Challenges of Operating a Business

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					“Planning for Success in a Family-Owned Business”
                  Aaron Warwick
           FIN 402—Dr. Juli-Ann Gasper
                    4/29/2002
EXECUTIVE SUMMARY:

       The topic covered in this paper is the psychological, emotional, and social
challenges facing family business owners. Most people in today‟s world understand
that operating a business is a very challenging task. However, what many people do
not realize is the unique aspect of operating a business that is part of the family. Family
business owners face many unique challenges that non-family business owners do not
face. Moreover, the entire family of the business is affected by the business itself. As
my paper shows, a family business owner should not separate the business from the
family. Without the family, there cannot be a “family business.” Likewise, without the
family‟s support, there will likely be no business at all. This paper offers many helpful
solutions to help control the level of stress within the family and the business of a family-
owned company.

       The paper begins by outlining many of the unique challenges facing family-
owned businesses. In part, the paper deals with the stereotypical make-up of a
successful entrepreneur. In addition, the paper points out many common problems and
scenarios that family business owners will likely encounter. Furthermore, the paper
discusses many frequent planning problems that family-owned businesses share. In
the final part of the paper, solutions are offered to counter essentially each issue that
was discussed in the first half of the paper. Simply put, the paper should leave the
reader with a sense of comfort, knowing that there is an answer to these common
problems.

        The research for this paper was conducted largely via Creighton University‟s
library website. The most prominent web search engine used was Academic Universe.
The only articles that were used for the paper were articles written by credible authors
and published in reliable magazines. In addition to Academic Universe, I conducted an
interview with my parents, who are family business entrepreneurs.

The major findings of the paper include the “personal legacy statement” and the use of
proper and effective planning in increasing the business‟s life expectancy. The personal
legacy statement is a unique document created by the entrepreneur of a family-owned
business, which gives the person an opportunity to influence the business beyond the
grave. An example of the legacy statement can be found in Appendix A. Finally, the
use of proper planning is the absolute key to being successful in a family-owned
business. The number one reason for failure is due to a deficiency in planning. Family-
owned businesses must not only plan, but must learn how to plan effectively and
efficiently. This paper attempts to provide a family-business owner with the basic ideas
and structure needed to overcome the psychological, emotional, and social challenges
facing the business, and to plan effectively in order to maintain the business throughout
all generations.
                    TABLE OF CONTENTS


Introduction……………………………………………………………….. page 1

Challenges Facing Family Businesses………………………………… page 1
      Self-Reliance
      Favoritism
      Fear of Mortality
      “All in the Family”
      Family Business Paradox
      Failure to Plan

Planning for Continued Success……………………………………….. page 5
      Family Council
      Legacy Statement
      Performance Leads to Promotion
      Outsiders
      Stress
      General Planning
      Estate and Succession Planning

Conclusion………………………………………………………………… page 8

References (Works Cited)………………………………………………. page 9

About the Author…………………………………………………………. page 10

Appendix A (Personal Legacy Statement)…………………………….. page 11
I.     Introduction

       Surviving in a family-owned business is difficult in today‟s world. In fact, only
one-third of family-owned businesses survive to the next generation. Even more
astonishing is the fact that only 15% of these businesses reach the third generation of
the family (Higgins). Despite the high rate of failure, family owned businesses are one
of the most important segments of business in the U.S. economy. In the United States,
family firms account for 78% of new jobs. Furthermore, these businesses are
responsible for 60% of employment and one-half of the gross domestic product
(Watson).

        A family-owned firm, for the purposes of this paper, is defined as any firm that is
privately owned by one, or at most, a few individuals. Some of these firms are rather
large firms that make significant profits. Many of them may someday wish to “go
public.” Others, however, are simply lifestyle firms. In other words, they give the
owner(s) the chance to make a living doing something they love to do. For the most
part, these firms have less than 500 employees (CFOB). Despite the fact that family-
owned businesses have traditionally been dominated by men, American women are
now chosen as successors in about 20% of transfers of family-owned businesses
(CFOB).

