Advantages and Disadvantages of of Keeping the Business Under Family Control or Held It Privately:
FAMILY-OWNED BUSINESSES
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A family-endemic business is any business in which two or more family members are involved and the majority of ownership or control lies within a family. Family-owned businesses may be the oldest form of business concern arrangement, and today they are recognized every bit important and distinct participants in the world economy. Co-ordinate to Nancy Bowman-Upton in the Small Business Assistants publication Transferring Management in the Family-Owned Business organization, nigh xc pct of American businesses are family owned or controlled. Ranging in size from two-person partnerships to Fortune 500 firms, these businesses generate about one-half of the nation's Gross National Production. Family unit businesses may have some advantages over other business entities in their focus on the long term, their commitment to quality (which is frequently associated with the family unit name), and their intendance and concern for employees. But family unit businesses also face up a unique gear up of management challenges stemming from the overlap of family and business concern issues.
Bug IN Family BUSINESSES
A family business can be described as an interaction between ii separate only connected systems—the business and the family unit—with uncertain boundaries and different rules. Graphically, this concept can be presented as two intersecting circles. Family businesses may include numerous combinations of family members in various business organization roles, including husbands and wives, parents and children, extended families, and multiple generations playing the roles of stockholders, board members, working partners, advisors, and employees. Conflicts often ascend due to the overlap of these roles. The ways in which individuals typically communicate inside a family, for example, may be inappropriate in business situations. Also, personal concerns or rivalries may carry over into the work place to the detriment of the firm. In order to succeed, a family business must proceed lines of communication open, make use of strategic planning tools, and appoint the help of outside advisors equally needed.
Bowman-Upton listed a number of common bug that most family unit businesses face. Attracting and retaining nonfamily employees can exist problematic, for case, because such employees may find it difficult to deal with family conflicts on the job, limited opportunities for advancement, and the special treatment sometimes accorded family members. In addition, some family members may resent outsiders beingness brought into the firm and purposely make things unpleasant for nonfamily employees. But outsiders can provide a stabilizing force in a family business by offering a fair and impartial perspective on business problems. Family business organisation leaders can carry exit interviews with parting nonfamily employees to decide the cause of turnover and develop a class of activeness to foreclose it. If the problem is a troublemaking family member, Bowman-Upton suggests counseling them on their responsibilities to the business, transferring them to another part of the company, finding them a job with another firm, or encouraging them to get-go their own, noncompeting company.
Many family businesses also accept trouble determining guidelines and qualifications for family members hoping to participate in the business. Some companies try to limit the participation of people with sure relationships to the family, such as in-laws, in order to minimize the potential for conflicts. Family businesses often confront force per unit area to rent relatives or shut friends who may lack the talent or skill to make a useful contribution to the business. Once hired, such people can be hard to fire, even if they cost the company money or reduce the motivation of other employees by exhibiting a poor attitude. A strict policy of only hiring people with legitimate qualifications to make full existing openings tin help a company avoid such issues, but merely if the policy is practical without exception. If a company is forced to hire a less-than-desirable employee, Bowman-Upton suggests providing special training to develop a useful talent, enlisting the help of a nonfamily employee in grooming and supervising, and assigning special projects that minimize negative contact with other employees.
Some other challenge often encountered by family businesses involves paying salaries to and dividing the profits amidst the family members who participate in the firm. In club to abound, a pocket-size business must be able to use a relatively large percentage of profits for expansion. But some family members, especially those that are owners only not employees of the company, may not see the value of expenditures that reduce the amount of current dividends they receive. In order to convince such people of the value of investments in the company's future, Bowman-Upton suggests that the leader of the family business use nonfamily employees to gather facts and figures to support the argument, demonstrate the bottom-line event of the expenditure, and enlist the help of outside advisors such as an accountant, broker, or attorney. To ensure that salaries are distributed adequately among family and nonfamily employees, business leaders should match them to industry guidelines for each job description. When additional bounty is needed to reward certain employees for their contributions to the visitor, fringe benefits or disinterestedness distributions can be used.
