Family Businesses: Surviving and Thriving in the New Digital Era

by Todd W. Carter

In the classic film It's a Wonderful Life, George Bailey and his father are sitting around the kitchen table, discussing the future--of George, his brother, and, more importantly, the family business.

His father wants George to return after college to Bedford Falls, where he can run the Bailey Building & Loan Association, its cramped office and elusive profits the only tangible calling cards for the wannabe civil engineer.

"Of course, it's just a hope, but you wouldn't consider coming back to the Building & Loan, would you?" his father asks. It doesn't take long to get George's answer. "Oh, now, pop, I couldn't. I couldn't face being cooped up for the rest of my life in a shabby little office," he says.

Reflecting on that scene in the 1946 film, David Niemeyer, director of Rutgers University's Family Business Forum, says, "If you look at George's face, he's very torn between the idea of going off and doing what he really wants to do versus what he does, what his father wants him to do. And also out of respect for what his dad his built."

George never makes it to college, forced to shepherd along the Building & Loan after his father suddenly dies and his college-educated brother snags employment elsewhere. In the end, George realizes how lucky he is, surrounded by family and friends and enough donated cash to avoid fraud charges.

But he was lucky in another way too: his family's business survived a second generation. That's rare in America, where fully two-thirds of family-run businesses never make it past the first generation. Only 12 percent of them hand over the reins to a third generation, while just three percent ever continue into the fourth generation and beyond, according to the Boston-based Family Firm Institute (http://www.ffi.org).

"The biggest problem that family businesses run into is that there's no planning for that transition to the next generation," says Niemeyer, a family therapist. "It's almost like something's just got to happen at a certain point and it will happen, but there's no planning for it, no preparation for it."

And yet the United States isn't suffering a drought of familial enterprises: more than 90 percent of American companies are family-owned, representing nearly 35 percent of Fortune 500 companies, according to the Family Firm Institute.

"Our expectation is that family businesses are here to stay," says Robin Matza, director of Deloitte Touche's business succession planning practice for New York, New Jersey, and Connecticut.

Indeed, despite the attention paid to Internet startups and the millions they bring to their founders, the family business remains the foundation of American enterprise. "Behind all of those Internet businesses," Rutgers's Niemeyer argues, "there are needs for people to produce and to distribute, and all those things that are very much a part of the family business tradition."

He adds, "I don't think the family business will ever die." If it did, "the economy is dead because family businesses are kind of the fuel that boosts the economy."

Often, the first and second generations don't agree on the company's direction. Many times one or more of the children simply aren't interested in running the company. They have other aspirations, similar to George Bailey's dream to build bridges and skyscrapers. The company is sold, a victim of conflicting ambitions, sibling rivalry, or atrophy.

Which makes the story of the Eastman Machine Company an anomaly. Eastman is a Buffalo, N.Y.-based manufacturer and distributor of fabric-cutting machinery. Purchased in 1901 by real-estate investor Charles Stevenson, Eastman Machine has remained in the family through four generations.

The multimillion-dollar company, which employs 250 workers and operates a 180,000-square-foot facility, now is in the hands of Robert Stevenson and his two brothers. They purchased the company from their father in 1988.
Others in the family chose to work outside the business: A fourth brother is a New York City financial manager, while a sister heads a university's academic department. Consequently, neither of them has an ownership interest in Eastman Machine. It was a "deliberate" decision, designed to benefit the siblings actively running the company.

Despite what many family business consultants recommend today, Robert Stevenson jumped right into the family business before holding positions at other companies first. He wavers when asked whether that was a wise decision.

But he knows that it won't happen with the fifth generation, which includes a son and a daughter in their early twenties. Both have graduated from college and both have held summer jobs at Eastman Machine. "Until they start working somewhere else and actually come to us with their resume and say, 'Hey, I'm accomplished, I want to do it, I want to come in the business,' it's not going to be a consideration," Stevenson says.

Aside from the outside experience they bring back to the family business, next-generation family members who first work elsewhere carry themselves with more confidence, consultants agree.

Even with many members of the immediate and extended family working in a business, there's likely a need at some point to hire outsiders for executive posts.

It's a situation that Eastman Machine's Stevenson knows well. Admittedly, he says, executives recruited by the company know they're "never going to be the top dog." Instead, they're well compensated and provided an incentive package that includes "phantom" stock options, which increase in value as the company's profitability rises.