       Although family firms do have a high rate of failure, there are many family-owned
businesses that are very successful and influential, as evidenced by the above
numbers. However, in order for a family business to be successful, the owner(s) must
be aware that the business faces many challenges that a non-family business does not
experience. After recognizing these challenges, family business owners can then focus
on ways to make their business successful despite the obstacles.

       In this paper, I will outline some of the unique challenges and problems faced by
family-owned businesses. As the son of a family business owner, I believe that my own
experiences and interview with my family will supplement this topic well. After exploring
the unique concerns of owning a family business, I will show how these businesses can
overcome the obstacles and win the “family business game.”

II.    Challenges Facing Family Businesses

        One of the most unique, and often overlooked, challenges facing a family
business comes from the psychological makeup of a successful entrepreneur. Few
people would argue that entrepreneurs must be special people. While this is certainly
true, the psychological characteristics of an entrepreneur could also damage the
business in the long-run.

A.     Self-Reliance

      According to John Gephart, second vice president of Union Central Life
Insurance Company, “[Family business owners] are very inward. They are reluctant to
share information. This unwillingness to share the intimate details of their business
finances is a detriment to the entire financial planning process” (Higgins). As Gephart
points out, owners of family businesses are often extremely private. Due to fierce
competition and a high rate of failure, family business owners are hesitant to disclose
information with anyone outside of the family. Moreover, the stereotypical owner of a
family business is a “rugged individualist.”

        In an interview with my family, my dad, an entrepreneur of a family business,
reiterated Mr. Gephart‟s point. He said, “When we first began the business, we were
very hesitant to share our personal information with the banker. Our finances and
personal life had always been just that—personal. However, as we began to grow and
needed more financing, we realized that we had to open up.” Although an individualistic
attitude may be necessary to be successful in small business, the owner must be aware
that being overly inward can cause many problems, such as the ones discussed below.

B.    Favoritism

        In addition to the problem of self-reliance, a family business owner is also
assaulted with the psychological problem of favoritism towards a particular child. In
order to be successful in a family business, the owner sometimes has to show
favoritism towards one or more of the children. This often results in the exclusion of one
or more of the other children who is not suited to run the business. Contrarily, in a non-
family owned business, the owners do not have to be concerned with showing
favoritism within the company to one or more children. This is often the case because
in these businesses, the owner or president is not solely responsible for appointing
employees. As a result, favoritism towards one or more children can be very
psychologically problematic for a family business owner in comparison to the non-family
business owner. Unfortunately, as Gephart notes, “When people are in this type of
situation, they tend to avoid it and do nothing” (Higgins). As a result, the family
business may experience future problems that could have been solved if the owner had
not ignored the problem.

C.    Fear of Mortality

       Another psychological problem that can lead to the failure of a family business is
the fear of mortality. Often, business owners resist discussing the future of their
business because they do not want to face their retirement and eventual death
(Henning). Certainly, the fear of mortality is not unique to family business owners. At
the same time, the fear of mortality can affect their business in a unique way. In a
family-owned business, the only person that plans for the retirement or death of the
owner is generally the owner him/herself. Thus, an owner who fears mortality, as most
humans do, may try to avoid planning for retirement or death for psychological reasons.
As with the other psychological challenges, this obstacle can often be very damaging to
the family-owned business.
D.     “All in the Family”

        In addition to the unique psychological challenges facing a family-owned
business, family firms also experience troubles with keeping the business “all in the
family.” One of the most prevalent problems with keeping the business “all in the family”
is what Phillip Perry of National Petroleum News labels the “entitlement mentality.”
According to Perry, if family members believe that they should have better jobs, perks,
and salaries than non-family members, then the business may suffer from the
“entitlement mentality” (Perry).

        Unfortunately for the business, the presence of this mindset may decrease
company morale, especially if non-family employees are aware of the attitude (Perry).
Moreover, this mentality may be very inefficient for a family-owned business if the
“entitled” family members are not useful and productive. Thus, family businesses must
be fully aware of the problems caused by the “entitlement mentality.”