Another important issue relating to family businesses is succession—determining who will take over leadership and/or buying of the company when the current generation retires or dies. Bowman-Upton recommends that families take steps to prepare for succession long before the demand arises. A family retreat, or a meeting on neutral footing without distractions or interruptions, can be an ideal setting to open discussions on family goals and future plans, the timing of expected transitions, and the grooming of the current generation for stepping down and the future generation for taking over. When succession is postponed, older relatives who remain involved in the family firm may develop a preference for maintaining the status quo. These people may resist change and turn down to take risks, even though such an attitude tin inhibit business growth. The concern leaders should take steps to gradually remove these relatives from the daily operations of the house, including encouraging them to get involved in outside activities, arranging for them to sell some of their stock or convert it to preferred shares, or peradventure restructuring the visitor to dilute their influence.
Family business leaders can take a number of steps in guild to avoid condign caught upward in these issues and their negative consequences. Bowman-Upton noted that having a clear statement of goals, an organized programme to attain the goals, a defined hierarchy for controlling, an established plan for succession, and stiff lines of communication can assist prevent many possible bug from arising. All family members involved in the business organization must sympathise that their rights and responsibilities are different at home and at work. While family relationships and goals take precedence at home, the success of the business concern comes start at piece of work.
When emotion intrudes upon work relationships and the inevitable conflicts between family members arise, the business organization leader must intervene and brand the objective decisions necessary to protect the interests of the firm. Rather than taking sides in a dispute, the leader must arrive clear to all employees that personal disagreements will not be allowed to interfere with work. This approach should discourage employees from jockeying for position or playing politics. The business leader may also find it useful to accept regular meetings with family members, engage the services of outside advisors who have no connection to family members as needed, and put all concern agreements and policy guidelines in writing.
THE PLANNING PROCESS
Strategic planning—centering around both business organization and family goals—is vital to successful family businesses. In fact, planning may be more crucial to family businesses than to other types of business entities, considering in many cases families have a bulk of their assets tied up in the business. Since much disharmonize arises due to a disparity between family and concern goals, planning is required to align these goals and formulate a strategy for reaching them. The ideal plan will let the company to balance family and business needs to everyone's advantage. Unfortunately, Nation's Business organisation reported that but 31 percent of family unit businesses surveyed in 1997 had written strategic plans. In that location are four chief types of planning that should be conducted by family businesses: family planning, business planning, succession planning, and manor planning.
Family PLANNING In family unit planning, all interested members of the family unit get together to develop a mission argument that describes why they are committed to the business. In assuasive family members to share their goals, needs, priorities, strengths, weaknesses, and power to contribute, family planning helps create a unified vision of the company that volition guide future dealings.
A special coming together called a family unit retreat or family council tin guide the communication procedure and encourage involvement by providing family members with a venue to voice their opinions and programme for the futurity in a structured way. Past participating in the family unit retreat, children tin can gain a better understanding of the opportunities in the business, learn about managing resource, and inherit values and traditions. It also provides an opportunity for conflicts to be discussed and settled. Topics brought to family unit councils can include: rules for joining the business organization, treatment of family members working and not working in the concern, part of in-laws, evaluations and pay scales, stock ownership, ways to provide financial security for the senior generation, training and development of the junior generation, the company'south image in the community, philanthropy, opportunities for new businesses, and diverse interests among family unit members. Leadership of the family council can be on a rotating footing, or an outside family concern consultant may be hired as a facilitator.
Concern PLANNING Business concern planning begins with the long-term goals and objectives the family holds for themselves and for the concern. The business leaders then integrate these goals into the business organization strategy. In business planning, management analyzes the strengths and weaknesses of the company in relation to its surround, including its organizational structure, culture, and resource. The next stage involves identifying opportunities for the visitor to pursue, given its strengths, and threats for the company to manage, given its weaknesses. Finally, the planning process concludes with the creation of a mission statement, a set of objectives, and a prepare of full general strategies and specific action steps to meet the objectives and back up the mission. This process is often overseen by a board of directors, an advisory lath, or professional advisors.
