operates grew slightly as a group (0.4% in total) from 2000 to 2004, according to the U.S. Census Bureau. Not Las Vegas, exactly, but growing areas nonetheless.

“You can't believe everything you read,” Ty says. “If there was nothing here, nobody would live here. Most of the towns we're in are agriculture-based, and agriculture, believe it or not, is still a major part of the American economy.”

“The farmer that used to have a truck that held 300 bushels now has a semi that holds 1,000 bushels,” Otto explains. “Instead of going to the local town, he just keeps on rolling to the larger terminal elevator. That's why those little towns are dwindling, but the larger towns are actually growing.” He says farm women drive to shop, too: “Some towns draw from a hundred-mile radius.”

Of course, Scheweser's isn't the only retailer to figure out there's a market out there on the prairies. Sam Walton founded an empire on stores in places just like Fremont, Neb. Today, JC Penney, Younkers, Wal-Mart, K-Mart and Target compete on Main Street, as do apparel chains like Herbergers, Gordmans and Christopher & Banks, among many others. Staying profitable in the face of that kind of competition requires constant attention to cost, expenses and customers.

“We only open stores if we can find somebody who has a location who is willing to work with us on an affordable lease,” Ty explains. “Generally, we like to move into spots where another clothing store had been, so we don't have to build the dressing rooms. Ideally, we'd just move in without spending a lot of money building a brand-new store.” Two-thirds of the stores are in enclosed malls, but there are several in downtown and strip mall locations as well. Most are 5,000 square feet or smaller, although some of the older downtown locations, originally department stores, are twice that size.

Corporate overhead is low, too. There are a grand total of six employees in the corporate offices in Fremont and a scant dozen at the 10,000-square-foot distribution center. Ty's sister, Betsy Smith Hocking, 36, handles almost all the buying from her home office in Philadelphia. Most stores operate with just six or seven employees.

Price, value and service

Low expenses are only part of the equation. Perhaps the tougher task is balancing customer demand for low prices with the fickle nature of the fashion business. That begins by precisely defining the market, which Schweser's has done, according to Ty. “Our customers are women over the age of 30,” he says. “We don't target the teenagers and the 20-somethings.”

Schweser's customers are concerned about looking good, just like their sisters on Fifth Avenue or Rodeo Drive. “Our customer wants a lot of value,” says Betsy, who travels to New York's fashion district by train at least once a week to keep the stores stocked with merchandise. The customer “wants to be in style, but does not want to stand out,” Betsy explains. “[Schweser's shoppers] read magazines and watch TV, so they know what the looks are, although they may not be willing to fully embrace them.”

“It's a more conservative look than what you'd find at stores on the coasts, or even what you'd find at the other stores in the malls that cater to a younger customer,” Ty adds. “The colors have to be right. The styles have to be right. We have to be fashion aware, but we don't have to be on the cutting edge.”

Price means a lot to Schweser's customers, according to Betsy. “The towns just don't have much money,” she notes. “The people here are struggling to make ends meet, so our customer base cannot afford to go on weekend shopping binges.”

And there is always the competition. “We want to make sure we're providing better value than they are,” Ty says. “We're not a discount store, but we're certainly a high-value store.” The chain stays at the lower end of the price point.

“From the small-town merchant's perspective right now,” Otto observes, “the real challenge is figuring out a niche so they can coexist with the big-box stores. Small-town businesspeople concentrate on service and their customers' likes and dislikes.”

After 125 years of serving small-town women in the upper Midwest, Schweser's knows its customer and the value of service. Company controller Helen Lanin, a 52-year employee, says doing business in places like Huron, S.D., has its marketing advantages: “In small towns, you know everybody,” she says. “When you walk through the door, the manager calls you by name. That's very important.”

“Since we have an older customer base, many people come in and really need help,” Betsy explains. “They need help finding the clothing, making sure it matches. There are sales associates who call customers when things come in that they know they would like. They really know their customer base.”

“We know if we give up the service, which is kind of unique, it will never work,” observes Barbara. “We have a lot of older customers, and their style is to come in and let us put it together for them. But they want the same price—or better—than they would get from the big-box stores.”

“We take a really, really personal interest in it. It's our life,” Betsy says. “It's what we've known, so it's part of every aspect of our life.”

Changing with the times

It's a constant struggle to beat the competition, but it's one the company has fought and won before. One reason has been its ability to change as circumstances warrant. Each of the first three generations reinvented the business. George Schweser opened a general store. His son, Fred, turned it into a group of small-town department stores offering clothing for the entire family as well as draperies and home accessories.

Ty's mother, Barbara, the third generation to manage the company, changed direction entirely. She dropped departments like home furnishings and bridal wear and refined the concept into small specialty stores offering value-priced women's fashions. She joined the company when it was in financial difficulty and ran it from 1973 to 2003, growing it from seven to 22 stores in the process. “I changed it a lot,” she recalls.

Over the years, Barbara didn't hesitate to try different formats. She experimented with discount stores, junior fashions and shops catering to full-figured women. Large cities weren't entirely out of bounds, either, although stores in Omaha and Lincoln, Neb., proved to not fit the company cost structure.

