Families in Business
Background
Preliminaries
Family Businesses
a. Owning Family Businesses
b. Managing Family Businesses
c. Working in the “Store”
d. “Helping Out”
A Collaboration
A Family Business Profile
Intentions to Transfer Ownership
Families in Business
Other Topics
Final Comments
Background
A heightened interest in family business has developed over the last several years. The interest has resulted in new publications, organizations, professional consultancies, and academic treatises. But since the term has been used to describe almost every enterprise from Anheuser-Busch (the Busch family) and Ford Motor (the Ford family) at one extreme to a tiny side venture run out of a home at the other, the term “family business” generally lacks meaning from either a practical or conceptual standpoint. One consequence is that family business is not quantified or described from a definition that is intuitively appealing to a lay audience. Moreover, while the term “family business” applies to some type of family involvement in a single firm, an equally relevant related concept involves family members owning firms in addition to the family business. This edition of the National Small Business Poll tackles the problem of estimating the family business population using five simple and commonsensical distinctions between family and non-family businesses. In the process, it attempts to quantify the number of immediate family members who own at least one additional enterprise, that is to say, Families in Business.
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Preliminaries
Five operating definitions of family business are subsequently employed to distinguish between family and non-family businesses. They are: two or more family members own a business (with or without other owners); two or more family members help manage a business (that at least one owns) on a day-to-day basis; in addition to the/an owner, at least one other adult family member works in the business more than 20 hours per week for wages or salary; adult family members (other than an/the owner) contribute to the business periodically by offering a special skill, filling in for someone, or otherwise helping out; and, two or more family members collaborate on critical decisions impacting the business. One definition is not necessarily superior to the others, though most observers will have a preference. But the five are used because each easily separates the two groups, each offers a somewhat different perspective on the phenomenon, and each is intuitively appealing.
A family member for current purposes is someone in the interviewed business owner’s family extending to nieces and nephews, first cousins and in-laws. As a practical matter, however, anyone outside the immediate family, i.e., spouse, parents, children, and siblings, could be excluded without notable loss in the family business population.
From the beginning, 10 percent of the survey sample was omitted from most of the analysis. Eighty-four (84) percent of those interviewed occupied the position of business owner/manager; almost 7 percent were owners of the business, but not its
manager (Q#1). That leaves 10 percent who were managers, but not owners. These people were not interviewed because it was assumed that as a group they could not provide reliable information on the ownership structure. The omitted group is likely to differ from the broader business community. For example, this group operates 26 percent of firms employing 20 or more people while only 7 percent of those with fewer than 10.
To extrapolate the data to the entire employer population requires that assumptions be made. Some evidence appeared showing the omitted group changed the population’s percentages minimally, though they did impact those of the largest firms. Without further information to rationalize an assumption, it was assumed for purposes of estimating the population that the omitted group reflects the entire population. That results in somewhat inflated estimates, but not great enough for concern. Further, since those estimates were developed from a sample of people owning firms employing up to 250 people other than the owner(s), they represent only those employers. However, those
employers account for 99 percent of employing businesses, over 45 percent of the population whose primary economic activity in a year is self-employment (corporate and non-corporate) and over 20 percent of anyone who files a tax return with any business income on it. Estimates, therefore, represent the employer population.
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Family Businesses
The proportion of businesses that are “family businesses” vary enormously depending on the definition of employed and there are a variety of reasonable definitions from which to choose. The following illustrate:
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a. Owning Family Businesses
Forty-eight (48) percent of all businesses employing fewer than 250 people have two or more family members as their owners (Q#2). Of that number, 64 percent (31% of the total population) have just one family member owner other than the one family member owner interviewed (Q#2a). An additional 19 percent were owned by two more (three in total); 10 percent by three more (four in total); and, 7 percent by four or more (five or more family members in total). Among this group of family businesses, the average number of family owners per firm is about 2.7. Larger firms, those employing 20 or more people, have more owners averaging 3.5 family members. However, it appears that the number of family members who own any one business is usually quite small.
