As director of the Family Business Program at USC’s Marshall School of Business, James Ellis has seen it all: from family squabbles to difficulties in raising capital.
Ellis, 51, was chief executive from 1991-1997 at Port O’Call in Pasadena, a home accessory retailer that was recently sold. He is currently an owner/officer of Mayco Colors, a Columbus, Ohio-based ceramic paint manufacturer as well as a full-time professor of marketing at USC.
Question: Let’s start with the basics. Just what is a family-owned business?
Answer: There’s the legal definition, which is any business more than 50 percent owned by a single family. But it’s really more than that. A business doesn’t really become family-owned until it passes on to the next generation or the founder/entrepreneur gets other family members involved in the business.
Q: What are the problems you encounter most when dealing with family-owned businesses?
A: By far the biggest problem is the transition of ownership and operations from the founder or entrepreneur. The succession of a business from one generation to the next is the greatest decision an entrepreneur/founder makes in his career. Often, there is no planning far enough in advance for any transitions. The father and usually it is the father has kept the issue of succession close to his vest. He doesn’t spend time communicating with other members of the family as to who will take over upon his demise. All of a sudden, it gets to the bitter end and everyone looks at each other and says, “What now?” This is especially true when death or incapacitating illness or injury strikes suddenly.
I’ve often noticed that few companies sit down and plan these things out. This applies also to the financial end. There are major tax implications for passing on a business from one generation to the next, and yet few business owners sit down with professional advisors to figure out how to minimize that tax.
And then there is the issue of just how a second-generation family member fits into the company. What’s the role of a son coming to, say, a warehouse? Is he supposed to learn the job? Or is he supposed to run the warehouse? Or is he just supposed to turn up at the warehouse office?
Q: All of these problems have to do with succession. What are the other problems family-owned or operated businesses face?
A: There are other business-related issues. One is the role of an outside board of directors and the extent to which the entrepreneur/founder wants to give up control.
Another is what happens when professional managers are brought on. I can recall instances when a family brought in a professional CEO who then ran the business in a different way. Sometimes, the company falls apart, in which case the family must band together and say this is not the direction they want to go in. Right now, at Dow Jones & Co., a couple of family members have sharply criticized the management. Other times, the CEO and his cadre of professional managers can really turn a company around or keep it on a solid footing. This is the case with the Chandler family and Times Mirror.
Q: What about some of the pluses of owning or running a family business?
A: The biggest plus is that a family-owned business builds a wonderful lifestyle for a family. And it allows you to point the younger generation toward goals in the future. They see the lifestyle their parents have and see it as an opportunity.
Another plus is that there is generally more trust of family members than of outsiders. And trust is absolutely essential in running a business.
Q: How are today’s family-owned businesses different from those of five or 10 years ago?
A: The single biggest change is the rise of technology. Kids are much more sophisticated today when it comes to technology. In many cases, they are more sophisticated than their parents. I don’t know how many times I’ve run across instances when the kids may push Dad or Mom toward computerization, when that person is generally not comfortable with computers.
Q: What about access to capital? Do family-owned businesses have a tougher time raising capital to grow their companies?
A: Access to capital is a problem. Family-owned businesses tend to be smaller. Many times that’s just the way the owner wants it; otherwise the company gets too big for a single family to manage and they must cede some control. But more often, they are small because they don’t have access to capital. In this respect they are not much different than any small private company seeking capital.
But, there’s something else that frequently happens in family-owned businesses that causes bankers or investors to look twice. The individual or individuals who own the company often put a lot of expenses through a company that may not be directly related to its operations. For example, putting a family member on the payroll who does little or no work for the company. Or writing off that extra family car as a business expense. These individuals are in essence using the company as their own personal bank, trying to justify these things as business expenses for tax purposes. Where does the money for all these things come from? It comes out of the company’s bottom line.
Q: You mentioned earlier on that it is the father who typically runs the family business. What about the increases in the number of women-owned businesses?
A: It is still true that more fathers are running family-owned businesses today. This is a generational thing. There just aren’t that many women-owned businesses that have been in the family for a while. That’s because women of the last generation just didn’t go and start businesses. And, until recently, it was primarily the sons who would go into their fathers’ business, not the daughters. But all this is starting to change. The number of women-owned businesses is skyrocketing. As these businesses mature and these women begin to look at succession issues or draw on other family members, they will become family-owned businesses. Also, more daughters are now coming into the family business; many of them will soon be running the show.