The current approach may have worked best in recent years, but there's nothing sacred about it, according to Betsy. Are other formats being planned? “Not right now, but there could be,” she says. “We had others in the past. You never say never.”

“As far as strategic planning goes, it's a very informal process here,” notes Ty, who joined the company as president in 2003. “There isn't a lot of time or energy or resources available to just sit down and think about what are the next ten steps. We have a plan, but for the most part, it's in our heads.”

Ty says he isn't in a hurry to change. “We feel like we know the ladies in the small towns,” he says. “That's our customer, and that's who we know. That's how we do business.”

Ty acknowledges that the company still needs to grow sales. The way to do that, he says, is by adding locations. “It's a big challenge to get comparable store growth within these towns that are maybe not growing in size and their economies aren't growing,” he concedes. “But certainly there are other towns out there that have good opportunities within them.” He recognizes that “given our current ways of doing things, there is probably a limit,” he says. “We can't drive trucks to Oklahoma. But when we reach that limit, I'm sure we'll find another way of doing things.”

One thing not likely to change in the near future, Ty says, is family ownership of the company. “I can't imagine a scenario where it's not a family business,” he says. “We're not such a high-growth business that we would need any huge infusion of capital or outsiders to take positions in the company.” But it would be a long time before a fifth generation is ready to take over, since Ty, recently married, currently has no children. Sister Betsy has three children, but the oldest is only six.

“Ty is young, and he is enjoying it,” Betsy observes. As for her own future in her position, she adds, “I'll definitely keep doing it for a while.”

Dave Donelson is the author of Creative Selling (Entrepreneur Press). He is based in West Harrison, N.Y.

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Declaration of independents

Capitalizing on chaos

Scott R. Elkins
UAS Inc., Broomall, Pa.

Scott R. Elkins, president of UAS Inc., says consolidation has affected his security systems company tremendously—in a good way.

The family owners spotted the buyout trend in their industry in the early 1990s. Instead of trying to grow through acquisition or expand internally, they switched their focus from the residential market to national commercial accounts. That put them in direct competition with much bigger players, like ADT, Brinks and Honeywell.

Figuring that consolidation would create chaos, Elkins' family devised a system for capitalizing on that scenario. Larger security companies, he explains, operate out of regional service centers to put the response team close to the customer. But that means a national client—one with 30 or 40 stores throughout the country—must deal with 30 or 40 different sales centers, salespeople and executives.

That's bad enough. But when that large security company is merged into another company, the national client may have to deal with new security service and salespeople in each location. The customer gets shuffled from one office or service center to another, explains Elkins, 31. “Customers feel they, too, have been bought and sold, and that they lose touch with people they've developed a relationship with,” he says.

That's why many large companies—including Boston Market, Cumberland Farms, Hess, McDonald's, Papa John's and Shoney's —have turned to UAS's 55-person, 12,000-square-foot central operations station in suburban Philadelphia. These commercial customers don't learn about UAS through advertising, because the company doesn't advertise.

Prospective clients may find Elkins at a trade show; UAS attends shows in a few key industries, such as food service and convenience stores. Elkins also does his share of cold calling. But mostly, he says, customers hear through the grapevine about UAS and its centralized system. “That's a tremendous competitive edge,” he asserts.

Indeed, the company—which was founded in 1972 by Elkins' stepfather, 70-year-old Ronald Schwartz—has been growing at a 20% clip for the past six or seven years and now produces annual revenue of about $10 million, Elkins reports. His mother, Sandra Schwartz, 61, is the company's vice president of marketing. His stepbrother, Bret Schwartz, 38, is a project manager, while step-brother-in-law Bruce Greenbaum, 36, is vice president of operations.

Steering away from competition

Eugene Johnson
Rainier Dodge, Olympia, Wash.

A few years ago, large companies like AutoNation and Carmax were on a rampage, paying “crazy money” for dozens of dealerships around the country, says Eugene Johnson, owner of Rainier Dodge, a single-franchise dealership in Olympia, Wash. But Johnson, 59, says he was unimpressed—and unthreatened.

“I don't pay any attention to them,” Johnson says. “The large companies bring people from outside the market into the market, and they have their own groups and ways of doing business. They're not personally committed to the business like a private entrepreneur. I don't feel the competition from them.”

No wonder. All 11 dealers who share space in Olympia's auto mall remain independent. Johnson explains that most of the M&A activity has been centered in higher-traffic areas like Seattle.

“The biggest threat we have in the auto business, or in any business, is how we think about it,” he muses. “People in America are not going to walk. You'll get your share of business when you do what it takes. If you do a good job, they'll know it; if lousy, they'll find out.”

Johnson says he's never been approached by a potential suitor and would not be interested in an offer should one come his way. Nor is he interested in acquiring any of his competitors. But that might not be case with his son Casey, 26, who has worked full-time at Rainier Dodge for the past three years.

Eugene Johnson says Casey is “different than I am. He wants to buy other franchises and other businesses. If he wants to do all that work, fine. He's a good delegator and will take the company to another level.” In fact, Johnson hints that he and Casey are talking to some people now, but have no concrete plans.