The estimated percentage of family businesses defined by ownership is clouded by community-property issues. There are nine community-property states, comprising 27 percent of the sample population, in which assets or income obtained after marriage are jointly owned. Inheritances can be an exception. But for the most part businesses formed or purchased after marriage are family businesses (defined by ownership) regardless. Owner reports indicate that there are no more family businesses (proportionally) in community-property states than in non-community- property states. That is a virtual impossibility. The data were, therefore, recalculated on the presumption that spouses in community-property states more often are co-owners. Since no determination could be made regarding the firm’s existence prior to a marriage, it was assumed that half of the businesses did not exist prior and the other half did. If this were true, the percentage of businesses that are family businesses, defined by ownership, rises about 7 percentage points to 55 percent of all firms. Thus, when at least two family member owners is the definition’s criterion for a family business, there are about 3 million of them in the United States that employ people other than the owners.
To avoid the spouse issue in community- property states, the ownership definition can be reshuffled to two or more family members not including a spouse. The proportion of family businesses falls to 22 percent of all employers in that event. The 33 percentage point differential in the proportion of family businesses among the total population when spouses are and are not included underscores the dominance of a spouse in family business ownership. Spouses represent about two of every three (66%) family members in these businesses (Q#2b). (The questionnaire allowed only three family members to be listed as owners in addition to the respondent. Seven (7) percent report more than three. The percentage of spouses and subsequently other relatives is, therefore, likely to be modestly underreported.)
The most common ownership structure involves two people, typically husband and wife.
These data, too, ignore the community-property issue. As a result, the number of spouses that are owners is under-reported from this perspective as well. If half of the excluded spouses in community-property states are assumed to be owners, the proportion of family businesses with spouses as owners would rise to over 70 percent.
The next most likely family members to own a share of the business after a spouse are sons (17%), brothers (13%), and fathers (10%). Sisters (8%), mothers (6%), and daughters (5%) are owners about half as often. Relatively few members of the extended family are involved, but 5 percent of family businesses have in-laws as owners. These family member owners participate in critical business decisions as a general rule. Sixty-three (63) percent say that family members are “active” owners, at least in terms of participating in important decisions (Q#2c). The fewer the owners, the more active the ownership group is likely to be. These data complement figures that were published in an earlier issue of the Poll and will be reproduced again later in this issue.
Non-family members own a share in 17 percent of these family businesses (defined in terms of ownership) (Q#2d). The proportion increases as the size of the firm grows. Fully one-third (32%) of all those employing 20 or more people have non-family members owning a share. Given these figures, many do not seem hesitant to mix family and non-family ownership. But, such a mixture adds a different dimension to the decision-making process in a family firm.
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b. Managing Family Businesses
Forty-three (43) percent of the small employer population are family businesses when defined as two or more family members managing a business (that at least one family member owns) on a day-to-day basis (Q#3). But when a firm’s size is 20 employees or more, the proportion of family businesses rises to 54 percent. These figures could be modestly understated. Over half of those who say that they do not manage the business also indicate that more than one family member manages it. But they report only one other family member involved meaning only a single manager.
When this occurred, the cases were deleted from the analysis. That implies when family business consists of two or more family members managing the enterprise on a day-to-day basis, there are about 2.1 million of them in the United States.
A spouse is the family member most frequently sharing day-to-day management of the firm. Fifty-three (53) percent identify a spouse, but that number drops sharply in larger, small businesses (Q#3a). Only 24 percent have a spouse helping with day-today management when the firm employs 20 or more people.
The second most likely family member to be involved is a son (35%). A son helps a parent manage about one in eight businesses throughout the country. Though a son may be a manager (and a designated heir), he has ownership interest only about
half of the time.
Other family members are part of the management team much less often. Brothers and daughters follow sons, but are present only about one-third as frequently. They are also more common in larger, small firms. That is particularly true of daughters. Sons, in contrast, tend to be involved with similar frequency in firms of all sizes. It is noteworthy that in-laws more frequently participate in the day-to-day management than other blood relatives.
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c. Working in the “Store”
Almost as many businesses have additional family members working in them (beyond an owner) as are owned by more than one family member. The difference is the specific family members involved. Thus, if a family business is defined as one where more than one family member works more than 20 hours in the business for compensation, the number of family businesses in the United States is almost 2.5 million.
Forty-five (45) percent of small-business owners indicate that one or more family members (other than the person interviewed) work more than 20 hours per week in the business for wages or salary whether or not in a management capacity (Q#4). The phenomenon is over 50 percent more likely to occur in firms employing 20 or more people than in firms employing less than 10. A son(s) is the most likely family member(s) to be employed in the family firm.
