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Forget the “mom and pop” image. According
to a new study of family-owned businesses conducted by MassMutual Financial
Group/Raymond Institute American Family Business, family firms have come
a long way from Main Street. Mean revenues from the firms surveyed have
grown to $36.5 million, up more than 50 percent since 1997. And there
are more than 24 million family-owned businesses nationwide today.
“Make no mistake: family business is big business,
and as our new survey results clearly demonstrate, it’s one of the
brightest spots on the American economic horizon,” says Matthew E.
Winter, Executive Vice President, Individual Insurance Group, Massachusetts
Mutual Life Insurance Company (MassMutual).
The study was conducted over a six-month period in the
spring and summer of 2002. Twenty-page questionnaires were sent nationwide
to more than 38,000 family businesses, defined as companies controlled
by family members. Family business experts from Kennesaw State University,
Loyola University Chicago and Babson College conducted the research. Nearly
a quarter of family firms work in the manufacturing industry, while 17
percent specialize in wholesale/distribution, 12 percent in construction
and 11 percent in retail.
Following are some key findings based on survey results:
1. Family-business leaders share a positive outlook.
More than 60 percent of respondents say they are “very” optimistic
about their company’s prospects. In the next year, 48 percent expect
sales-revenue growth of at least 6 percent, and more than half expect
staffing increases of up to 5 percent.
2. Debt remains comfortably low.
More than 25 percent of respondents report no debt other than trade payables
and another 30 percent have moderate debt levels, in the range of 1-25
percent of equity.
3. The desire to remain family-owned predominates.
Nearly 90 percent of participants report that the family will continue
to control the firm in five years. In nearly 80 percent of responses,
the current CEO is related to the controlling family by blood or adoption,
and another 14 percent are connected by marriage. Of those who have identified
a successor to the CEO, 85 percent say the successor will be a family
member, typically a 40-year-old college graduate.
4. An unprecedented power shift is anticipated.
Results show 39 percent of family-owned businesses will change leadership
within the next five years, as CEOs retire or semi-retire. This expected
turnover is dramatic because the average CEO tenure at a family-owned
business can be six times longer than at a typical non-family public company.
Yet, despite the disruption likely to accompany poorly planned leadership
transitions, 55 percent of CEOs aged 61 or older who are expected to retire
within five years have not chosen a successor.
5. Women gain ground in family-owned businesses.
While fewer than 10 percent of participants say a female CEO currently
leads their firms, 34 percent suggest the next CEO may be a woman. Of
the respondents expecting their companies to be run by two or more co-CEOs,
nearly half indicate one of the CEOs may be female. Currently, 52 percent
of the respondents employ at least one female family member full-time,
and 10 percent report two female family members among their full-time
ranks. Interestingly, women-owned firms tend to have Boards with better
gender balance.
6. Family-business Boards represent a lost opportunity.
Ideally, a Board plays a crucial role in a family firm—helping choose
successors, setting executive compensation levels and guiding other major
decisions. While 58 percent of respondents rate their Boards’ contributions
as outstanding or good, 25 percent cite no Board contribution at all.
Almost half of the Boards meet only once or twice a year, while 13 percent
“never” meet. Only 30 percent say their Boards meet three or
more times annually. Further, only 29 percent of respondents say their
Boards include an audit subcommittee. Not surprisingly, members of family-business
Boards tend to be compensated modestly or not at all.
7. Inadequate estate planning causes succession risk.
Nineteen percent of respondents say they have not completed estate planning,
other than to prepare a will, though a majority say they have a “good”
understanding of the amount of estate tax that will be due upon their
deaths. Only 62 percent of significant shareholders report knowing of
the senior generation’s share-transfer intentions. Such gaps in understanding
are likely to impede the business’s capital-needs plans for estate
taxes and stock redemptions, as well as generate friction among family
members. Further, respondents’ plans to rely heavily on life insurance
to cover most of the death-tax tab may be unrealistic, since 55 percent
of respondents fail to conduct regular, formal valuations of company share
value and, therefore, cannot accurately forecast estate taxes.
8. Domestic competition and concerns about management
strength top the list of challenges.
Fourteen percent of respondents cite domestic competition as their key
challenge, followed by management strength (13 percent), recessionary
environment (12 percent), lack of qualified workers (9 percent) and management
succession (8 percent.)
9. Most family businesses lack written strategic
plans.
Only 37 percent of respondents report having a written strategic plan.
Respondents with written strategic plans tend to engage in other types
of planning as well: They are more likely to have buy/sell agreements,
formal redemption plans and formal company-share valuations. They hold
Board meetings more frequently and rate their Boards’ contributions
more positively. They also employ more workers, tend to have qualification
policies for employing family members and are more likely to have selected
a successor. In addition, they post higher sales revenues and greater
international sales. These findings appear to demonstrate a correlation
between the existence of a written strategic plan and taking actions commonly
viewed as essential to family business survival.
10. Family-owned businesses share a fierce desire
to survive.
The study shows that 61 percent were very optimistic about their company’s
future prospects.
For more information or complete results of the
MassMutual Financial Group/Raymond Institute American Family Business
Survey, contact MassMutual at 800-234-1007 or familybusiness@massmutual.com,
or the Raymond Institute at 607-587-9695 or www.RaymondInstitute.org.
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