Down to the wire

Beverly Gleaton Sterling
Plant Telecommunications, Tifton, Ga.

Though the telecommunications industry is consolidating wildly, deals like Verizon's $6.6 billion bid for MCI or SBC's $16 billion offer for AT&T have no direct effect on the local phone service that Plant Telecommunications provides in 13 counties of southern Georgia. For now, its customers—about six per square mile—have nowhere else to go for local phone service.

“We're in markets that local carriers don't want to be in right now,” says company vice president Beverly Gleaton Sterling. “They're concentrating on high-density areas. But they'll get to us one day.”

A carrier that wants to offer long-distance or DSL service in rural markets must rent time on land lines from the local company. Customers can choose MCI, Sprint, AT&T or BellSouth as their long-distance carrier in Plant Telecommunications' exchanges. “We can't compete with the big guys,” Sterling explains. “It costs more in a rural situation to provide the service. Therefore, our rates might be higher. In a big company they can even it out—if they lose money by going into our tiny area, they can make it up in their high-density areas.”

To compete, Plantel (the company's nickname) offers a full line of services. The $19 million company—founded in 1895 by Sterling's great-grandfather, Ben Gleaton—gets about 25% of its revenue from unregulated services like voice mail, a regional directory, web hosting and design, telephone business systems, teleconferencing, pagers and wireless broadband satellite Internet service. “Some of these little places had no Internet at all and were real happy to have us,” says Sterling.

In the regulated end of the industry, Plantel provides long-distance service to residential and business customers. And it began providing cell phone service in the 1980s, in a 50-50 partnership with another company. The venture was profitable, but when the FCC deregulated the wireless business in 1996, the family found it too hard to compete and sold that business.

Sterling, 58, and her husband, Dan, 61, the president and general manager, hope to pass the business to the fifth and sixth generations. Sterling's sister, Betty Chloe Gleaton Metzger, is vice president and co-owner. Jimmy Metzger, Betty Chloe's son, is outside plant manager. Sterling's daughter Ginger Sterling Nelson is human resources manager; her other daughter, Anglea Sterling Ringenberg, is administrative assistant. Mike Ringenberg, Angela's husband, is an engineer; David Nelson, Ginger's husband, serves as purchasing agent. In addition, one of Betty Chloe's grandchildren, 17-year-old David Metzger, does odd jobs for the company on a part-time basis.

But the future is not at all clear. In the mid-1960s there were about 4,000 independent telephone companies in the nation. Today only about 1,000 have survived. “A lot of these family businesses have sold out over the years because they couldn't stay in business and compete with these larger companies,” says Sterling, who adds that she receives about four or five solicitations a month from interested buyers. The only way she would consider selling, she says, is if her children decided to leave or if the company were losing money. “It hasn't happened yet,” says Sterling. “But it's getting real close.”

Drawing interest from competitors' customers

Will Schmidt
Mountain States Bank, Denver

Denver is an “over-banked” market, says Will Schmidt, the 36-year-old president of Mountain States Bank. Yet, notes Schmidt—who took the reins last year with his cousin, 34-year-old president and CEO Jeff Reder, after their grandfather passed away and a non-family president retired—new banks continue to open. Many are started by former owners of acquired banks who want to resume offering the level of service they delivered when they were independent.

Schmidt says he and Reder do not intend to devise dramatic counter-strategies. “Our continuing plan is to remain independent and deliver quality customer service,” he asserts. That simple approach has proved effective, he points out. Though larger competitors have more locations, more products and services, and perhaps even better fee structures sometimes, Schmidt says he hasn't experienced an exodus of customers. If anything, he says, the tide moves in.

“A year or year and a half after a bank gets acquired, we see fallout of people looking for what we offer,” Schmidt says. “A lot of individuals and businesses really want to know their bank and banker. As long as we feel there is an opportunity for customers who want the service and relationship we provide—who don't want to be treated as a number by revolving-door bankers—our intention is to stay independent.”

While Mountain States might not have branches in every neighborhood (in fact, it has just one banking location), the bank does have two mobile branches—courier cars that can drop off loan documents and collect deposits (credited that business day) from 150 outlying customers. “Now it's more convenient than the bank around the corner,” Schmidt boasts.

The bank is also looking to grow internally a bit. “In two or three years we may try to open another physical branch,” Schmidt says.

The biggest threat to staying independent comes from inside, not outside, Schmidt points out. When his great-grandfather, Gene Griffith, founded the bank in 1947, he needed outside investors to get off the ground. The family has always owned 43%. With 150 non-family investors controlling the other 57%, the family could conceivably be outvoted if an unsolicited buyout offer came along. But Schmidt doesn't seem worried. He notes that the largest non-family investor owns just 5%, so it would be difficult to stage a minority shareholder rally.

Yet he admits he would never say never. “If an aggressive bank offered us three times book, I'd have to present the offer to our shareholders,” he says.

Cornering the grocery market

Salvatore (Sam) Guercio
Guercio & Sons Inc., Buffalo, N.Y.

