Vive la Difference: Why Family Firms are Special
A recent survey offers a rare comparison between how family and nonfamily business leaders manage.
Family business chiefs are more concerned with successors, long-term stability, and achieving personal wealth than their nonfamily business counterparts. This according to this year's Pulse of the Middle Market survey conducted by BDO Seidman, a national accounting and consulting firm based in New York City.
This year Family Business magazine asked that an extra question be included on the annual questionnaire: Are you a family business? A majority — 57 percent — checked yes, giving us a rare chance to directly quantify the differences between how family and nonfamily businesses pick their successor, concentrate their management time and energy, and derive personal satisfaction. Of the 1,650 respondents, representing the top spots in companies with revenue between $2 million and $100 million, more than 70 percent reported sales of $24 million or less. Some highlights:
- Senior members of family businesses are more likely to have selected a successor than those in charge of nonfamily businesses. They also are more diligent when it comes to putting their plans in writing.
- The family business managers measure their success on inner criteria such as lifestyle and personal relationships, rather than on outer measures such as admiration and recognition by their peers, their organization, and community.
- Acquiring other companies, going public, or spending time on marketing and developing strategic plans are less important to family businesses than they are to their nonfamily counterparts.
"In a family run business the CEO tends to just hang on longer," says Herb Goldstein, head of BDO Seidman's management services division, which conducted the survey. One reason may be that family business chiefs, most of whom plan to pass the company on to a family member, find it difficult to grant complete authority to their children or other relatives. They tend to have more difficulty separating their role as parent from their role as business owner, and view retirement as severing family connections.
Fewer family business executives have continued beyond college, with 24 percent of those responding doing post graduate work, compared with 40 percent of nonfamily business people.
This is not surprising. For one, the family business respondents were older; when they joined or founded their company, MBAs were not de rigeur. As well, many younger family business members can't finish school because the family needs them to pinch hit after a relative gets sick, or to just plain help out. The education gap likely contributes to the cliché that family businesses tend not to be "professionally" run.
AGE AND AFFINITY
Just as with the age of executives themselves, family companies also tend to be older than nonfamily firms. One likely explanation: Young nonfamily companies, which have not yet reached their first succession hurdle, may not start out with the vision of passing the company on to their children, but may end up doing so and become family companies down the road.
About 70 percent of family firms are in traditional manufacturing and wholesale trades; there are half as many family service companies (20 percent) as nonfamily (43 percent).
Family business owners also like to live well. They pay themselves lavish salaries: 20 percent earn $300,000 or more in total compensation, compared with 14 percent of nonfamily executives. Nonfamily members cannot pay themselves as generously, surmises BDO's Goldstein, because "they are more concerned about the scrutiny of outsiders, while those in family businesses don't have those worries. If they have a board of directors at all, it may be heavily stacked with family members."
There was no significant difference between the number of women at the highest ranks of family and nonfamily businesses, but among mid-sized companies overall, there has been a gradual decline in women at the top. In 1987, 6 percent of respondents to BDO's survey were women.
That slipped to 4 percent last year, and 3 percent this year. None of the BDO Seidman experts interviewed could explain this regression.
More family business owners have given thought to succession than nonfamily owners. Almost 60 percent of family firms have identified a successor, although only 47 percent of them have worked on an actual plan. Nonfamily businesses are less certain about their successors — only 40 percent have someone in mind, and 33 percent have a plan. However, the group as a whole is improving: Since just last year, there has been a 10 percent improvement in the number of all mid-sized companies that have put a succession plan in ink.
STABILITY OVER GROWTH
Middle market companies share a growing concern about a credit crunch. About 80 percent of all respondents expect bank loans to be more difficult to obtain during the next year, with family and nonfamily respondents weighing in equally. On average, 73 percent of all companies surveyed expect the terms of loans to get tighter, 19 percent believe the terms will remain the same as last year, and 7.6 percent say terms will get easier.
Despite their credit concerns, more than half of all companies surveyed expressed interest in acquiring another company in the next three to five years — no significant change from last year. Slightly fewer family businesses — 51 percent — are interested in playing the takeover game, while 57 percent of nonfamily businesses are surveying the field.
"Growth and expansion are more important to nonfamily businesses," says Goldstein. Family businesses tend to be more conservative in their borrowing practices and growth plans: They are more interested in preserving the business for future generations than they are in building a behemoth corporation.
Education may also play a role: With more nonfamily businesses managed by people with post-graduate degrees, BDO's Goldstein notes, "I would think that the manager with an MBA is going to be more interested in the growth of the company through acquisitions, while the family businessman is focusing on issues such as profitability and how well the family members are doing personally."
ROLLING UP THE SLEEVES
"Family business respondents devote a larger portion of their time to 'inside' functions, such as manufacturing, administration, and finance," notes Goldstein. They spend slightly less time managing people than their nonfamily business counterparts. All the executives seem to want to reduce their time and effort in these areas.
Both family and nonfamily respondents spend about equal amounts of time in outside functions, such as selling and marketing. Family and nonfamily leaders think they should spend more time on these efforts, but they differ on how much. Family business execs want to triple the time they spend on selling and double their time on marketing. The reverse is true of nonfamily business people, whowould like to double their time selling and triple their time marketing.
One interpretation: Marketing is more of a cerebral exercise, involving research and strategic planning. Nonfamily business people, with their higher post-grad population, are more inclined toward such activities. Family business managers are renowned for being hands-on, for believing that they are the only ones who can get the job done. That may account for why they want to sell, sell, sell, instead of pouring over strategic marketing reports.
WORRIED ABOUT CREDITIs it as bad for you as it is for me?
Recently, the accounting firm Grant Thornton surveyed mid-sized companies about their economic outlook, Fully two-thirds of the 250 manufacturing companies polled, with revenue between $10 million and $200 million, were family owned.
The most startling finding: family firms are far more pessimistic about their own profit picture than nonfamily companies. However, they are no more concerned about the economy as a whole.
"Family-owned businesses are more likely to rely on traditional forms of financing, such as commercial bank loans," explains Dominick Esposito, managing partner of Grant Thornton's New York office. The recent tightening of the credit markets, uncertainty about interest rates, and the dubious position of banks themselves are bound to pinch family businesses harder than nonfamily manufacturers.
"Even though family firms are no more or less worried about the economy, it makes sense that they are more concerned about their own health than their nonfamily counterparts, who generally have more diverse sources of funds, including broader equity ownership and venture capital," Esposito says.