March 11, 2014

Family Business: Backbone of U.S. Economy

Blurring the Lines Between Business and Family
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Some of the world's most famous businesses have been family-owned. Think about it: the Morgans, the Fords, the Guggenheims, the Waltons, and the Rockefellers, for example, all created and managed companies that are integral parts of America.

The average family-owned business is not likely to grow to such prominence, but given that about 28% of all businesses in America today are indeed family businesses, according to the U.S. Census, the sector as a whole is genuinely formidable.

So how do family-owned businesses start, and how will they survive the generations? We took a look at the state of the family business in America. Here’s what we found.

(Click Image to Enlarge)
Infographic: Family Business
Infographic: Family Business © CreditDonkey

Small but Powerful

A business qualifies as family-owned, according to the Small Business Administration, when one family has control or holds a majority of the ownership and at least two of those family members are directly involved in the business.

Those families are powerhouses, no matter how small their businesses are, because it turns out that they create 64% of America’s gross domestic product - almost two-thirds of the goods and services this country makes in a year. And a good chunk of these businesses are coming from groups that may find reaching the top level at more traditional business setups difficult: Just over one-fourth of businesses that fall into the woman-owned, minority-owned, or veteran-owned label generate a whopping 42% of all business receipts in this country.

And they are turning this nation’s huge economic engine with a million little gears, as almost all family businesses have fewer than 500 employees.

Passing the Torch

There has been a considerable slowdown in the formation of family-owned businesses in America, however. Many family-owned businesses are approaching middle age: about 7 in 10 started before 1980. But less than 5% are what could be considered the future – teenage business born in 1997 or later.

Even the owners of family businesses are trending toward an older age - only about 10% are under 44 years old. A full third of them are at or past the traditional retirement age of 65.

Clearly, a massive transfer of wealth is looming for America’s family business owners. The problem, however, is that oftentimes children and grandchildren just aren’t interested in working for the business or don’t have the necessary experience.

For some offspring, that could be because about 20% of them aren’t paid fair market value for their roles (though this could mean they’re overpaid, too). In addition, a full 64% of business owners don’t require family members to have appropriate qualifications or experience, which suggests that many business owners face unrequited interest in passing businesses down to the next generation.

About half of the businesses in our research said they consult an accountant for outside advice; only a third call an attorney or the bank. But little of that advice appears to be about planning for the future; the vast majority of family business owners say they have no idea what they’ll do with their business once they’re ready to retire or when they die. This is especially problematic for the families involved, no matter whether they want to take on the business one day or not.

(Research by Kelly; Graphic Design by Boris; Graphic Editing by Maria; Writing by Tina; Editing by Sarah; Additional Editing by Dana)

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