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The Family Business
Part One

See also:
The Family Business -- Part Two
The Family Business -- Part Three
The Family Business -- Part Four
The Family Business -- Part Five
The Demise of the Family Business?
          In this era of multinational corporations and borderless economies, the family business  is popularly perceived to be a relic of the Nineteenth Century. In fact, there are 12 million  family-controlled businesses currently providing 59 percent  of total US employment and generating 78 percent  of net new jobs. As the Fortune  500® corporations are being re-engineered  and downsized,  new opportunities are being seized by smaller family businesses further enhancing their profitability and value. Family-controlled businesses power today's economy.

          A recent survey (September 1995) undertaken by the Family Business Network of the Massachusetts Mutual Life Insurance Company (MassMutual) offers some unexpected insights into today's family businesses. The 1,029 respondents to this Gallup Organization survey spanned from the oldest continually-owned family business dating from 1800 (now in its eighth generation of family ownership) through 37 percent founded prior to 1960 to half of these businesses still being in the first generation of family ownership.

          Encouragingly, family-owned businesses are openly planning for the succession of ownership and management, and working consciously to keep the business within the family. This increasing trend now finds 44 percent of family-owned businesses have a formalized (written) succession plan for transition of ownership and management control. Predictably, older owners are more likely to have implemented a formal succession plan; 63 percent of family business owners over the age of 65 have a written plan in contrast with only 38 percent of owners under the age of 50. About half of the men have a written succession plan in contrast with about one-third of the women family business owners. Perhaps surprisingly, there is little difference to be found between older and young family businesses or between large and smaller family businesses in having established formal succession plans.

          Focusing on the challenges of succession, it is understandable that family business owners are more concerned about the negative impact of estate taxes than they are about capital gains taxes. With estate taxes rising to 55 percent and higher, 28 percent of these business owners report their primary concern is estate taxes in contrast to only 14 percent whose primary concern is the capital gains tax. With 63 percent of the respondents reporting that the business represents more than half of their family's net worth, this anxiety simply recognizes that estate tax bills can compel the family to liquidate their assets by selling the business, selling stock, or increasing their business debt.

          Consequently, family business owners are becoming more aware of the extent of their estates' tax liabilities and are undertaking more definitive estate planning. Fifty-eight percent of family business owners now report having a "good"  idea of the estate's tax liability; this level of concern seems to be consistent across all sizes of businesses with 55 percent of owners of businesses with annual revenues under $10.0 million offering the same response. While some form of life insurance is the most popular vehicle through which heirs are expected to pay estate taxes (66 percent), the use of cash reserves (13 percent), trusts, liquidation, buy-sell agreements, cash, or investments are alternative or supplemental resources by which these tax bills are to be paid.

          This preoccupation with estate tax liabilities has caused 26 percent of family businesses to purposefully reduce the capital investments in these enterprises. Thus, more than a quarter of all family businesses are being either downsized or exposed to greater risk in response to these anticipated estate tax liabilities -- a worrisome issue of public policy.

          Looking at today's ongoing operations, family businesses are more sanguine about their access to capital than has been reported in earlier surveys. More than half (54 percent) of family business owners find their access to capital to be "excellent."  Improved access to capital appears to be particularly striking among smaller businesses -- i.e.,  annual revenues less than $10.0 million -- with 51 percent now finding their access to capital to be "excellent."  And there is little difference between men and women family business owners. Almost half of all family businesses (48 percent) have personal guarantees or loans to their companies; this increases to 51 percent for the smaller family businesses. However, more than two-thirds of those making personal guarantees or loans say they are either "not at all concerned"  (42 percent) or "not too concerned"  (26 percent); only 8 percent report being "very concerned."  Nearly one-third (30 percent) note that 75 percent or more of their family's net worth is invested in the family business, and another one-third explain that between 50 and 74 percent of their family’s net worth is invested in the family business.

          The illuminating and authoritative findings unearthed through this Gallup survey of family-controlled businesses will be the focus of subsequent columns.

Your comments and suggestions for these pages are most welcomed!

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Thomas A. Faulhaber, Editor

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