A family owned business “is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business’ overall well-being.”
In this post Generational Equity reviews, based on our experience, three common myths that we often see and hear discussed about family owned business.
Generational Equity Reviews Myth #1:
Family owned businesses are privately held.
Some of the country’s largest businesses are family owned. Koch Industries, Carlson Companies, and Cargill are three examples.
In cases where the company is very large and publicly owned, they can still be considered to be a family business. This is done when the largest shareholder is the controlling shareholder.
Generational Equity Reviews Myth #2:
In a family owned business, the owners are family members.
No, that is actually not always the case.
Family members will usually be involved inof the company and oftentimes are managing the company or senior officers; however, the owner is not always a family member.
Generational Equity Reviews Myth #3:
Family owned businesses are fading to a thing of the past.
This is absolutely a myth, backed up by empirical evidence. According to a Newsweek article:
“Family-owned businesses continue to form the backbone of the American. 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.”
Clearly, family owned business remain an integral part of the American economy.
They are not without their challenges, however.
As we wrote in this article, entitled “Challenges of the Family Owned Business“:
The family owned business oftentimes has a “romantic” appeal to it. However, when the smoke and lights fade, there are certain challenges that family-owned businesses must prepare for. There are risks that the family owner is prone to that a small business without the family entanglements is not.
One of these challenges is planning for succession, and certainly it is not a myth to say that this issue has provided many a headache for families in the past. The primary reason for this is that, as we noted in the post “Generational Equity Succession Planning Advice“:
The most important reason why a family handoff should not be assumed as the automatic course of action is this stark reality: the ability run your business, or any business for that matter, often skips a generation. Obviously this is not true in every case, but we have seen it enough to know that it occurs more often than not.
It can be difficult to come to the conclusion that an assume heir to the throne may not be ready or able to take over, but making such a decision is often necessary for the long-term health of the business.
Ultimately, success for a family owned business (and the family that owns the business) over a series of generations often comes down to balance.
For many business owners, the business in itself is like another child, sometimes making it difficult to make the correct decisions for both the family and the business. Having proper boundaries set in place along with advisors you respect will help to bring a healthy separation between both. This healthy division is of critical importance to the success of both the family and the business.
So while it is important to understand the fallacies behind the three myths described that the beginning of this post, understanding the common challenges faces by family owned businesses is also important for long-term success.
And one thing is for sure: the long-term success of America’s economy depends on the continued prosperity of family owned businesses.
If you’re considering selling a family owned business or are looking to sell part of a family owned business, you’ll want to avoid the 5 fatal mistakes that owners make. Click here for the full report.
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