In the old days, recalls Salvatore (Sam) Guercio, president of Guercio & Sons in Buffalo, N.Y., small neighborhood grocery stores were clustered around each corner of the city. “We had three independent stores on our block in the 1960s,” laments Guercio, 61. “Now the whole city has 20 or 30.”

First the advent of giant supermarkets and then a wave of consolidation put hundreds of smaller Buffalo grocers out of business. Competing head-on with the big players without comparable financial resources was not an option. Most little grocers closed shop. Medium-sized competitors, those with annual sales of $30 million to $50 million, began gobbling each other up.

Guercio's strategy was to let those companies duke it out, while switching to higher-margin food items on the retail side and pursuing wholesale restaurant accounts. “To survive, we needed to do something different,” he says. “We started doing wholesale about 14 years ago and made it into a gourmet store, bringing in more imported food.”

The store no longer stocks staples such as cereals, soaps and household items that filled the shelves when his parents, Vincent and Nancy, first opened the market in 1961 after emigrating from Italy in the mid-1950s. Instead, fresh fruits and vegetables line the sidewalk and front of the store, and shelves inside display deli meats, cheeses, olive oils, nuts and fresh herbs.

Guercio runs the business with his four brothers: vice president Charles, 58; secretary Tom, 56; treasurer Louis, 52; and produce buyer John, 38. Their sister, Santina, works the register, while three nieces and three nephews track orders, load trucks and handle phones.

At first, Guercio's found its business contracting, from about $800,000 a year to $600,000 in the mid-'70s. But eventually, the strategy began bearing fruit. Over time the family found that any economies of scale their larger competitors enjoyed were offset by higher overhead. “I found out that a store our size could do business for a lot less than a supermarket with millions of dollars invested in brand-new stores,” notes Guercio.

Today about two-thirds of Guercio's sales come from wholesale business, including about 100 area restaurants. To serve them, the store recently bought a couple of new trucks and a built a 10,000-square-foot addition. This allows the company to separate its retail and wholesale operations. The brothers also moved their crowded administrative offices a few doors down, where they can enjoy tracking and managing their growth. Currently, they ring in $5.5 million in annual revenues.

Jayne A. Pearl, a freelance writer, editor and speaker (, is the author of Kids and Money: Giving Them the Savvy to Succeed Financially and a workbook based on her seminar, How to Gimme-Proof Your Kids.

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Looking back, looking ahead

If the average life span of a family business is 24 years, as conventional wisdom has it, then the family companies that started up at the same time that Family Business Magazine was launched—in the fall of 1989—face a “death sentence” in 2013. For family firms now entering their third generation and beyond, the chances of survival are even slimmer. Family business advisers estimate that only 12% of family companies reach the third generation, and just 3% make it to the fourth.

But the past decade and a half —a period of dramatic changes in the economic, political, cultural, global and technological environment in which companies operate—have taught us a few lessons that can help a family business beat these odds. As we celebrate our magazine's 15th anniversary, we take a look back at how these forces have helped shape today's family companies, and look ahead to the potential impact of this recent history on family firms in the future.

Birth of a field
Although more than a dozen U.S. family businesses are older than the nation itself, in many respects family business didn't come into its own as a field of study in America until the late 1980s. In 1978, according to an article on the history of the field by Greg McCann and Michelle DeMoss, Baylor University established the first endowed chair in family business; one year later, the University of Pennsylvania's Wharton School introduced the country's first university-based family business program. Oregon State University started the second such program in 1986. Kennesaw State University began its family business forum —which became the model for many other campus programs— in 1987, and the phenomenon took off from there. By 1995, there were about 60 academic family business programs nationwide; today, there are more than 100 (see “Back to school,” FB, Summer 2003).

At the same time, the number of consultants —financial, legal and psychological—who are focusing on the family business market has exploded, says Judy Green, executive director of the Boston-based Family Firm Institute, founded in 1986. Since 1992, FFI has grown from fewer than 500 to nearly 1,200 members, 74% of whom are advisers (22% are educators and forum directors; 4% are students). FFI's academic journal, Family Business Review, debuted in 1988. Today, a Google search on the term “family business” yields 1.38 million hits.

With more resources and information available to them, family business owners have become more insightful. FFI's Green notes that her association now fields different types of requests from those it received in its early years. “We used to get panicky calls, like ‘My brother died; now I need a consultant,'” she says. “Now people call seeking information about family offices.” Callers hope to educate themselves before an anticipated transition or are seeking to avoid a crisis, Green notes.

Advisers also observe that owners have grown smarter about the need to professionalize their family companies. “I think family businesses have come to regard themselves as needing to control their own destiny more,” says Ira Bryck, director of the University of Massachusetts Family Business Center in Amherst, Mass. Astute next-generation family business owners understand that once a company has outgrown the start-up stage, they no longer can afford to operate as the entrepreneurial founder did. The business's infrastructure must evolve to encompass the same systems and practices that public companies have in place, like lean manufacturing and just-in-time processes, Bryck notes. “The next generation is not jumping on a big lifeboat that's going to support them no matter what,” he says.

