November/December 2014 Openers
A survey of family businesses in Western Michigan finds high commitment but few formal plans.
A survey of family businesses in Western Michigan found that family firms in the region are highly committed to their employees, to philanthropic giving and to keeping their companies in the family. Yet despite this commitment, most of these companies lack formal policies to help perpetuate the family values and ensure a smooth generational transition.
The study was a collaborative effort of the Seidman College of Business at Grand Valley State University and the Haworth College of Business at Western Michigan University. Academics and professionals at the two universities plus the Family Business Alliance of Grand Rapids helped develop the survey questions. Laurel Ofstein, an assistant professor of management at Western Michigan University, analyzed the data.
The online survey was completed by 156 family business stakeholders, including owners, CEOs/presidents, managers, board chairs and directors, and employees. More than a third (36%) said the second generation was the youngest generation working in the business; 26% said the most junior generation was the third, and 19% said the fourth generation was the youngest employed in the company. Nearly four in ten of these companies (38%) generated annual revenues of $1 million to $9.9 million; 17% reported revenues of $100,000 to $499,000; 9% said sales were in the range of $500,000 to $999,999; and 18% had sales of $10 million to $24.9 million. Less than a fifth (17%) generated revenues of $50 million and above; 1% reported sales of less than $100,000.
Although most of the survey participants were associated with smaller companies, the Western Michigan region is home to many large family firms, including Amway, Bissell, Gordon Food Service, Meijer, Haworth, Irwin Seating, Steelcase and Lacks Enterprises, notes Joseph Horak, director of Grand Valley State's Family-Owned Business Institute (FOBI). "We think Western Michigan is a unique area when it comes to the prevalence of family-owned businesses," Horak says.
One of the most significant findings, according to the survey team, was the business owners' intention to avoid layoffs. Respondents were asked what measures they would consider taking if earnings fell at their companies. Only about a fifth (21%) said they would be likely or very likely to institute layoffs; 27% said layoffs would not likely occur, and 30% said layoffs would not happen at all. On the other hand, 58% said that to counteract an earnings decline they would be likely or very likely to reduce family members' salaries, and 76% said they would be likely or very likely to reduce distributions to owners.
While family businesses are often criticized for being risk-averse, their conservatism means they are less burdened by debt, Horak says. "In a downturn, they can function differently [from public companies] because they have less debt," he explains. While a debt-ridden company would reduce staff as a cost-cutting measure, family firms are better able to protect employees' jobs in hard times, Horak says. "Because they're risk-averse, they can live out this value," he observes.
Ninety percent of the Western Michigan survey respondents said they participate in philanthropy. More than eight in ten (82%) estimated their annual philanthropic giving at "up to $100,000." Six percent said they gave between $100,001 and $500,000, and 2% said they contributed between $500,001 and $999,999. One family company gave between $1 million and $10 million annually. More than half (56%) of the respondents said their philanthropy was a combination of individual and business giving. One fifth contributed "as a business," and 21% gave on an individual basis. Only 3% of the respondents said their gifts were made through a foundation.
"There's something special about Western Michigan," says Ellie Frey, director of the Family Business Alliance of Grand Rapids, which offers workshops, assistance and networking opportunities to family business owners. "There's a focus on doing the right thing for the community, even if you're not making a lot of money. I'm pleased to see family values that transcend into the family business and into the community."
Like other recent family business surveys, the Western Michigan study found a disconnect between business owners' intentions to keep their company in the family and the development of plans governing how that goal will be achieved. One telling statistic: 80% of the respondents said they plan to pass the family business to the next generation, but 81% said they lack a formal, written succession plan.
"Getting these numbers higher should be our sole focus," says Family Business Alliance director Frey. She says succession planning is an important part of her center's agenda. "[Members] know what a succession plan is. They know it takes between five and ten years to transfer the business." Like their counterparts throughout the nation, family business owners in her region find excuses for delaying the hard work of developing a transition plan, Frey observes. "They say, 'I'll put it off till tomorrow,' or 'I'm not ready yet,' or 'I have so many things to think about, I don't have the time to think about this now,' " she says.
Although 63% of the survey participants said they have a formal shareholder agreement, the documents they have developed appear to lack some key provisions that could help protect the business from family disputes. For example, only 26% of respondents have a mechanism for removing disgruntled shareholders (such as a stock redemption plan). Less than half (43%) of companies with shareholder agreements have identified who is permitted to own shares of the business, and just 25% have spelled out who may inherit shares. A mere 6% of the survey participants have a prenuptial policy. Only 16% have developed a tie-breaking mechanism in the event of an ownership dispute, and just 19% have a formal dividend policy.
Nearly a fifth (18%) of the respondents have a family employment policy, but only 8% have created a family constitution. While 13% have a family council, 40% of those prohibit in-laws from serving on the council.
The next step for the survey team, according to FOBI's Horak, is to conduct studies of the economic and philanthropic impact of the region's family companies. Horak says his institute is broadening its research and education mission to include advocacy for policies that create a favorable environment for family-owned businesses.
"Family-owned businesses are the ballast of the economy," Horak says. "They may actually have a buffering effect in a downturn."
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