Family Businesses and the Global Economy

May 18, 2010 Updated: May 18, 2010

WASHINGTON—Globally, family-owned businesses support some 50 percent of the population, and during these difficult economic times, they put many of the unemployed back on the payroll.

Worldwide, four-fifths of all businesses are family owned. In Europe, more than 75 percent of all businesses are family owned, providing for close to half of all available jobs. The majority of such businesses employ less than 10 people, according to a study by the KMU Austrian Research Institute, a nonprofit organization that focuses on economic research relating to small and medium-sized enterprises.

In the United States, family-owned businesses account for roughly half of the country’s gross domestic product. Such businesses could be a small mom-and-pop store employing no more than two people, a medium-sized enterprise, or even a Fortune 500 corporation.

“Family-based operations are represented across the full spectrum of American companies, from small businesses to large corporations,” according to an article on gaebler.com, a website providing resources for entrepreneurs.

In the United States, more than one-third of all Fortune 500 companies are family owned or controlled, including the Ford Motor Co., Koch Industries Inc., Cargill Inc., Wal-Mart Stores Inc., Weyerhaeuser Co., and Loews Corp. More than half of all publicly listed companies are still family controlled.

“Family-owned businesses account for 60% of total U.S. employment, 78% of all new jobs, and 65% of all wages paid,” according to the Cox Family Enterprise Center at Kennesaw State University.

A great number of all U.S. family businesses were established after World War II and a little less than one-third of all such businesses outlive the first generation. And over the past five years, 37 percent of family-owned businesses were either started or inherited by women.

“There is also evidence to indicate that women-owned family businesses are better prepared for transition scenarios and have higher success rates than businesses controlled by their male counterparts,” claims the gaebler.com article.

Planning for Succession
“Less than one-third of family-owned businesses survive the transition from the first generation of ownership to the second, and only 13 percent of family businesses remain in the family over 60 years,” according to an article about family-owned businesses on Answers.com.

An extreme example is Kongo Gumi Co. Ltd. of Japan, which was owned by the same family for 1,400 years. It was recently sold to Takamatsu Corp., a large construction company, in 2006. The sale wasn’t due to succession feuds, but because it ran into financial difficulties.

Succession planning involves several steps that include developing and training a successor, finally letting go of the reigns, and turning the company over to the successor.

The successor must have the interest, education, experience, and ability to run the business. Besides the aforementioned know-how, organizational and managerial skills, as well as the ability to put a vision into practice, are fundamental for a successful candidate.

Experts suggest that for a company to remain competitive, a company should strike out and consider hiring from outside the family, as it is not that often that a successor who possesses all that is needed to head a business can be found within the family.

“It may make more sense—even if the successors to the company’s founder are in control because they own enough shares—for subsequent generations to choose an independent professional from outside the clan to take over, experts note; someone with broader vision and experience than any family member,” according to a recent Knowledge@Wharton (KW) report.

Succession Feuds
Research of historical information provides an ample number of stories that suggest “the problem occurs during the second generation of family ownership … In many cases, this can lead to the sale of the company,” according to KW.

At the Hooters restaurant chain, a family feud over succession has been going on since the 2006 death of owner Robert H. Brooks. Brooks had bought the company in 1984 from the original founders and built it into a lucrative billion-dollar business. Litigation has been going on for years and the latest news is that the company’s management is looking for potential buyers. The settlement among the litigants needs a cash injection that only can be found through sale of the firm.

Family members of the Redstone entertainment family business dynasty—which holds the controlling interest in CBS Inc. and Viacom Inc.—have been suing each other back and forth for money, power, and succession, although the family patriarch is still very much alive.

Liliane Bettencourt, whose father Eugene Schueller founded L’Oréal, a French cosmetic company, is in a fierce court battle with her daughter who wants her declared mentally incompetent for giving a younger companion $1.37 billion over the past 8 years.

“Experts stress that it is very important to prevent the succession process from becoming an isolated, traumatic episode. Officials must provide a more permanent role for the process. Experts say this requires learning from what has taken place in the past, yet not forgetting that each moment in time requires a somewhat different formula for success,” KW researchers said.