In forty (40) percent of firms that employ family members, at least one of them is a son (Q#4a). A spouse is the family member second most frequently employed (37%). Less often hired are daughters (14%), brothers (11%), and in-laws (10%).
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d. “Helping Out”
Twenty-two (22) percent say that there are other adult family members (in addition to the person interviewed) who help out in the business (Q#5). These family members contribute their time and skills as needed. For example, a spouse may do the books; a daughter working full-time elsewhere may run the cash register on Saturdays during the busy season; a son who is an accountant may help out at tax time. The idea is one of “pitching-in” (unpaid) to help when help is needed. If this concept is used to define family business, there would be about 1.2 million of them in the United States.
Not surprisingly, this type of activity is most prevalent in the smallest businesses. Those employing fewer than 10 people are substantially more likely (24%) than those employing 20 or more (16%) to engage such help. A smaller amount of expertise, less slack in the labor force, and the significant possibility of lower earnings are just three reasons why unpaid pitching-in is more likely to characterize the smallest firms.
Spouses (35%), sons (31%), and daughters (23%) are the ones who most frequently pitch-in to help (Q#5a).
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A Collaboration
Trying times or critical decisions can force a small-business owner to carefully evaluate the consequences of an action potentially taken (or not). At these crucial junctures, the owner may turn to a confidant or some other person upon whom he can rely for solid advice, purposeful evaluation, or simply to be a sounding board. The person selected for this responsibility obviously has a special relationship with the decision-maker and is a trusted collaborator. While not necessarily a co-decision-maker, this trusted advisor helps shape the firm. A family business could be defined as one in which at least two family members participate in critical decisions affecting the business.
Sixty-five (65) percent of small employers say that they have one person that they are likely to talk to or discuss matters with before making a critical business decision (Q#6). In 59 percent of those cases (38% of the total), that confidant is a family member (Q#6a). If some type of collaborative decision-making among two family members concerning critical matters becomes the essence of family business, there are somewhat over 2 million of them. Should the number of collaborators be increased to at least two, the number of family businesses defined by its decision-making would rise as well but doubtfully by very many. For example, 37 percent say that family member owners are generally active in major decisions.
A spouse is the person most likely (63% of the time) to occupy that position (Q#6a1). A son (11%) is the next most likely collaborator followed by a brother (9%), and a father (9%). (A more complete exposition of these data can also be found in Advice and Advisors, an earlier issue in the Series. The percentages between the populations in the two can vary a percentage point due to a filter made for this issue, though they are often greater within the 20 employee and over size category.)
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A Family Business Profile
A family business by one criterion or definition is often a family business by another as well. For example, 20 percent or 1.1 million (22% and 1.2 million adjusting for the community-property issue) report that they have at least two family members who own the business, at least two family members who help manage the business on a day-today basis, and at least one other family member who works in the business at least 20 hours per week for wages and or salary. If only the ownership and management criteria are employed, the number rises to 1.4 million (slightly higher adjusting for community property). If the management and the decision-making criteria are used, the figure becomes 24 percent or 1.3 million (slightly higher adjusting for community property). Similar combinations could be readily developed. The result, however, is that there is a substantial core of businesses in the United States that can be called “family business” using any reasonable definition of the term. They obviously vary in detail, but their essential composition is similar. If a single number is required to quantify this population, 2.5 million is arbitrary though as sensible as any. That 2.5 million includes all employing businesses with an owner who says that another family member is also an owner, and two or more adult family members actively participate as a manager, employee, or as-needed volunteer.
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Intentions to Transfer Ownership
The eventual transfer of ownership is a major consideration for many small-business owners. It causes them to take a variety of actions that they otherwise would not, such as establishing various legal entities to minimize their Estate and Gift Tax, a.k.a., the Death Tax, liability, operating the business in a manner to give potential heirs experience and opportunity, etc. But while critical to some, a preoccupation with ownership transfer, particularly inter-generational transfer, is not common to all owners.
Forty-eight (48) percent of small employers say that they would like one or more of their family members to eventually take over the business and operate it (Q#11). An equal number (48%) would prefer not to have someone in their family eventually take over. Those with larger ventures, in this case employing 20 or more people, express interest most frequently (63%) in having a family member eventually take over. Transferring larger firms is probably more appealing than transferring smaller ones because of their income-generating possibilities as well as their greater legacy value.
