Looking back, looking ahead

By Jayne A. Pearl

The past 15 years have been marked by incredible economic, political and technological changes. What lessons can family business owners learn from this fascinating period in history?

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 (www.kidsandmoney.com). 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, LiquidMarkets.com, 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.

Article categories: 
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Issue: 
Autumn 2004

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