Turbulent times
While the field of family business has come a long way in the last 15 years, the U.S. itself has undergone major shifts as well—a dot-com boom and bust, a wave of corporate fraud followed by regulatory backlash, record low interest rates, record high oil and gas prices, major (temporary) estate-tax rollbacks, two wars in the Persian Gulf and the terrorist attacks of Sept. 11, 2001.

Investment firm Fred Alger Management Inc., which was based on the 93rd floor of the World Trade Center's north tower, lost about 35 employees—including its leader, 57-year-old David Alger—in the 2001 attack. David's brother, founder Fred Alger, then 66, emerged from retirement to navigate the investment firm back from the brink of emotional and financial shock. (Boston family business consultant Richard Ross, 58, was aboard hijacked American Airlines Flight 11, which crashed into the north tower.)

Zachary Karabell—Fred Alger's son-in-law and the company's senior vice president, senior economic analyst and co-portfolio manager—says the lesson the tragedy brought home was the importance of being prepared for significant disruption. His company had a contingency plan, which included an alternative site in Morristown, N.J., 35 miles away from Manhattan, and an electronic backup of all account information and research. Karabell, 37, says that the firm had not designated an interim leader beforehand. But if it had, he notes, that person could have been in the building at the time and met the same tragic fate as his or her colleagues. “Better to have a structure and systems to be taken up by anyone,” he suggests, “than to designate a person who may or may not be around.”

Although the 2001 terrorist attacks highlighted the need for emergency planning, many family firms have yet to make transition decisions. Mike Cohn, managing director of CFG Business Solutions in Phoenix, Ariz., has found that owners have become more knowledgeable about business, wealth and family dynamics over the past 15 years, but he still sees “a fair amount who haven't done succession planning,” he says. “Intellectually, they're smarter, but emotionally they're still procrastinators.”

While the terrorist attacks heightened the anxiety associated with commercial air travel, new security measures also made the experience more unpredictable and time-consuming. Suzanne Rinfret Moore, who worked with her father and brother in an economic consulting company until her father's 1991 retirement, saw an opportunity in passengers' apprehensions. She and her father also noticed a parallel development: an increase in the number of wealthy people.

Those two “random events” added up to an untapped market for charter air business, says Rinfret Moore, 51, whose previous entrepreneurial ventures included an executive search firm and a cookie company. “The amount of wealth that was created in the 1990s is astounding,” says Rinfret Moore, who earned degrees in economics and history, joined her father's consulting firm in 1974 and later worked on Wall Street. “At the high end, it's the largest it's ever been and continues to grow exponentially. We were looking at the environment and saying, ‘What are the opportunities?'”

She and her father, Pierre Rinfret, 80, had invested in a twin-engine, seven-seater plane in 1999 and leased it to a charter plane company with the provision that they could use it, too. Two years ago, father and daughter took back the plane, purchased a second, bigger one and launched their own charter company, Fly My Plane LLC, based in Nantucket, Mass. They based their decision on careful economic analysis, says Rinfret Moore, who deals with marketing, hiring pilots and operations. (Her father handles finances.) They plan to purchase a jet this year and another two planes next year. “We anticipate doubling every year,” she says.

The economy: Boom and bust
Although interest rates and the cost of technology have been historically low, it's harder today for small businesses to obtain start-up and expansion capital from banks or government sources such as the Small Business Administration, according to Fred Hochberg, who served as deputy administrator of SBA under President Bill Clinton and is currently dean of New School University's Milano Graduate School of Management and Urban Policy.

“You have a lot of forces that are very positive, others that are negative. While you're in the middle of it, it's not clear how they're balancing out and which are more dominant,” says Hochberg, 52, who worked for 19 years with his mother at Lillian Vernon Corp., a catalog and online retail company in Rye, N.Y., and was president and COO when he left in 1993 (see “Mid-career passages,” FB, Autumn 1995).

Lillian Vernon Corp. was sold last year for $60 million to Strauss Zelnick, a former executive at BMG Entertainment and 20th Century Fox. Hochberg chooses his words carefully when discussing the sale. “With technology and the market changing,” he says, “bringing in some fresh perspectives was the right time for the brand. It certainly was an emotional thing, but whatever mourning I went through happened a decade ago when I left.”

Hochberg notes that while costs have come down for many materials and supplies, price pressure has increased for most companies. “The way to grow profits and earnings has got to be in productivity and efficiency,” he says. “There's no room in this global economy for aggressive price increases. So that puts a real premium on good management, systems and marketing.

“In some ways, the business my mother started would be more difficult to do today,” Hochberg figures, “because of the amount of capital you'd need to establish the infrastructure and brand name and to get the name and products out there above all the competition.” Outsourcing is another double-edged development, he says. On one hand, large companies' outsourcing of production and other tasks to overseas contractors has put smaller companies at a disadvantage because of the higher cost of domestic labor. “But the flip side is, sometimes small businesses have been a beneficiary of that,” he notes. For example, he points out, some companies are outsourcing services to smaller domestic firms.

Other factors also have affected economic health. “The Iraq war created an overhang of uncertainty and anxiety, which are never good for the economy,” Hochberg says. He adds that rising gas prices may make consumers think twice about getting in the car to go shopping. While this scenario would hurt retail stores, Hochberg notes, it would benefit online retailers and mail-order catalog companies.