"And at the same time, I've always encouraged people," Stevenson says. "If you feel you've been trained here well enough and you're ready to move on, move on."

Still, "family businesses have a little bit of a problem because they're not going to give up equity," says Laura Michaud, who once worked in her family's business before entering the consulting field. Instead, as at Eastman, bonus programs often are implemented in place of stock shares to motivate top-level people, she says.

In any case, family businesses often require the services of a special outsider, "someone who is not threatened, who is very secure and helps the business," Michaud adds.

Michaud's grandfather founded Chicago-based hearing-aid maker Beltone Electronics, which the family sold in fall 1997. She stayed on as vice president until August 1998 and retains a minority ownership interest.

How did Eastman Machine make it to the fourth generation--and, quite possibly, the fifth--when so many other
enterprises failed after the first and second? Stevenson thinks his company's prosperity comes from looking beyond the numbers, understanding that emotions are a stronger determinant of success than spreadsheets.

When a family business fails, he explains, it's often because "nobody's dealt with the fact that Sam really hated Tom because at age five he beat the hell out of him and he's never felt his best about that. And he's kept his mouth shut, but he says, 'One day I'm going to get even.'"

Rather than such catalysts serving to fuel a family business's growth, they hinder it. "Families start to go inward and worry about family problems when they should be worried about what the competition is doing," Stevenson says.

It's those kind of relationship issues that bring out the consultants.

"We don't take sides, says Deloitte & Touche's Matza. "We work with the family in family meetings to raise the issues, to develop some kind of consensus around them, and to ultimately develop a shared vision so that you can start focusing on the business at hand."

Sibling rivalries and other relationship issues are a big reason for the failure of family businesses to prosper and move to the next generation. "There's always a parallel. Always a parallel," Rutgers's Niemeyer says. "There's a flow from one into the other, so there's no separation or distinction."

Sometimes family relationship issues turn ugly, forcing a showdown. Michaud recounts an incident where father and son didn't agree on their company's future. The son left and became a competitor. "It's not always beautiful," she says. Still, she emphasizes, most well-tuned family businesses prosper and the owners find the experience of working with parents, children, siblings and other relatives "very rewarding."

In Buffalo, where Stevenson serves on several boards, he's often told he's a good listener. It's one of those skills he's developed from running a family business, where disagreements are less likely to result in someone's
resignation.

Those same qualities often are found in non-family members who work in family businesses, he argues. And the skills they develop working for a family business can be a selling point when they look elsewhere for employment. "Successful family business leaders tend to be more empathetic toward the concerns of employees and concerns of those around them than people who haven't been there," Stevenson says. "Because you have to be."

As many publicly traded companies increasingly focus on short-term results, foregoing much of the strategic and
long-term planning necessary to prosper in the future, family business executives may be increasingly in demand. It's the family businesses, after all, that have the time and drive to focus on the future and their legacies.

"Working in a family business can be a really enlightening and empowering experience for an executive," Matza says. "It's a very challenging environment and it often requires the development of skills as a facilitator to be able to view the system from an impartial perspective--and yet understand that they have an obligation to make this business profitable."

Moreover, family members are not necessarily disadvantaged in the job market when they decide, for whatever reason, to quit the family business and continue their career elsewhere. "If the person brings with them a track record, then the chances are that they're going to be able to sell themselves," Niemeyer says.

Some families have succeeded better than others in keeping the family separate from business when they're outside the office. Those that have created a firewall between the two have set "clear boundaries," Niemeyer says. "And everybody has agreed on those boundaries." Adds Michaud, "You hope your family's built on more than the business."

By habit, the Stevensons talk about things other than company business when gathering for Thanksgiving dinner and other holidays. "It's not a deliberate thing," he says. "I think it's the environment that we grew up in with our father. He did not really discuss business at home. He made it a point to be involved in a larger number of other activities, so there were other things to talk about."

With families owning nine out of 10 U.S. businesses, it seems hard to imagine that the Bailey Building & Loan Associations will disappear, even when faced with infighting and children uninterested in continuing the legacy.
"Will America have a lot of family businesses? I don't see that changing," says consultant Michaud. "But when it goes from generation to generation, that's a challenge. That's a big challenge. I don't see that--I don't see an increase there."

(C)1998-2008, Todd W. Carter