But wanting a family member to take over and expecting one to take over are very different issues. In fact, just 13 percent believe that it is “very likely” a family member will eventually take over though another 22 percent believe that it is “likely” (Q#11a). That means over one in 10 expect to be disappointed.
Most of the projected transfers are not eminent. Nine (9) percent intend to transfer their businesses within the next five years (Q#11b). However, one in five (20%) of those with a firm employing 20 or more people expect the transfer to occur in that relatively brief time frame. Owners expecting to make a transfer in the next five years are older as a group. They average almost 60 years while the others average less than 50. The survey also inquired about the likelihood of a business currently owned and operated by a parent(s) being transferred to a family member. Unfortunately, too few cases of this phenomenon were available to report meaningful results.
A large portion of small-business owners would like to keep the business in the family; somewhat fewer believe that it will happen; but as will be shown subsequently, a much smaller percentage actually will make the transition. Inheritances and/or sales to family members remain a small portion of ownership changes, let alone compared to de novo formations. Rather than lying in numbers, the policy importance of these transfers seems attached to their relatively large size and economic impact.
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Families in Business
Families in business do not necessarily revolve around a single firm. Relatives participating in one family enterprise may own and operate others themselves or in combinations with other family members, non-family members or some grouping of the two. Within the larger family unit, therefore, there may be several businesses operating at one time. That appears to happen frequently. No attempt has been made here to quantify the number of such enterprises. The intent is simply to determine the likelihood that members within a core family unit, defined here as spouse, parents, siblings, and adult children of the business owner (the person interviewed), own a business separate and distinct from the one discussed, and that the business is large enough to employ at least one person other than the owner(s). Non-employing ventures have been consciously excluded for purposes of consistency and distinguishing between marginal and more substantive operations.
Most small-business owners have a spouse. Eighty-five (85) percent say that they are currently married (Q#7), far above the adult population norm. Six (6) percent indicate that they are single and never have been married while 7 percent are divorced. Just a smattering report that they are currently separated or widowed.
Not only are a substantial number of spouses involved in the family business, but many have other businesses of their own. Of those who are married or separated, 9 percent say that their spouse has a business separate and distinct from the interviewed person’s business and that it is large enough to employ people other than the owner(s) (Q#7a). That means about two in ten employing businesses are located in households where each spouse owns at least one enterprise. Over one-half million households or approximately one in 200 fit this description of a family in business. These numbers disregard any individual who owns multiple businesses or the presence of a third member in the household who also owns a separate business. If multiple businesses were counted (and the data set provides no capacity to do so), the concentration of business activity in comparatively few households would appear even greater.
Parents also continue to own and operate ventures separate from that of their children. Roughly one-third (32%) of small-business owners have both parents living; another one-third (33%) have one living parent; the remainder (35%) do not have a parent that is still alive (Q#10). Yet, seven (7) percent of those with at least one living parent own and operate a business (that employs others) separate and distinct from the child’s (Q#9a). That means about 5 percent of all current owners have a parent in an equivalent occupational position.
This phenomenon differs from one or more parents having owned a business at some point in their lives. It is a subset of that group. The number who had a parent who once owned a business is much greater. Thirty-eight (38) percent of small-business owners do not have any children age 18 years or older (Q#8). Sixty-two (62) percent do. Of those with adult children, 15 percent have at least one child who owns a separate and distinct business that employs people other than the owner(s) (Q#8a). Most (82%) have only a single child with such a business, though 17 percent claim to have two or more children with at least one (Q#8b).
These numbers only provide a snapshot of the present. Children who currently are not business owners could become one later in life. Further, an unknown number of owners have children who are less than 18 years old. Some of these could eventually become business owners as well. But even the cross-section suggests that business ownership among children is over 50 percent more frequent than would be expected given the proportion of business owners in the population. Thus, while the 15 percent does not appear high, it once again demonstrates that people involved in their own businesses tend to originate in families already associated with entrepreneurial activity.