SUCCESSION PLANNING Succession planning involves deciding who will lead the company in the side by side generation. Unfortunately, less than one-third of family unit-endemic businesses survive the transition from the commencement generation of buying to the 2d, and but xiii per centum of family unit businesses remain in the family over threescore years. Problems making the transition tin occur because the business was no longer viable or because the owner or his or her children did not want it to occur, but commonly event from a lack of planning. At any given time, a full xl percent of American firms are facing the succession issue, yet relatively few make succession plans. Business owners may be reluctant to face up the event considering they do not desire to relinquish control, feel their successor is not set up, have few interests outside the business, or wish to maintain the sense of identity work provides.
But it is vital that the succession procedure exist carefully planned before it becomes necessary due to the owner's illness or death. Bowman-Upton recommends that family businesses follow a four-stage procedure in planning for succession: initiation, selection, didactics, and transition. In the initiation phase, possible successors are introduced to the business and guided through a variety of work experiences of increasing responsibleness. In the pick phase, a successor is chosen and a schedule is developed for the transition. During the education stage, the business owner gradually hands over the reigns to the successor, 1 task at a time, so that he or she may learn the requirements of the position. Finally, the transition is made and the business organisation owner removes himself or herself from the daily operations of the business firm. This concluding phase can be the most difficult, equally many entrepreneurs feel not bad difficulty in letting go of the family business organization. Information technology may help if the concern possessor establishes outside interests, creates a sound fiscal base for retirement, and gains conviction in the abilities of the successor.
ESTATE PLANNING Estate planning involves the financial and taxation aspects of transferring ownership of the family business organisation to the next generation. Families must plan to minimize their tax brunt at the time of the possessor's decease so that the resources can stay within the company and the family unit. Unfortunately, revenue enhancement laws today provide disincentives for families wishing to proceed the business. Heirs are taxed upon the value of the business at a high rate when ownership is transferred. Due to its complexity, estate planning is normally handled by a team of professional advisors which includes a lawyer, accountant, financial planner, insurance agent, and perhaps a family unit business consultant. An estate plan should be established as soon as the business organization becomes successful and then updated every bit business or family unit circumstances change.
One technique available to family unit business organization owners in planning their manor is known as "estate freeze." This technique enables the business owner to "freeze" the value of the business organization at a particular point in time by creating preferred stock, which does not appreciate in value, and then transferring the common stock to his or her heirs. Since the majority of shares in the firm are preferred and do not appreciate, manor taxes are reduced. The heirs are required to pay gift taxes, however, when the preferred stock is transferred to them.
A variety of tools are available that tin can help a business owner defer the transfer taxes associated with handing down a family business concern. A basic will outlines the owner's wishes regarding the distribution of property upon his or her expiry. A living trust creates a trustee to manage the possessor'southward property not covered by the volition, for instance during a long disease. A marital deduction trust passes holding along to a surviving spouse in the issue of the owner's death, and no taxes are owed until the spouse dies. It is likewise possible to pay the estate taxes associated with the transfer of a family unit business on an installment basis, and so that no taxes are owed for 5 years and the rest are paid in annual installments over a x-year menstruum. Other techniques exist that allow business organisation owners to exclude some or all of their assets from manor taxes, including a unified credit/exemption trust, a dynamic trust, and an annual exclusion gift. Since laws change oftentimes, retaining legal assistance is highly advisable.
Assistance IN PLANNING
A professional family unit business consultant can be a tremendous asset when confronting planning bug. The consultant is a neutral party who can stabilize the emotional forces within the family unit and bring the expertise of working with numerous families across many industries. Most families believe theirs is the but company facing these difficult issues, and a family unit business consultant brings a refreshing perspective. In improver, the family business consultant can found a family council and advisory board and serve as a facilitator to those 2 groups.
Advisory boards can be established to advise the company's president or board of directors. These boards consist of five to nine nonfamily members who see regularly to provide advice and direction to the visitor. They as well tin can accept the emotions out of the planning process and provide objective input. Advisory board members should accept business experience and be capable of helping the business to get to the next level of growth. In almost cases, the advisory board is compensated in some manner.