         “I learned very quickly,” said my dad, “that hiring family members was a mistake
for our business if not done properly. I hired [my nephew] to help him work through
college, and then [my niece‟s husband] expected a job as well. Quite frankly, he was
not going to be an asset to the company and I couldn‟t afford to pay him to do nothing.
So, I started a policy that from then until I die, a family member outside our immediate
family will not be hired at [my company].”

        Another problem of keeping the business “all in the family” relates to the stress of
operating a family-owned business. In a family organization, the usual strains of
business are magnified because emotions and misunderstandings get involved more
easily than in non-family businesses (Perry). Many times, family members begin to let
feelings of resentment build up over time. Unfortunately, these feelings can be
problems at home as well. Moreover, in a family business, problems at home can often
become problems of the business. Family members may be upset with one another
because of a non-business incident. However, they may bring their harsh feelings to
the workplace, leading to more serious problems for the business (Perry).

         During the interview with my family, my mom told me about her experiences of
working in the family business. “Your dad needed someone to work in the office in a
secretarial position, but he couldn‟t afford to hire anyone. I worked in the office for
several months, but things just didn‟t work out well. Your dad and I would have fights
about how much money we were spending and how little we were bringing in. We
would ride home and argue on the way home and then argue all night. As soon as we
could afford it, we hired a secretary and I got a job [outside of the business].” As this
example shows, family business owners must be cautious when keeping the business
"all in the family."
E.    Family Business Paradox

        Yet another problem faced by family business owners is the problem of their
children. As Richard Wolfe, an industrial psychologist, points out, creating wealth from
scratch produces a "family business paradox" because children of self-made
entrepreneurs often develop different personalities, skills, work ethics, confidence
levels, and interests than the parent(s) who built the company (Watson). He believes
that this is one of the main reasons why "handing down a family business fails at least
50% of the time" (Watson). In many cases, Wolfe's observation seems to be true. In
light of this, family business owners must be aware of the social and psychological
effects their business can have on their children's development. Such attention could
help preserve the family business throughout generations.

       “I have always tried to instill in you and your sister the values that my parents
taught me,” my dad told me. “My dad taught me how to work hard and earn every dollar
I make from the time I was a child. That‟s why I always made you and your sister work
to earn your money. Whether it was vacuuming the office on Fridays or painting the
bathroom over the weekend, I always made sure that you didn‟t get anything for free.”

        Conversely, family business owners must be careful that they do not push their
kids into something they do not want to do. As James Olan Hutcheson and Dan Pryor
note in Financial Planning, family business owners must be careful that they are
sensitive to their children's "vocation," even if that means they will not take over the
family business. Often, parents feel disappointed or hurt when their children have a
different calling in life and decide not to take over the family business. This
disappointment can lead the parents to pressure their children into the business. When
this happens, the children are frequently miserable and the business suffers greatly
(Hutcheson and Pryor). Thus, family business owners face the challenge of finding an
equilibrium between raising responsible children and pushing them into running the
business against their own wishes.

F.    Failure to Plan

         Finally, when the family business takes all the above challenges into planning
consideration, it is left with a potential planning disaster. Most of the time, the only
people who can really plan for the business are the owners themselves. As stated
above, however, these owners must simultaneously balance their planning needs with
the extreme psychological, emotional, and familial challenges of operating a family
business. Consequently, family business owners often reserve little time or energy for
planning. As John Gephart believes, the main reason for family business failure is "little
or no planning" (Higgins). Family business owners should then spend more of their time
planning. This planning, as I will show below, can help family business owners conquer
all of their obstacles at the same time.
III.   Planning for Continued Success

        The first step in building a successful plan for the family business is to
concentrate on winning the psychological warfare of family business. The family is the
most important part of the family business--without it, there is no "family business." The
psychological aspect of owning a family business is the most damaging to the family,
thus it should be dealt with first.

