Family Issues Can Block Path to Growth

Your business’ growth or even survival could be at stake if you don’t consider getting counseling as a family and as a business.

That’s the opinion of Marta Vago, founder of Family Business Advisory International in Santa Monica, one of about 40 speakers at an upcoming UCLA conference on family-owned business.

“A small business can grow up to $15 million [in sales] with an entrepreneurial infrastructure, but it cannot grow beyond that with the ‘Pop’ structure,” Vago said, meaning “the way that Pop started the biz. He ran it like a one-person show; he did everything.”

Although some consultants say businesses can peak at $250 million before needing radical reorganizing out of the family or entrepreneurial mode, the bottom line is that growth in the Information Age requires change. And consultants can help smooth the way.

The stakes are getting higher for family-owned businesses as retirement-age baby boomers, who formed companies in the 1960s and 1970s, begin grappling with succession issues.

“We don’t recognize just how many of our businesses are family businesses,” said Alan Carsrud of the UCLA Family & Closely Held Business Program. “Most people in this town think of the corner grocery store as a family business, but 80% to 90% of our industrial base is family-owned.”

With so many companies under family control, ignoring the family can harm business and, ultimately, the local and national economy, family business experts say. Some problems in family businesses that consultants often see and can help with include:

* Dividing company stock ownership equally among all children, with no consideration for offspring who actually run the business or desire to work in it. As a result, the majority voice can go to family shareholders, who have no knowledge about running the business, refuse to make capital investments and want only to take money out of it.

* Passing shares of the business to succeeding generations, resulting in a cumbersome decision-making structure, such as the business with 38 family shareholders and only one family member running it.

Problems like these arise when business owners treat the business as an asset, such as real estate or stock, to be passed on to the next generation, instead of regarding it as a functioning unit with a life of its own, Vago said.

“The first thing I tell business owners, who are running their company as a patriarchy, is to start investing outside the business so they have something to leave their children other than the business,” she said.

* Staffing the business or hiring attorneys and accountants based on family and personal relationships, which can result in gaps in knowledge in crucial areas such as marketing, technology, operations and financial tracking.

The accountant who’s been with the company for 30 years may be the most trusted, loyal advisor, but lack state-of-the-art knowledge, Vago said. Similarly, an unqualified nephew hired because of family ties, or the receptionist who has been with the company 18 years and earns $40,000 annually, can impose financial burdens that have no business basis. Family businesses must follow principles of good management and rely on demonstrated professional--not personal--standards, Vago said.

* Relying on family doctors or golfing buddies as advisors because of a reluctance to open the business to those outside the family. The problem is that they may lack an appropriate background or have a vested interest in how the company operates. The solution is to bring in true outsiders and create a board of advisors who are forward-looking, objective experts.

* Failing to address unspoken family issues. One business owner delayed signing a succession plan that would have saved him $58 million in taxes, Carsrud recalled, because the business would have been left in the hands of an irresponsible son. And Vago cited the example of two antagonistic siblings who screamed at each other in front of 40 salespeople.

Families need a way to work out their own issues before they hurt the business. One solution devised in Europe, used by the Italian shoe company Salvatore Ferragamo and Paris-based fashion house Hermes International, is the family council. Family councils meet regularly and include all family members, including those uninvolved in company operations.

Where can a family business owner find consultants to help provide solutions to such problems? Unfortunately, very few places, because no credentialing program exists, and the number of family business consultants is small.

Business schools focus on corporate business principles and dynamics, and entrepreneurial programs focus on creation and growth of start-ups, Carsrud said.

Often, a college will establish a family business program with a business professor in charge who lacks experience with family-owned businesses, Carsrud said. And, in the professional world, consultants who have family business owners as clients label themselves family business “experts,” but lack a real knowledge of family dynamics or their impact on business.

To find a true family business consultant, a business owner must ask about the consultant’s background, education, experience and professional affiliations. Make sure the consultant delves into three main areas: ownership structure; family relationships; and business growth, profitability and management, Vago said.

Reject any family therapist who doesn’t know how to read a profit-and-loss statement or a balance sheet, or a legal or financial advisor who says you don’t need to worry about family issues, Carsrud said.

Examining family dynamics along with the family business may seem unnecessary. But Vago says business owners must decide if they want to watch the business fail because family dynamics are dragging it down or deal with those dynamics upfront to ensure growth and prosperity.

“Where would you rather spend your energy?” she asks.

The Business of Family Business conference will be held March 27-29 at UCLA’s Anderson School of Management. For more information, contact the Family Firm Institute at (617) 789-4200 or https://www.ffi.org.

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Times staff writer Vicki Torres can be reached at (213) 237-6553 or at [email protected].