Technology explosion
Fred Alger's Karabell says that while the roller-coaster ride of the past decade and a half is not unprecedented, what's exceptional about 1989-2004 is the technology boom.

“Most ten- or 15-year periods have been punctuated by economic and political ups and downs. The past 15 years have not been distinct in that respect,” Karabell notes. “But the effects of information technology have been profound. Most businesses are still coming to grips with what it means to be in a wired, connected world, where you can find vendors locally or globally. It starts to matter in terms of your cost structure. It's impossible to be insular when you can find materials and supplies at lower costs just as easily from China as from South Dakota.”

Rinfret Moore agrees. “Technology has allowed more family businesses to grow, with access to suppliers, manufacturers, advertising and the Internet,” she says. “Not only can you get virtually anything on the Internet, but the cost of things, like computers, has decreased. I was just looking at a new computer for $399 that would have cost $3,000 years ago.”

Seniors are a fast-growing segment of new Internet users. The number of web surfers in this age group had grown 25%, to 9.6 million, as of late 2003, according to Nielsen/NetRatings. Some, like Pierre Rinfret, are quite technologically savvy. Rinfret was early to join the Internet, in 1992, and designed his own website. “I'm hearing fewer people say, ‘I don't know how to turn on the computer,'” says family business center director Ira Bryck. “I think e-mail has helped penetrate [the senior] market, and people have gotten over the hump.”

Bryck also says pressure from the outside is inspiring older family business owners get up to speed technologically. “It's foisted on them by their customers and suppliers to get with the program,” he says.

Consultant Cohn sees family businesses investing huge amounts in information technology. “The founder may not understand the technology,” Cohn says, “but he's hiring people and putting huge amounts into systems and upgrades, connectivity and databases.”

Cohn notes that “Pressure is driven from the bottom up. MBAs won't come work for you if you don't have systems in place for them to do their job properly.”

While some companies suffered or died during the irrational exuberance involving anything dot-com, Fred Hochberg points to many new opportunities that continue to open up. “Satellite radio didn't exist five years ago,” he says. “Computers at home barely existed 15 years ago. A whole industry of computer technicians is servicing these companies.”

In the wake of the dot-com fiascoes, the University of Massachusetts' Bryck observes, many business owners have abandoned unrealistic expectations. They recognize that the purpose of the business is to turn a profit and that this goal requires a substantive business model, Bryck says. “You can't build a company out of thin air,” he says. “I think that investors got a nice whack on the side of the head about not throwing millions of dollars around to people who have no business talent.”

Rinfret Moore concurs. “We've gone back to the basics,” she says. “Businesses predicated on shaky business models or that overexpanded didn't survive. They had no real understanding of business cycles and didn't prepare for the bad days. And the bad days do come.”

Corporate scandals hit home
Family firms were not immune to the wave of corporate scandals that brought once-heralded companies like Tyco, Enron and WorldCom down in disgrace. Last May, former Rite Aid Corp. chief executive Martin L. Grass, 50, was sentenced to eight years in prison for his role in a wide-ranging accounting fraud at the drugstore chain his father co-founded. Two other former Rite Aid executives also received federal conspiracy sentences. In July, John Rigas, the 79-year-old founder of Adelphia Communications Corp., and his son Timothy were convicted in federal court of conspiracy, bank fraud and securities fraud. (The case against another son, Michael Rigas, ended in a mistrial.)

In the aftermath of these debacles, many owners of businesses large and small are recognizing the need to clarify their codes of ethics and creating conflict-of-interest policies to prevent such disasters at their companies. But not all family businesses see the warning signs. The Family Business Consulting Group estimates that only 10% to 15% of medium-sized private companies have outside board members.

More mature companies are more likely than newer businesses to appoint outsiders to the board, says consultant Mike Cohn. In the first generation, the board is likely to consist of the founder and his or her spouse. “The patriarch and matriarch don't want anyone second-guessing them,” Cohn says. “But as you get into the second and third generations, where ownership is spread out, they have to have outsiders to properly manage their shareholder relationships.”

One side effect of the recent corporate scandals is that directors and officers' insurance has become more expensive and harder to obtain. That, in turn, hinders family firms' ability to find outside directors. Cohn suggests at least inviting outsiders onto a board of advisers, which doesn't have the same fiduciary responsibilities and risks as directors but can still provide much-needed objective, expert advice and oversight.

Internal threats
Not all threats to family businesses come from outside the enterprise. Some business owners have a hard time wrestling with demons within the company or the family, experts say. One of the thorniest issues, they point out, concerns planning—succession, estate and strategic.

Succession planning. Family business owners who put off developing a succession plan often are reluctant to relinquish power, says Cohn. “It's amazing that these guys could build these big companies and then can't see how the business could grow without them,” Cohn says. “They are adamant about not giving up control or creating an infrastructure.”

Ernie Doud Jr., managing partner of Doud Hausner Vistar, strategic family business advisers in Glendale, Calif., asserts that owners who insist on holding on to power too long end up harming themselves, their business and their family. “I've never found a politically correct way to say this,” Doud says, “but the potential is unlimited in families who can look at the need for the tradeoff between personal pride and power on the one hand and family and business on the other hand.”