A.     Family Council

      One way to help win the psychological war is to establish a "family advisory
council" (Henning). This council should be a liaison between family members and the
company management team. Moreover, "all family members, spouses and children old
enough not to cause a disruption" should be involved (Henning). This council should be
responsible for an estate plan and all of its details, which will be discussed below.

B.     Legacy Statement

         Another way to help family business owners combat the psychological game is
the use of a personal legacy statement (Stein). In general, a personal legacy statement
"is not legally binding, but provides the [family business owner] with the opportunity to
tell his or her own personal story to the beneficiaries of the estate. For some, the
legacy statement can focus on a history of a family business, including the goals and
principles upon which it was founded and the ideals upon which the business was
managed" (Stein). Of course, the family could also be involved in such a legacy
statement if the owner so desires. Whatever the case, the legacy statement allows the
owner to see him/herself influencing the business even beyond death. It also allows
him or her to deepen the planning process of the business. For an example of a legacy
statement, see Appendix A.

       Together, the "family advisory council" and the personal legacy statement help
the family business owner fight against the psychological influences of operating a
family business. The council will, among other things, help the owner and family
understand the roles of each family member within the business. This can help the
family business owner with his or her feelings of favoritism towards children because
the children will often be able to express their views and desires in regards to the
business. Consequently, the owner will likely discover that children who seem unfit to
take over the company are most likely uninterested in doing so anyway. Furthermore,
the legacy statement helps the owner deal with the fear of mortality, and helps give a
sense of influencing the business beyond the grave. In addition, both the council and
the statement force the entrepreneur to share information with others about the
business.
C.    Performance Leads to Promotion

       Beyond the psychological problems dealt with in the legacy statement and family
council, the family business owner must still keep the family happy while operating a
healthy business. In order to maintain a healthy family business, the owner must make
sure that performance and production lead to promotion rather than family status. In
other words, an employee should be promoted simply based on his/her merit. Family
membership alone should never lead to promotion. As business consultant Dr. Jerry
Kleiman points out, "Careful planning prior to positioning family members in jobs
prevents problems later on. Establish clear, written entry criteria, and detailed job
descriptions" (Perry). These criteria, of course, help deal with the "entitlement
mentality" mentioned above. Family members must understand from the beginning that
performance and productivity are more important than family status. If everyone
contributes, you can have as many family members as you like working at the business
(Perry).

D.    Outsiders

        In addition to establishing production and performance standards, family
business owners must make sure they are hiring quality non-family employees who
participate in decision-making (Perry). By doing so, owners ensure that if they fall ill,
remaining employees will be able to make sufficient and competent decisions that family
members may not yet be able to make (Perry). In the ancient kingdoms, when a king
died, his son would take over. However, if the son was too young to make decisions, as
was often the case, another person, who had been previously selected by the deceased
king, ruled temporarily. A family-owned business, which is the family‟s “kingdom,”
should be no different. These businesses should always have outsiders prepared to
guide the business temporarily in cases of disaster. Moreover, outsiders may be able
to mediate minor family disputes that attempt to creep into the workplace. Finally, non-
family members can often provide fresh and unique perspectives that may be
overlooked by the family.

E.    Stress

       Another key to keeping the family happy and running a successful business is to
simply recognize the stress associated with a family business (Perry). Unfortunately,
many family business owners wish to ignore the stress that they or the business causes
on the family. Owning a business is undoubtedly stressful and ignoring this fact can be
damaging to both the family and the business. As a result, family business owners
must attend to their family and their stresses in order to keep the family balanced.
Obviously, by recognizing these stresses, family business owners will be able to keep
feelings of resentment and issues from home from entering into the business.

      Even more than simply recognizing the stress caused by running a family
business, owners must also foster open communication with their spouse and children.
Such communication can help the family combat the issue of forcing a child into a
vocation that is not his or her own (Hutcheson and Pryor). Throughout this
communication, the child must know that the family relationship is not dependent upon
his or her success in the business (Hutcheson and Pryor).