Separate businesses are found most often among siblings. Small-business owners average 2.6 living brothers and sisters. Just 9 percent do not have at least one (Q#9). Of the 91 percent with a living sibling, one-quarter (25%) have one or more who own a separate and distinct business, large enough to employ one or more people other than the owner(s) (Q#9a). That means between 1 in 4 and 1 in 5 have at least one brother or sister in business for themselves. Most (75%) have just one sibling owning at least one such firm, but 9 percent have three or more (Q#9b). The proportion of siblings involved may seem high given the participation of adult children and parents, but it is not necessarily. Siblings should be relatively more plentiful than parents and children if for no other reason than their ages more closely approximate that of all business owners than do the ages of the other two groups.
About 31 percent of small employers say that they have someone in their immediate family who owns a different business than theirs. Those businesses do not include firms too small to have employees. If those smaller, non-employing enterprises were included along with preparatory activity prior to a formation (nascent activity), the number would obviously move much higher. How high it would move is only subject to a guess. Nor does that 31 percent consider family members who were or will be owners, but currently are not.
The substantial percentage of business owners with family members also in business is difficult to interpret at all but the most superficial level. While it is obvious that only a handful of families do not control the activity of employing enterprises, it is equally obvious that a number of families are significantly more likely to produce multiple owners than are others. Effectively, business ownership runs in families, but apparently not to the point that it excludes others. Given experience in other parts of the world, this mix could be particularly significant from a social as well as an economic perspective.
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Other Topics
Most small employers currently operating a firm started their ventures (65%) with a second large portion (22%) purchasing an on-going enterprise. About 7 percent inherited their businesses, though the proportion is double that among owners of larger, small firms (Q#12). Over one-third (38%) of them went into their businesses with a family member (Q#12a).
The data do not tell us which family member; however the type of start probably has an influence. For example, a sibling is likely the family member in an inherited firm and a spouse in a de novo entry. Once again community property clouds the issue. Almost three-quarters of those who inherited a business entered with a family member(s). Proportionally, the next most likely way to go into business with a family member was to purchase an on-going firm. The most common way to enter without a family member was a de novo start. However, in absolute terms the order of frequency is reversed.
Somewhat more (44%) entered alone than with a family member and another 17 percent went into business with a non-family member. Few (1%) were accompanied by both family and non-family members. As a result, at least 2 million of today’s employing businesses originated as a family business if ownership is the defining criterion.
Owners of family businesses usually believe that working with other family members has had a positive financial impact on their ventures. Fifty-eight (58) percent say that family members in the business has increased the venture’s financial success (Q#13). Thirty-one (31) percent say that it has had no affect one way or another on its financial success while 9 percent believe family members have limited it. To the extent that financial success reflects overall success, family members in the business appear to have a generally favorable effect on the firm.
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Final Comments
Families play an important role in business ownership and operation in the United States. As many as 57 percent of all employing enterprises could be termed family businesses and a non-mutually exclusive 31 percent of small employers have immediate family members who also own at least one other venture. Combinations of business characteristics or other measures of family and business activity could be developed and quantified to present additional perspectives on the phenomenon, but at this juncture it is unnecessary.
Family businesses usually involve a very limited number of family members. Husband and wife and one other is the typical combination. While larger enterprises more often engage a larger number of family members and are more likely to reach beyond the immediate family, these firms still commonly have a reasonably small number of family members involved and the focus remains spouse, children, siblings and parents. This is a very different portrait than the stereotypical ‘if you’re in the family, you’re in the business.’
About half of all small employers hope to keep the firm within the family after they leave it. Yet, the number who eventually transfer their businesses to family members remains relatively small.
The obvious question is why. What impedes them from doing so? And, is there anything that can be done to eliminate those obstacles?
If the focus is redirected from the firm to the family, another portrait of families in business appears. The perspective moves from the depth of family involvement in businesses to the breadth of family ownership among businesses. Some families are far more likely to exhibit an entrepreneurial bent than are others. In fact, there is almost a one in three chance that a small employer has someone in the immediate family who is also a small employer. That number is multiples of the chances for any randomly selected non-owner.
This perspective projects an entirely different set of issues and questions, not the least of which involves efficiencies gained though the reduction of transaction costs. Still, families in business are often regarded as a social, rather than an economic phenomenon. And, while there is nothing wrong with recognizing their social aspects, businesses are economic entities and their economic aspects have much to tell us about business generally.