Taking the Pulse of Family Business

From behemoths such as Ford to mom-and-pop shops, they share a set of common challenges in today's business climate

by Stacy Perman

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Family-owned businesses continue to form the backbone of the American economy. Consider the following statistics reported by the University of Southern Maine's Institute for Family-Owned Business: Some 35% of Fortune 500 companies are family-controlled. Family businesses account for 50% of U.S. gross domestic product. They generate 60% of the country's employment and 78% of all new job creation.

Indeed, some of the world's largest corporations, from Wal-Mart (WMT) to News Corp. (NWS) to Ford Motor (F) are family businesses. And regardless of size, all family businesses face significant challenges of continuity, longevity, and ultimately success.

Generally speaking, the failure rate for all private businesses is high. According to the Small Business Administration's Office of Advocacy, 580,900 new businesses were launched in 2004, the most recent date available for data, while 576,200 closed. Given that only one in three family businesses succeeds in making it from the first to the second generation, it's clear they have their own inherent risks.

Each succeeding generation has its own ideas about taking the company forward -- or if, indeed, it wants to join the family business at all. Successful transition has always been crucial to the continued success of family businesses -- and the next 10 years will see a major increase in the number of companies facing that hurdle, as more baby boomers begin to retire.

"GREED FACTOR."

Accordingly, the question arises as to whether and how boomers will pass the baton along to their children. The issue is fast becoming a critical one. The challenges to longevity are substantial.

For starters, many of the concepts that have been traditionally associated with family businesses have eroded and new sources of potential conflicts have arisen, as have new opportunities and challenges. Compared with 10 or 20 years ago, the sense of duty and obligation to join the family business has weakened, while the sense of entitlement has grown.

"There's always a decent greed factor out there, whether it's between father and son or between established business executives," says Tom Holly, a tax partner with PricewaterhouseCoopers' Private Company Services practice, who works with a number of family-owned businesses. "But I think there's a substantial entitlement discrepancy between the first and second generations." At the same time, Holly says: "I'm not seeing the second generation as actively involved in the business as they were 15 to 20 years ago."

BURGER FLIP.

When internal conflicts spill out into the public, it exposes just how important formal succession plans are for the future of a company. Last year, when Lachlan Murdoch, the son of News Corp. CEO Rupert Murdoch, resigned from the post of deputy chief operating officer of the family media empire he was expected one day to run, speculation ran rampant. Was this the result of a feud between father and son over strategy? Did it concern the elder Murdoch's unwillingness to cede more of his authority? Both remain open questions for the company.

Similarly, in January, a series of lawsuits between family-owned In-N-Out Burger and one of its executives, who is also a board member, gave rise to claims of a potential internal power struggle over the 58-year-old California-based burger chain. Esther Snyder, the 86-year-old matriarch, remains president, but the company's only living blood heir is her 23-year-old granddaughter, leaving many questions about how and who will ultimately run this fiercely private, family-run firm.