The Family Business Challenge

November 12th, 2008

I thought it was time for me to do a post on family-owned businesses. I have worked for them, consulted for them and advised them. Yes we even started one of our own. As a CPA I have some advantages that many family businesses aren’t able to access and that is my training and experience as a financial advisor and a controller. Accordingly, I will share some of my observations and experiences.One thing I have observed is that owners of family owned business think they are bullet proof and don’t plan for succession. This represents an area where CPAs and family-owned businesses need to spend more time and effort. Without this type of careful planning, a crisis is sure to happen.

Owners of family-owned businesses tend to go solo and not rely on advisors. The entrepreneurial drive creates success but the difficulty comes in sustaining the success as the business becomes more complex. This is when things start to unravel because an effective management team hasn’t been put in place. The sense of separateness and need for control creates real problems because owners have an over-powering urge to do things their way. This tendency of my way or the highway puts many business owners between a rock and a hard place when things start to hit the wall. Then there is often no way out. My advice to business owners is hire advisors who are smarter than they are and have experience in dealing with tough business issues.

Another trait of many business owners is not engaging in an effective process of strategic thinking and planning. Operating from the center of the circle and not using good advisors to guide them through a solid process of management discipline can prove to be a fatal mistake.

The failure to plan and provide for succession is probably the biggest mistake I see as well as the biggest opportunity to provide for the future. Only about 40% of family businesses make it to the second generation and only 12% make it to the third generation. These aren’t very good odds. The down side of these statistics is that current economic conditions will make it difficult for family businesses to sell and get the value built up after years of hard work. This should be a wakeup call for business owners to address the succession planning issue and face the hard facts of current reality.

There are some steps that can be taken to avoid these problems and we will talk about these in future posts.