Taking care of business the family way

The Rothman Institute of Entrepreneurial Studies offers a wide range of programs to help family businesses.

By: Jon Steele
   You don’t have to be crazy to start a family business — just hopelessly optimistic. To say that most fail is to grossly understate the case: Fewer than 30 percent survive the first generation, and two-thirds of those do not make it past the second.
   In other words, 90 percent of all family businesses do not survive into the third generation. For the past 10 years, Fairleigh Dickinson University’s Rothman Institute of Entrepreneurial Studies has tried to reduce this mortality rate by offering a wide range of family business programs, including an awards program honoring the Rothman Institute family businesses of the year and family forums that address critical issues facing family business owners and their heirs.
   For eight of those 10 years, Leo Rogers has served as the institute’s director, and has had an opportunity to observe and work with firms that found winning strategies, as well as those that did not. In general, he says, successful and unsuccessful businesses differ in the way they deal with three key issues:
   1. Succession planning
   2. Financial and estate planning
   3. Communications
   And, no, estate planning is not redundant with succession planning.
Succession planning
   
While much of the failure to continue past the founder’s lifetime can be explained by the nature of business in general — remember, we’re talking about businesses that survive long enough to become established, when most sink without a trace in the first months or year — it has more to do with the nature of families.
   Leaving aside those cases where there are no heirs, a successful transition demands heirs who are interested, competent and, when there’s more than one heir, able to agree on a succession plan. (The difficulty in achieving the latter may help explain why the now-inactive Rutgers Family Business Forum was based in the Psychology Department, not the Business School.)
   Oh, and founders must be willing to set up a transition plan in the first place.
   The problem, of course, is a familiar one: the mindset needed to begin, nurture and grow a business is not one that readily considers how to let go. And the suspension of disbelief needed to convince yourself that you can succeed where most people fail can easily lead you to exaggerate your own staying power.
   And, while none of us lasts forever, some manage to stretch things out long enough that it seems likely they will take it all with them. A couple of cartoons on the subject say it nicely. In one, a father and son are standing by a window, surveying a vast manufacturing plant. "Someday," the father says, "this will all be yours — if my father ever gives it to me." In the other, a man is lying in a hospital bed. "As far as we can tell," his doctor says, "the only thing keeping you alive is the realization that your son would inherit the business."
   Which, of course, is another way of saying that one of the greatest benefits of building a family business — the opportunity to pass something along to the next generation — is also one of its greatest challenges. And, while the younger generation plays a role in this process, it’s up to the founder to set the stage properly.
   This is a common theme in the forums presented by the Rothman Institute, many of which are preserved in its newsletter, Rothman Ink. (Some of the past articles are available online at http://www.fdu.edu/academic/rothman/articles.htm.)
Financial and estate planning
   
One of the most concise Rothman Ink pieces outlines "A Development Plan for the Future Generation" in 10 simple-seeming, one-sentence steps. But, while its conciseness is attractive, one suspects that many readers will stumble on the very first step: "Draw an organization chart." Many, if not most, family businesses won’t have one. Neither do they have a business plan that would make such a chart necessary.
   Even if they do develop a business plan, the chances are that, like most of their thinking, it will shy away from the key issue: what happens next. Or it will make assumptions that don’t have any basis in reality. For example, it may assume that Junior will be able to step in when Old Jones retires from advertising without ever asking whether Junior has any interest, ability or inclination to do so.
   In addition to addressing such forward looking questions, a good business plan will — like the development plan alluded to above — start with a snapshot of where the business is today. If you don’t know where you are, or have no clear idea of what skills your probable successors possess and, more important, which ones they need to develop further, how can you expect to set the stage for an orderly transition?
   More in-depth help in devising your plan can be found in books, magazines and, of course, online. For example, one of the Rothman Institute’s online partners is WSJ.com’s Startup Journal (http://www.startupjournal.com/), which offers a broad selection of articles and resources that can help you address your deficiencies. From the home page, click Create a Business Plan in the left navigation bar and you will be walked through the process of constructing your own plan.
   And, if you’re not sure what they’re talking about on some of the steps, they even have some sample plans you can crib from. But don’t do that too much. Remember, this is your business and the objective of the exercise is to set up a process by which you can pass your business in an orderly way to your children, not some hypothetical construct’s.
   Speaking of which, are your affairs truly in order? When you own more than purely personal property, your will must take into account the more complex nature of your estate. This is not something that you can do yourself. Unless your family business happens to be a law firm or accountancy that specializes in business transition, don’t even think about doing it yourself. Even then, of course, you’ll run the risk of proving the old adage that only a fool has himself as a client.
   Before you dismiss this as just another pitch for you to hire a high-priced professional that you can’t afford, read the Rothman Ink articles, "Estate Planning: Hindsight and Foresight" and "Inadequate Estate/Financial Planning Blamed for Family Business Failures."
   The point they try to drive home is that money, and the failure to take it into account and manage it, is at the root of most business failures. Not lack of customers or an inability to hold on to them. Not old-fashioned equipment or processes. Not failure to adapt to "life without the old man." What kills most businesses when the founder dies is a lack of the capital needed to carry on day-to-day operations — capital that would have been available had the owners taken time to put their affairs in order.
   The failure to recognize this simple fact is the real root of most of the horror stories you hear about how "the taxman took the business when mom died." That’s not to say that inheritance taxes are not real, but the tax code has ample provisions for protecting assets — legal provisions — that should be part of every business owner’s personal financial plan.
Communications
   
And why don’t more people plan the way they should? In many cases, it comes down to communication or, rather, the lack of it. The excuses are myriad, but one of the most common themes is, "We’re family. We don’t need a formal plan because we’re all on the same page. We know what’s important and what needs to be done."
   That’s such a comforting thought. It’s easy to see how business owners and their heirs can delude themselves into thinking it’s true. But doing so is dangerous. Not just because it leads to mistakes, but because it may prevent people from even recognizing the errors that occur. A father afraid his son will go into another line of work may not point out deficiencies. A son afraid of provoking an argument that may cause him to be disowned may not raise the issue of the need to modernize. A mother not wanting to discourage her son from "taking an interest" may excuse his lack of productivity.
   Which brings us to the moral of a lot of the articles you’ll find in Rothman Ink and other sources: your family business is a business first, a family activity second. If you don’t approach it in a businesslike way, it won’t survive.
So what to do?
   
When asked what’s the one thing that family business owners can do to overcome these challenges, Mr. Rogers not-surprisingly recommends that they join his forum — or something similar.
   "It may sound self-serving," he notes, "but one way to get a start on dealing with these and other family business issues is to join a Family Business Forum like the one here at FDU’s Rothman Institute. Here they rub elbows with other family businesses, hear speakers on various family business issues and have an opportunity for honest give-and-take with their peers."
   His advice is seconded by Gary Cohen, VP/Sales at RC Fine Foods of Hillsborough, whose firm was a semifinalist in the Rothman Institute’s Family Business of the Year program a few years ago. He was also a participant in the Rutgers Family Business Forum.
   "It was appropriate that it was sponsored by the Psychology Department," he said. "Much of what we talked about was how to relate to family members as business people."
   That, again, is a common thread in the field: Successful businesses find ways to get beyond the family concerns to deal with the business realities. This doesn’t mean you don’t care that the person you’re arguing with is your sister or father, but that you deal with her or him professionally when you’re at work. And groups like the Family Forum, where you can let your hair down around people facing the same problems, can play an important role in helping you deal with those pressures.
   "It helped," Mr. Cohen concluded, "to know that I wasn’t the only person dealing with these kinds of problems."