Philadelphia, PA—80% of U.S. businesses are family owned. But the likelihood of the business surviving each successive generation decreases exponentially: only about 3% of family businesses make it to the fourth generation, according to the Initiative for Family Business & Entrepreneurship at the Haub School of Business at St. Joseph’s University in Philadelphia, PA.
The jewelry industry may be an anomaly in that regard. Though the Jewelers Board of Trade doesn’t keep statistics on family vs. non-family ownership of jewelry businesses, researching the history of our industry shows a high percentage of firms in the third generation and beyond. Still, the number of stores closing every year shows jewelers still face the same challenges, especially because the majority of those closings are for personal reasons like retirement, not bankruptcy.
At a recent conference sponsored by the school, Meghan Juday (above left), one of the Initiative’s directors and a fourth generation family business owner, discussed many of the challenges all family businesses are likely to face at one time or another.
The good news. On the positive side, family businesses almost always outperform public companies over time, Juday said. In an economic upturn, public companies can sometimes do better, but overall the consistent trend is that family businesses outperform public companies. The reason is “patient capital.”
“Patient capital is the concept that you are investing for long term, not quarter to quarter like a public company,” explained Juday. “You're making capital investments that aren't going to pay off for five years, but that's fine.” Sometimes the investments won’t even pay off until the next generation, such as her own family’s business, Ideal Industries Inc., which made investments in operations in China and India that she anticipates won’t pay off until the next generation.
Shared values, rather than stock performance or analysts’ expectations, drive family business decision making. Many family businesses don’t have debt, which puts them in the position to take advantage of bargains in the marketplace during a downturn.
“In 2008 we got some of the best of the best consultants at bargain prices because they wanted to stay in business,” she said.
In short, she said, family businesses are low risk but the family has to make investments that balance the rewards of today yet pay off for future generations.
The biggest threat to survival. More often than not, the biggest threat to any family business isn’t external market forces. It’s the family.
“Your family can take down your company in a matter of weeks. Even your best competitor can't do that kind of damage in that short period of time,” cautioned Juday. That goes for the whole family, both those working in the business and those that aren’t.
At the very core, the family has to ensure that members are not going to sue each other—an almost surefire way to destroy the business. Even if the family gets along and there’s little risk of infighting to cause reputational damage, egos have to be kept in check.
Family feuds--whether intergenerational or between branches--are the biggest threat to family businesses. Image: Huffington Post
“If your company is growing at a fairly quick pace but the family is flat-lining in terms of knowledge and expertise, it’s time to swallow pride and look outside the family for the appropriate talent to lead,” she emphasized. It could be temporary until a family member develops the necessary skills to take over, or it could be permanent if that’s what’s best for the business.
Unexpected transitions pose another risk to family businesses. Families need to prepare and think about transitions in advance. It’s one thing to plan an orderly transition over the next 10 years, but what happens if the CEO steps down (or dies) beforehand? What happens if other key executives, family or not, leave the business?
“If you spend some time being strategic about what you need to have a plan for, you can have successful transitions,” she reassured the audience.
What's most important to survival? The most important thing is for family members to have cohesion with each other, says Juday. So is having a board of directors or a family council, but those by themselves aren’t a guarantee of success. It’s all in how they’re used.
“Family, board, and management have to be in alignment with each other. If management and the board are ready to step up to new challenges, the family can't be the part that holds it back. It’s surprisingly common to have a family business outgrow the family's ability to be good stewards of it.
“When the family becomes a real drag on the business, that’s when you end up on the front page of the paper. Then the board and management is focusing on the family and not on the business—and that leaves room for competitors to take market share. And when that happens, losing a talented management team is another risk that arises. If they feel they’re spending all their time managing the family, or they feel their job may be impacted, they’re going to start brushing up their LinkedIn profile and resume.”
Juday knows from whence she speaks. Ideal Industries was started by Juday’s great grandfather and makes wire strippers and other tools and supplies for tradesmen. It has 1500 employees and had a legacy of conflict.
The founder had two daughters—already a strike against succession for a manufacturing business of that era—so the two were pressured to marry future CEOs. Moreover, the two were highly competitive and one did marry the future CEO.
Their conflict was passed on to the third generation. There were always issues between siblings and cousins, and it all came to head when the fourth generation graduated college but none considered joining the business.
“It was total chaos. Family meetings had half the family crying and yelling, and half not showing up,” says Juday. “My father, who was CEO and chairman, was basically the only person who worked in the business his entire career. Dad and I were the only ones who would talk about the company at dinner. The rest of family talked about it once a year at the family gathering. Most had negative connotation of the company because of all the conflict the second and third generation had passed on to the fourth generation.”
That was when the family brought in an outside CEO. Juday’s father remained as chairman and tasked her with the goal of increasing engagement among her cousins. The family also brought in an outside consultant to address key issues.
“The biggest was this conflict and if we didn't address that, none of the other issues would be successful. If you have conflict, even if there are other urgent issues, it’s still first most urgent thing needs to be done,” she said.
Her first strategy was to bring the fifth generation—all young children—together often.
“My generation had a bunch of little kids and I thought about raising them in the conflict environment I was raised in. I saw how nicely they played together and thought, ‘wait till you get older, you won’t be talking to each other.’ But I realized I didn't want that, so I brought my cousins together and we decided we were going to stop this conflict cycle.
“For a long time my generation acted more adult than our parents. Even today the G4 can act a lot more mature than G3!”
It took about six years but the family and company addressed all issues of conflict. Juday revised the family council structure, creating task forces to get more voices to the table for decision-making.
“When I started, family engagement was pretty minimal, and one branch was going to either sell out or sue. Had we not addressed this, it would have really impacted the growth of the company—not because they were huge shareholders, but because it would have sent a bad message to management.
"Peace in the family isn’t the only argument for cohesion: it’s good business. Families with high levels of cohesion and engagement get a return on equity of at least 35%."