A family business isn’t just a career. It’s a way of life in which business owners are able to be their own boss, share a common history and identity, pass on the business to future generations and invest in the local community.
Family businesses, defined as businesses that comprise two or more members of the same family who work together and control at least 15 percent of a company, are at the core of the American economy, representing 62 percent of the U.S. workforce and 35 percent of the companies on the S&P 500. While some of these businesses — such as Ford Motor Co., Wal-Mart, Amway, Meijer, Gordon Food Service and Stryker — have grown into global corporations, most remain small and make an economic impact in their communities through employment opportunities, sourcing for goods or services and contributions to charities.
It is partly this ubiquitous nature of family businesses that attracted the interest of Laurel Ofstein, assistant professor of management at Western Michigan University. Ofstein became interested in researching the phenomenon of family businesses when she was assigned to teach a course in family business during her graduate studies at the University of Illinois at Chicago.
“I was struck then, and continue to be, by how many of the students I was teaching came from family businesses and how complicated their decisions were to enter the business or not,” Ofstein says. “I have been fascinated ever since to better understand how family businesses rely on their close relationships that have been established over many generations to drive firm strategy and innovation.”
In 2012, Ofstein collaborated with the Family Owned Business Institute at Grand Valley State University to conduct research on family businesses, including looking at the effects of the external environment on them. In 2014, she co-authored a study illustrating the strong lineage of family businesses thriving in Michigan.
Most start small
From her research Ofstein found that family businesses typically start small, with family members doing all the work. Subsequent generations usually grow the business and then need to add workers from outside the family.
Family businesses tend to expose themselves to less risk than non-family entrepreneurial businesses, and family businesses borrow far less in order to expand. During down times, family businesses tend to ride the wave better and have fewer layoffs.
“If they get close to layoffs, family members prefer to take cuts in their own salaries rather than lose their workers,” says Ofstein. “This comes from a philosophy that if everyone sacrifices a little bit, everyone gets to keep his or her job. Even non-family employees become part of the extended family in this type of business.”
All businesses need to innovate in order to keep going, and family businesses are no exception, says Ofstein. Family business owners tend to rely on their suppliers, clients and customers for information about changing market needs, and they also attend conferences and workshops through their respective trade organizations.
For example, Ofstein says, Schupan and Sons, a third-generation, family-owned metal and plastics business in Kalamazoo, started out as an industrial scrap metal company in the first generation. It now has an additional emphasis on electronics and beverage container recycling, as well as aluminum and plastic distribution and fabrication throughout the Midwest.
“This is a typical development,” says Ofstein. “Family businesses start out local, and in later generations they go to more regional or national markets.”
The next generation
Each year, Ofstein teaches a course in family business management at WMU that looks at the continuity challenges faced by family businesses, including family interactions, communication, conflict resolution and succession planning.
“A lot of my students who take the course come from family businesses, and they are trying to decide if they want to pursue that route for themselves,” she notes.
Most family businesses are in the categories of manufacturing, wholesale/retail, construction or restaurants/food services. However, not many young people are going into these fields, so that may impede ownership succession at these businesses, says Ofstein.
Many founders dream their progeny will take over the business. However, today’s younger generation often sees such a prospect as undesirable. In fact, 67 percent of family businesses do not survive beyond the first generation, and only about 12 percent make it to the third generation, says Ofstein.
“The younger generation has seen what it takes to run the business,” she says. “The parents may have been too busy to go to their baseball games or dance performances. They were never home, and there were few vacations. They don’t want to repeat that way of life.”
So how will family businesses thrive in the future?
Ofstein advises students whose families own businesses to work elsewhere for two to five years before they decide to enter the family business. Research shows that people can be more successful in the family business if they decide to pursue it after outside experience.
“The younger generation usually brings in best practices from their outside business experience and are then able to contribute a more unique perspective,” Ofstein says.
Experience outside the family business also gives the younger generation the necessary confidence and self-awareness that a business requires as well as the time and space to decide whether or not they really want to be the next generation in the business.
“When they work elsewhere, they are being evaluated objectively by someone else instead of the family,” says Ofstein. “They learn about their strengths and weaknesses, which will mean more to them than when it comes from their parents.”
Ofstein says young people should choose their own careers. “That way they don’t feel obligated to family or guilty if they choose not to continue the business,” she says. “Family businesses are built and maintained by entrepreneurs, and entrepreneurs need to feel passionate about their work in order to be successful.”
Ofstein’s course also teaches students how to achieve professionalism in family business operations.
“Some family businesses are more loose and relaxed environments, which can be an attraction to family members as well as non-family employees,” says Ofstein. “But certain things need to be formalized, like job descriptions, policies and even estate planning so future generations know what to do with the business.”
A lot of turmoil can result from events like an owner’s unexpected incapacity. Without a plan, the business can go into crisis and the family can be faced with difficult decisions that may require time and reflection.
Another problem that occurs with family businesses is the older generation’s hesitancy to cede decision-making power to the younger generation, says Ofstein.
“Such instances make it harder for the second or third generation to establish itself,” says Ofstein. “The skills needed for the first generation are different from those needed by subsequent generations. They might need a strategy person or a finance person or a marketing person that the first generation didn’t need.”