Checking Emotional Baggage - By Hannah Shaw Grove , Russ Alan Prince - 11/5/2009
Owning a business is the single most reliable way to become rich, and the more successful a business is the wealthier its owners will be when the asset is monetized. As a rule, most companies are led and managed using standard business techniques and processes. The exceptions are family-owned businesses that are often held captive by the history of the company, the idiosyncrasies of the founders or the dynamics of the intrafamilial relationships.

There are, however, a number of things that family-owned businesses can do to heighten the likelihood of success and ensure that key decisions are made with an eye on the strategic imperatives of the company rather than the personal and emotional concerns of the individual family members.

According to recent research by Prince & Associates and Campden Research conducted with 250 global families, the major differentiator is having the right mindset. Two thirds of the families say their governance approach is family-focused. In these cases, the business is a mechanism enabling family members to achieve their goals and address their issues. Although the business is the source of a family's wealth and resources, it is run in service to the family-and decisions are made accordingly, meaning that great consideration is given to how the extended family and the individual members will react to or be affected by a particular initiative or situation. The remaining third characterize their approach as business-focused. These firms are businesses first, with decisions driven by clear goals and rules of conduct. Family concerns are a second priority, if given priority at all. The family's needs and wants are not meaningful considerations (Exhibit 1).

Evidence that the business-focused approach pays dividends can be seen in a number of areas, chiefly business valuation. The average value of the businesses in the survey was $731 million and the median value was $573 million. When viewed by the psychographic segments described above, we learn that business-focused companies have meaningfully higher values than those that are family-focused (Exhibit 2).

In a similar vein, business-focused organizations tend to have priorities and procedures that result in smoother day-to-day operations and the realization of long-term objectives. The business-focused firms are more likely to see the totality of the situation, recognizing that the business itself is the wealth creator, whereas family-focused entities take a much more personal view of everything and are more concerned about protecting the wealth of the owners.

Retaining control of the business is a much higher priority for family-focused firms-a perspective that can be partially attributed to the central role the business plays in family interactions and communications (Exhibit 3).

In total, 78% of businesses in the survey want to keep control of the company within the family. Though less than one quarter have actively considered different ownership structures, the primary reasons are to monetize the asset for its stakeholders, to free up capital for investments in outside ventures or to bring in outside management expertise to position the organization more capably for future challenges (Exhibit 4).

Three possible exit strategies were cited by the small percentage of family-owned enterprises that have contemplated a change in ownership, though the large majority expect to sell the business outright while less than 20% would explore either taking the company public or ceding a portion of equity to outside investors (Exhibit 5).

In general, family-owned businesses are not well prepared for succession activities nor have they laid out estate planning and asset protection strategies to ensure that the principal asset is secured and transitioned in the most desirable and tax-efficient ways. (This phenomenon is discussed in more detail in "Shortsighted Success," in the March/April 2009 issue of Private Wealth.) However, business-focused organizations are far better situated to deal with the succession of the company, whether it's an internal transfer from an older generation to a younger one or a shift of responsibility to outside owners. About 90% have succession plans in place, versus just two thirds of family-focused firms, and half of them have begun to implement the plan, versus a mere quarter of those that are family-focused (Exhibits 6 and 7).

Family-focused companies are almost three times as likely to let family members who are not actively involved in the business exert influence over how it is run-a situation that can lead to significant conflicts (Exhibit 8). As a result, it's not surprising that family-focused companies report higher levels of strain in their marriages and intense complexity in their personal lives than business-focused firms (Exhibits 9 and 10).