       Moreover, if the child does decide to work for the business, they should be paid a
fair and competitive wage. Many children who move into family businesses find it
impossible to leave because they are bringing home a lucrative salary that outside
organizations could not match (Hutcheson and Pryor). Instead of paying children
outrageous salaries, the business could give them money or stock via a blind trust that
cannot be touched for several years (Hutcheson and Pryor). These suggestions should
help the children make the right decision of whether they should work for the business
or work elsewhere.

F.     General Planning

        Finally, in addition to the above planning, businesses should take advantage of
general planning. James Olan Hutcheson and Lee Colan give several tips in Financial
Planning that can help a family business. First, family businesses should focus on a
target market. A recent German study found that the most profitable companies sold
fewer products and had fewer customers and suppliers. The old 80/20 rule, which
states that 80% of a company‟s business comes from 20% of its customers seems to be
significant, especially for family businesses (Hutcheson and Pryor). Accordingly, these
businesses should try to define and target their most profitable market.

       Family businesses should also select and train their employees rigorously. This
training ensures that all employees understand the business, the cost/revenue drivers,
and how they can contribute to the financial success of the business (Hutcheson and
Pryor). This can also help the family business with another important tool: designing the
company culture. In sum, the company culture is created and reinforced by rules and
policies, goals, rewards, staffing, training, leadership, communications, environment,
and structure (Hutcheson and Pryor). Family business owners can greatly shape their
company and its future by establishing a culture that is fitting to their needs and desires.

G.     Estate and Succession Planning

        Finally, family businesses must use estate and succession planning to ensure
their future viability. As mentioned above, the "family advisory council" can help a
family business owner create an estate plan. A "solid plan includes a living will; durable
power of attorney; buy-sell agreements; proper insurance protection and an emergency
plan; wealth protection such as trusts or guardians for heirs' estates; special bequests;
and fair distribution of the senior generation's assets" (Henning). A good estate plan is
a great step in the general planning process. However, as Henning notes, "having a will
and a couple of trusts" should not be confused with having a succession plan.
Moreover, a family needs to make sure that they double-insure an owner‟s life
insurance. This is necessary for the sustenance of the family and for purchasing the
business from the estate of the owner. Many families of family-owned businesses are
not aware of the financial burden that is placed upon them when the owner dies.
Consequently, when the death of the owner does occur, families find themselves
without adequate insurance policies. Thus, family business owners must be sure to
include double insurance protection as a part of their estate plan.

        Succession plans need to be taken care of well in advance of any planned
successions. Waiting too long for succession planning can lead from business
considerations to family disagreements (Perry). Moreover, succession plans need to
consider the personal needs and desires of the founder. "It's not just a matter of what
the founder is retiring from," says business consultant Kleiman, "but what is he or she
retiring to?" (Perry). Thus, a succession plan should not only include career planning,
formal education, learning the business culture, and handling power and privilege
(Henning), but should also incorporate what the owner needs and wants after he retires
or dies.

IV.    Conclusion

       Operating a family business is a challenging task. The owner(s) and family
members face unique psychological, emotional, social, and familial problems not
experienced by most non-business owning families. Perhaps that is one of the main
reasons why so few family businesses are successful. Despite the high rate of failure,
family business owners can overcome these challenges by simply planning. They must
plan for all of the unique problems in addition to the general planning that takes place in
business. As a result, family business owners must often work twice as hard as a
normal business executive. However, the fruits of the family business owner‟s labor will
blossom twice as large if planted properly.
                                     Works Cited

Center for Family-Owned Businesses (CFOB). www.cfob.com/fact. 20 April 2002.

Henning, Mike. “A plan now keeps it in the family later.” Waste Age. Oct. 2001.

Higgins, Barry. “How family business owners think.” National Underwriter. 26 Nov.
      2001.

Hutcheson, James Olan, and Colan, Lee. “The seven veils creating wealth in a family
      firm means uncovering some key business truths still masked by post-dot-com
      euphoria.” Financial Planning. 1 Dec. 2001.

