Family Business -- 04

The Family Business
Part Four

See also:
The Family Business -- Part One
The Family Business -- Part Two
The Family Business -- Part Three
The Family Business -- Part Five
The Demise of the Family Business?

          One of the most comprehensive and statistically valid analyses of US family businesses is the American Family Business Survey 1995 sponsored by the Arthur Andersen Center for Family Business (Arthur Andersen & Co., SC). It was conducted jointly with the Family Enterprise Center at Kennesaw State College and the Loyola University Chicago Family Business Center. With the participation of 3,860 family businesses, these enterprises have median annual sales of $9.5 million, 50 full-time employees, and have been in business an average of 43 years. This survey discredits four common myths about family businesses.

Myth No. 1: Family business is synonymous with small business.

          "Unlike the popular image of family businesses as simple mom-and-pop enterprises, business leaders responding to this survey are likely to take a sophisticated and disciplined approach to managing their substantial businesses. Only 2 percent of the nearly 4000 respondents have annual sales revenues below $1 million, 44 percent have annual revenues of $10 million or more, and slightly more than a fifth report revenues exceeding $25 million annually.

          "Significant percentages of these family businesses engage in strategic planning, actively use boards of directors, embrace advanced technology and take advantage of family business education programs."

Myth No. 2: Family and non-family employees are in different classes when it comes to compensation.

          "Family businesses use various compensation practices in roughly equal proportions for family and non-family executives. As the most common provision, 65.5 percent of companies have annual cash-bonus policies for non-family, and 65.9 percent for family. The arrangements are also almost identical for long-term bonus policies and compensation contracts.

          "Among the exceptions is a bias for more disability protection for family, with 27 percent of companies offering it to family members and 21 percent to non-family. Family members also have more salary-continuation contracts, a policy of 12 percent of the companies, as compared to 6 percent of companies with such provisions for non-family members.

          "In terms of compensation arrangements, nepotism does not seem to be prospering in family businesses."

Myth No. 3: Family businesses are afraid of new technology and hesitate to invest in new ways of doing business.

          "Family businesses take new technology very seriously. Nearly two-thirds rate investment in information technology as ‘very important’ or ‘important’ for achieving future goals. Another 24 percent view it as ‘somewhat important,’ while only 10 percent consider it ‘not important.’

          "More than 67 percent of respondents say information technology has enabled them to improve customer service, 62 percent to enhance productivity, 53 percent to boost responsiveness, 44 percent to influence competitive advantage and 42 percent to develop quality control."

Myth No 4: Families plunder their businesses to serve family needs.

          "When dividends are paid, they are tied to corporate dividend-paying ability and not usually to family-member needs. In C corporations which represent 55 percent of the companies surveyed, 32 percent pay dividends. The most common determinants of dividend payout are profits, used by 54 percent of companies, and company cash flow, 18 percent. A quarter base payout on constant payments and only 3 percent cite family member needs as the determining factor.

          "Among S corporations, comprising 41 percent of the sample, 92 percent make distributions to owners. The most common determinant is to cover taxes, used by 53 percent of companies. Next is profits, used by 46 percent of businesses, and company cash flow, used by 33 percent. Family-member need is a determinant in 15 percent of the cases, with constant payment used in 5 percent of companies. In general, business issues come first, although there is slightly greater bias toward meeting the needs of family members in S corporations than in C corporations."

          The illuminating and authoritative findings unearthed through the American Family Business Survey 1995 sponsored by the Arthur Andersen Center for Family Business will continue to be the focus of a subsequent column.

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Thomas A. Faulhaber, Editor
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URL: http://www.businessforum.com/family04.html
Revised: December 30, 1996 TAF