That's not an easy task, acknowledges Hochberg, who left his family business in frustration over his mother's refusal to discuss a timetable for his ascension. He offers one reason founders may have a tough time stepping down: “What it takes to found a business is very personal,” he says. “Founders approach the business less as a commercial enterprise and more as a personal connection and identification.”

The good news is that in many families today there is less pressure on the next generation to work in the business if they don't want to. At the University of Massachusetts Family Business Center, director Bryck says that members tend to accept that the person with the strongest leadership skills is the one who must be named as the successor, because a business can't operate without a great person at the helm. “The next generation needs to get away from the idea that ‘president' is a sexy title they all want to grab,” Bryck says, “because it might not be a job that they are right for or even that they might like.”

Some next-generation members may opt out of the family business if they grew up watching their parents working long hours. “Work-life balance isn't just a women's issue,” cautions Bryck. He says that men have come to realize that business and financial success are not buying them more satisfaction at work or home. “Men and women are realizing that time is money,” Bryck says, “and they'd rather have the time.”

As parents become more willing to accept that their grown children might have other interests than the family business, they are also reconsidering passing company stock to those children who don't make their career at the company, adds Bryck. “I definitely see both generations of active family members drawing a line at not having the business wealth feed non-active family members,” he says.

Estate planning. When it comes to transferring wealth, consultant Cohn says, family business owners take more care today than they did in the past decade or so to consider all the options. “The recent spate of high-profile interfamily lawsuits, such as in the Pritzker, U-Haul and Dow Jones families, may finally motivate owners to take planning of all types more seriously.”

Fifteen years ago, notes Cohn, “Many companies just gave it to the kids. Now, more than ever, they are setting up multigenerational trusts and really thinking about their estate planning in a very long horizon, like several generations. And they're involving their adult children in planning and helping them understand.” Often, however, owners are “peeling off non-voting interests so they can still retain control,” he adds. Such people are “limited visionaries,” Cohn asserts. “They want to hedge their bets by transferring value, but not their voice.”

Owners may be reluctant to implement estate plans owing to uncertainty about the future of estate taxes. The federal estate tax exemption has risen from $600,000 before 2002 to $1.5 million today and is set to rise to $3.5 million in 2009. Estate taxes are slated to be eliminated in 2010. But unless a new estate tax bill is passed, the 2001 estate tax rules will be reinstated in 2011. The top marginal rate, now 48%, is scheduled to drop to 45% before repeal takes effect.

“I'm not holding my breath—at least not until the [federal] deficit is under control,” says Michael Fay, an estate and trust lawyer and senior partner at Wilmer Cutler Pickering Hale and Dorr in Boston. “Estate tax revenue is not chump change.”

But where estate tax rates may be headed is beside the point, Fay stresses. “People have put up with tax law alterations ever since there were tax laws,” he notes. “They should get over it.” Instead, he suggests, planning should focus on who will inherit what and under what circumstances as well as on good governance and capital preservation, including the need to protect assets from creditors. “These issues are very important,” Fay says. “People may be relieved if they don't have to contort plans with a view to reducing the tax burden.” Some options that might seem impractical from a tax-planning standpoint might actually be practical if unpredictable future estate taxes are not factored in, he says.

Strategic planning. The point of strategic planning is to make the company a master of change, says consultant Ernie Doud. He explains that from a macroeconomic view change may be the norm, but at the micro level, different industries and companies will feel the effects more or less severely. “It's important to test your vision and your strategic intent to make sure you have a good road map,” Doud advises.

Doud notes that in 1969, when he began consulting, strategic plans typically considered ten-year horizons. Today, such plans typically look ahead only three years—and are revisited every year. “Most family businesses are neophytes at this,” he laments. “Entrepreneurs tend to equate planning with rigidity and formality. In truth, though, planning actually contributes to flexibility.”

Sophisticated advice
Meanwhile, family business advisers are getting more sophisticated as they gain multidisciplinary experience and training, says estate lawyer Michael Fay. The field has become more collaborative, Fay and others note. “I have the comfort of knowing the client is much better served with a multidisciplinary team at his or her disposal,” says Fay.

Mike Cohn, whose background includes psychology and corporate strategy, says that consultants, suppliers and bankers are willing to work with family businesses on “new relationships”—creating and funding alliances, joint ventures and marketing arrangements. “Large institutions are looking for marketing relationships, distributors are looking for new channel partners and manufacturers are looking for better distribution,” Cohn says. Family business owners want to provide additional value without extra cost in order to keep their customers, he says.

It's impossible to predict what the next decade has in store for family business owners, and to what extent the lessons of the recent past will be critical for their survival. But, as economist and family business owner Suzanne Rinfret Moore notes, “This country is an incredibly dynamic, bright and resourceful economic environment. We have constantly risen to the challenge, and we've been the leader throughout history. I don't suspect that will change.”