Hutcheson, James Olan, and Pryor, Dan. “When „Right‟ is Wrong: When the children of
      small-business owners are under pressure to join the family firm and ignore their
      own calling, everyone loses.” Financial Planning. 1 Oct. 2001.

Perry, Phillip. “Listen…talk…and plan.” NPN, National Petroleum News. Sep. 2001.

Stein, Helene, and Brier, Marcia. “More Than a Feeling: A personal legacy statement
       allows clients to pass along more than just financial assets to their heirs.”
       Financial Planning. 1 Aug. 2001.

Warwick, Dave, and Warwick, Becky. Interview. 13 April 2002.

Watson, Thomas. “The rich 100—succession: Family circus.” Canadian Business. 31
     Dec. 2001.
About the Author:

       The author of this article, Aaron Warwick, is a junior accounting major at
Creighton University in Omaha, Nebraska. Aaron will spend his summer working for the
public accounting firm KPMG LLP. He will also be celebrating his one year anniversary
with his wife, Gwen-Joanna. Aaron has also spent the past year as an accounting
intern at Lozier Corporation in Omaha and has a cumulative GPA of 4.0.

       In addition to his education at Creighton, Aaron is the son of a small family
business owner. In 1990, Aaron‟s dad began a millworking company named “Warwick
Wood Products.” Although this company began as a custom-made woodworking
company, it quickly grew and took on other duties. Currently, the company has a close
relationship with Pella Windows. In addition, the company is also venturing into such
areas as window installation and home construction. Aaron‟s strong respect for his
parents and their business venture is what inspired him to write this paper.
APPENDIX A—Personal Legacy Statement
PURPOSE:
       The purpose of “Smith Wood Products” (herein referred to as “Company”) is to
provide the Smith family with a decent standard of living while taking advantage of the
family‟s excellent woodworking skills and hobby.

BACKGROUND:
        The Company was established by Mike Smith in 1969. Mike was the grandson
of the well-respected industrial technology teacher, Marv Smith. Marv‟s son, Frank, was
also an avid woodworker. Frank worked for a construction company for over 40 years
and spent his spare time making various items for people in his wood shop. He spent
approximately 20 hours per week on his hobby. Mike Smith spent much of his
childhood helping his dad in the wood shop and began making his own fine-crafted
items by the age of 13. During the summers, Mike would spend approximately 60 hours
a week in the wood shop making products for his friends and neighbors. He quickly
learned that he was a superb wood carver and that he could make a profit from his
work.
        In the summer of 1969, at the age of 17, Mike Smith decided to start the
Company, with the help of his father Frank. Mike was able to advertise in the local
newspapers of the area and pick up business through word of mouth. Once he
graduated from high school, Mike decided that he wanted to make running the
Company his career. Consequently, he decided that he should concentrate on growing
the company to help support his future family. In 1971, Mike was able to secure a loan
from the bank to open up a new state-of-the-art shop. With the loan, Mike was also
able to put together a catalog that he distributed throughout the region.
        Although Mike struggled to make a living for several years, he finally got a big
break in 1975. During the fall of the same year, Mike finished an iconostasis for a local
Eastern Orthodox church. The church, being very pleased with his quality and pricing,
informed the Antiochian Orthodox Christian Archdiocese of North America of their
satisfaction. After several months of negotiation, Mike was able to secure a contract
with the Archdiocese to produce and improve their iconostases throughout North
America. This contract forced Mike to hire outside employers for the first time.
        Since the signing of the contract, the Company has grown tremendously. The
Company still maintains its exclusive relationship with the Archdiocese and has secured
several other large contracts. Moreover, the Company is still run by the Smith family.
Mike has passed on his passion for woodworking to his son, Brad. Mike wishes to pass
on his woodworking skills to his heirs and keep the Company within the Smith family for
generations. Furthermore, he desires that the Company will continue to donate 10% of
all bottom-line profits to charitable organizations. The Company has provided a decent
standard of living for the Smith family over the past 30 years and has also preserved
Marv‟s love and knowledge of woodworking. The Company hopes to preserve this
family tradition for all generations.

				
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