Study Yields Fresh Insights Regarding Family Businesses
Editor’s Note: The following data was reprinted with the permission of Massachusetts Mutual Insurance Co. which initiated the study of family businesses. Copyright 1995.
A recent study, commissioned by the Massachusetts Mutual Insurance Company, has yielded some fresh new insights into family-owned businesses, ranging from their mounting concerns over estate taxes to the long range goals aimed at growing and keeping the business in the family.
The findings are based on 1,029 telephone interviews with the owners and co-owners of family businesses. Each of the companies interviewed was at least ten years old, had ten or more employees and annual revenues in excess of $2 million, according to Matthew Greenwald & Associates, who, working with a panel of family business experts, prepared and conducted the study for MassMutual.
Among the findings:
1. Estate Tax surpasses capital gains tax as a concern for family businesses.
Family business owners are more concerned about the negative impact of estate taxes than they are about capital gains taxes. The concern over estate taxes may stem from the fact that most families have large portions of their net worth tied up in the family business.
2. More interest in and more planning for keeping the business in the family.
Business-owning families report doing more formal planning to ensure a smooth transition between generations. Among businesses that intend to retain future ownership within the family, 44% report having a formalized succession plan to guide the transition.
3. Family business owners report few problems with access to capital.
Owners of family businesses of all sizes report uniformly high expectations for acquiring the capital they require. The improvement in access to capital is especially pronounced among smaller firms — those with revenues of $10 million or less.
4. Male relatives carry more clout in family firms.
Male relatives are more likely than females to be involved in family businesses, to hold more influential positions, and to be identified as the key decision makers for the business. Sons are four times as likely as daughters to be identified by owners as controlling ownership and governance decisions in the next generation.
5. Owners encourage children’s participation through nature and nurture.
Two-thirds of the people who own family businesses were raised in families that owned a business, and three-quarters of all owners with children said they would encourage their kids to follow in their footsteps.
6. Decisions, in most family firms, are made by consensus and fostered by trust.
Decisions on key issues are made by a small number of people who come to their decisions through consensus. Most owners feel the key decision makers in the business trust one an- other, but are less certain that they share goals or achieve what they set out to accomplish.
7. Family business owners remain moderately positive about the overall economy even while split over the effect of the administration’s policies, particularly with regard to family businesses.
Men appeared more optimistic than women (32% vs. 21%) about the state of the economy. The difference may be attributable to the size of business each owns. More than a third of the family owners with gross revenues of $10 million or more say they feel the economy has improved, compared with 27% of owners whose business yielded less than $10 million in 1994. (Women are more likely to own businesses with revenues under $5 million.)
8. Family Businesses continue to focus on improving the value of the firm.
Value and profitability continue to stand out as the top priorities of family business owners, while growth once again ranked considerable lower among financial considerations. These findings show that family businesses focus on long-term goals, and not on growth for growth’s sake.
An in-depth analysis of the survey results has also uncovered some subtle distinctions among family firms with fresh insights into the family business world. By employing a statistical technique called cluster analysis, which combines the responses to such questions as decision making, conflicts in the family, goals, etc. with the basic data about business size, revenue, and age, the study found seven distinct types (Clusters) of family firms. They are:
Cluster 1: “Parental Oversight” (13%)
The respondent in these firms was typically a co-owner, relatively young (average age is 37), second or third generation. The older generation has passed on its primary responsibility, but retains some equity and exercises some oversight, including being involved in any key-decision effort. Half of those interviewed did not have any non-family members involved in the decision-making process.
Intergenerational disagreements over capital investments and strategic directions are more frequent than usual and may reflect resistance to change or caution on the part of the senior generation.
Cluster 2: Looking Ahead” (16%)
Children in these firms are involved in the business with one or more participating in the decision making, even though the owners (average age 62) have not yet passed on control. There are no non-family members involved in the key-decision making groups. Two-thirds have a written succession plan in place, and trust runs strongly across the generations. Decisions in more than half (59%) of the families in this group is reached by a consensus.
Cluster 3: “Dominant Owners” (12%)
Generally first generation with revenues under $5 million. These firms are smaller; around 41 full-time employees as compared with the average of 74 among the sample group. The owner, whose average age is 52, is the top banana and key decision maker. Although 90% have children, fewer than half intend to pass on ownership. Discussion was listed as the dominant mode for resolving differences, with the owner having the final say.
Cluster 4: “Outside Assistance” (33%)
In about a third of these firms, generally first of second generation, the owner makes the key decisions without much assistance from the family. In a smaller number of cases, a sibling, sibling-in-law or extended family member may assist. There is high reliance on a small number of non-family members, such as CEOs whose average age is 49. The survey revealed a high level of trust and acceptance in the key-decision making group including the role played by non-family members.
Cluster 5: “Mom and Pop” (17%)
Spousal operation, generally first generation, average age 52, with revenues under $5 million. In one out of every four, a child may participate may participate in the key decision making process, and in about a third of the cases, a non-family member may also participate. At least two-thirds of the owners intend to pass the business on to their children.
Cluster 6: “The Mega Firm” (4%)
Unlike the other clusters with key decision making groups of three or four, these firms usually have an average of ten. The group is a medley of various family members and generally four outsiders. Although half of the firms are first generation and only a fifth second generation, the businesses are generally much larger than the other (cluster) groups with at least a third reporting revenues in excess of $25 million. Family members include: parents, children, siblings, in-laws, as well as some aunts, uncles and cousins.
Cluster 7: “The Sibling Team” (6%)
Virtually all respondents in this cluster (85%) are co-owners, sharing ownership with at least one and usually two siblings. In a substantial minority of cases (35%) a parent is also involved in the key decision making group. A large majority (76%) are past the first generation. The role of non-family members is limited. In slightly more than half (52%) of the companies, no outsider is involved in the decision making group. Differences are usually resolved by reaching a consensus. However, conflicts over the roles and qualifications of family members occur with above-average frequency.