Jayne A. Pearl, a freelance writer, editor and speaker, is the author of Kids and Money: Giving Them the Savvy to Succeed Financially and a workbook based on her seminar, How to Gimme-Proof Your Kids ( She has been associated with Family Business since the magazine's premier issue in 1989.

Now and thenSome key stats comparing the state of the economy today with conditions in 1989, the year Family Business was launched.

Now Then What
4% 10.87% Prime interest rate
6.25% 10.32% Average 30-year fixed mortgage (single-family home)
$180,200 $120,000 Median price of new single-family home
$42,409 (2002) $39,949 (1990) Median household income (constant 2002 dollars)
5.6% 5.3% Unemployment rate
Near $2 $1.16 Average price of a gallon of unleaded gasoline
3.05% 4.83% Inflation
10,300 2,752 Dow Jones Industrial Average
$36.5 million (2002) $18 million (1997) Revenues of the average family business

Sources: Federal Reserve Board, Department of Housing and Urban Development, Bureau of Economic Analysis, U.S. Census Bureau, Bureau of Labor Statistics,, 2002 American Family Business Survey.

Take-home lessons

• Track trends and events carefully to spot new business opportunities and threats.

• Stick with a basic business model focused on an understanding of business cycles, and prepare for hard times.

• Create a contingency plan to deal with sudden disruptions and disasters.

• Harness the power of information technology to bring down your costs.

• Improve productivity and efficiency with superb management, systems and marketing.

• Accept that not all children want to or can successfully join the business, and that the business may not be able to support an increasing number of family members anyway.

• Most trends and changes have positive and negative effects. Look for ways to capitalize on the positive and diminish the negative.

• Work-life balance is not just a women's issue. Your kids may resent the business and not want to join a company that robbed them of a relationship with their parents.

• Test your vision and strategic intent to make sure you have a good road map.

• Estate planning should focus not on current or future tax rates, but on factors such as who will inherit what and under what circumstances, good governance and the need to protect assets from creditors.

• Plans are a waste of time— unless they are implemented.

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The Case of a Non-Survivor

If one date sticks in Rona Nesbit's mind as her personal Fort Sumter, it's September 25, 1996. She was then the chief financial officer of and heir-apparent to the family-controlled Sutersville Lumber Inc. On that day she watched anxiously as Home Depot invaded the Pittsburgh suburbs, Sutersville's territory. The mammoth home-improvement chain opened three giant stores in the area, one of them located menacingly just three miles down the road from a major Sutersville outlet.

Not that Nesbit panicked. She had been bracing for Home Depot's arrival. In her industry, the saying had it, “little boxes” like Sutersville Lumber that responded shrewdly to the onslaught of a “big box” like Home Depot could survive. “The big boxes actually enlarge the size of the pie by drawing customers to a neighborhood,” explains Gary Donnelly, president of the National Lumber and Building Material Dealers Association. “If a company has good strategic planning and it goes after new business, then its owner will end up with a better business because it will become more focused.” Steeled by such advice, Nesbit pursued her counter-strategy. It would prove more difficult than she had imagined.

The lumber business runs thick in 38-year-old Nesbit's blood. Her maternal grandfather, Nelson Miller, had founded the company in 1947. While Nesbit was growing up, her family lived in a house next door to the lumberyard. In 1988 she quit her job as a financial planner at a Pittsburgh hospital to become Sutersville Lumber's controller.

In its heyday, in the late 1970s, the business had prospered under the stewardship of three of Nesbit's uncles and her father. It did a bustling business as a supplier of lumber and other building materials to contractors for new construction and remodeling jobs. But by the early 1990s the company's growth had stalled. Nesbit, by then a senior manager, continued a plan to expand and revamp the business. With the family's blessings, she sought to raise profit margins by shifting from labor-intensive products like framing lumber to more lucrative specialties, including kitchen and bath fixtures.

The stockholders—the family owned 60 percent and the company's employees held the rest—allowed Nesbit to increase the company's credit line with the bank to $1.5 million and complete the expansion to five stores. She says that the family frustrated her effort, however, to reduce costly inventory—a crucial plank in her strategy to redirect the business away from the contractor trade on which it had long relied. It was at that point that Nesbit and her family stopped seeing eye to eye, according to one of Nesbit's uncles, Jay Miller. Miller says that his niece lost the family's confidence by what they saw as “over-spending” on new stores. “Her efforts were ignored or tabled,” adds Bruce Oxendale, a former manager.

Once Home Depot started siphoning business away, Sutersville Lumber's income plummeted. Sales from walk-in customers slumped by one-third in the first month. Urgently, Nesbit sought to complete her plan, but the bank declined to lend her more money.

Short of cash, the company couldn't buy the inventory it needed to fill contractors' orders, and many of its long-time customers looked elsewhere. On January 20, 1998, Nesbit filed for Chapter 7. One of her two stores in North Huntingdon was snapped up by Steve Hildenbrand, a former Sutersville Lumber manager. He quickly concentrated inventory in the high-margin niches that Nesbit had coveted. And business is booming, says Hildenbrand, who adds, “We were actually showing a profit after only three months.”

Reprinted with permission of Inc. magazine (August 1998), Goldhirsh Group, Boston, via Copyright Clearance Center.


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