Equally the family business grows, the family business consultant may suggest different options for the family unit. Ofttimes professional nonfamily managers or an outside CEO are recruited to play a role in the time to come growth of the concern. Some families simply retain ownership of the business organisation and permit it to operate with few or no family unit members involved.
THE FUTURE OF Family BUSINESSES
According to Nation's Business, the leadership of more than 40 percent of America'southward family-owned businesses will either change or brainstorm to shift past the twelvemonth 2002. Such big-scale changes volition bring both challenges and opportunities to these businesses. One expert worried that with and so many companies facing succession bug in the virtually future, disagreements between family members over estates and wills may become more than common.
The vast majority of firms that planned a change in leadership (92 per centum) expected that buying of the family business would remain within the family. Simply the nature of that leadership may change in other ways. I-fourth of the firms said that information technology was probable their adjacent CEO would be a woman, while 42 pct thought it likely that their company would name co-CEOs. Ross W. Nager, executive director of the Arthur Anderson Center for Family Business, warned that parents should avoid naming co-CEOs just to placate their children who desire the job: "But qualified, competent, capable, motivated people should be in the CEO spot."
Finally, some leaders of family-owned businesses near retirement age, just to find that the list of candidates to carry on the business is a distressingly brusk one. "As many disappointed family business organisation owners larn too late, information technology'due south unsafe to assume that a son or daughter will follow you into the business," wrote Sharon Nelton in Nation's Concern. "Just considering you, without question, followed your parents into the family firm doesn't mean your children will exercise the aforementioned. Today'southward immature people have more options than always before—more to lure them away from the family unit enterprise."
James Lea, author of Keeping It In the Family unit, recommended five ways in which current leaders of family-owned enterprises tin attract future generations to keep the business afloat after their retirement or death.
- Expose family members to all aspects of the concern, including employees, customers, products, and services.
- Define the business's attractive qualities in terms that will appeal to the listener.
- Recognize those factors that have the potential to dissuade family unit members from staying involved in the concern. These factors can range from personal interests that lie in other areas to conflicts with other family members.
- Reward family unit members who decide to bring together or stay with the family business. "The 'price' successors pay to join and operate your business may include giving up career options that are financially and personally bonny," noted Nelton. "It may mean loss of privacy, or the tension that occurs between parent and child when their management styles conflict. Lea says a business may make compromises—such equally making it possible for the successor to spend more than fourth dimension with his or her family or hiring an interim senior manager to buffer conflicts between parent and child. But the visitor's 'cost' and the successor'southward 'price' must be affordable to both."
- Give family unit members outlets to explore their ideas, interests, and concerns.
Finally, Nelton said, "marketing doesn't end once yous accept successfully brought your children aboard. You have to continue selling them—and their families—on the challenges and rewards of your company."
Further READING:
Ambler, Aldonna R. "The Legacy: Family Businesses Struggle with Succession." Business Periodical of New Jersey. October 1991.
Bowman-Upton, Nancy. Challenges in Managing a Family Business concern. Washington: U.S. Small Business Administration, 1991.
Bowman-Upton. Transferring Ownership in the Family unit-Owned Business. Washington: U.S. Small Concern Assistants, 1991.
Lea, James. "The Best Way to Teach Responsibility is to Delegate It." South Florida Business organization Journal. July 25, 1997.
Lea, James. Keeping it in the Family: Successful Succession of the Family unit Business . New York: Wiley, 1991.
McMenamin, Brigid. "Close-Knit: Keeping Family unit Businesses Private and in the Family." Forbes. Dec 25, 2000.
Nelton, Sharon. "Family unit Business: Major Shifts in Leadership Lie Ahead." Nation's Business organisation. June 1997.
Rowland, Mary. "Putting Your Kids on the Payroll." Nation'south Business. January 1996.
Source: https://www.referenceforbusiness.com/small/Eq-Inc/Family-Owned-Businesses.html
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