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All businesses are the same, but some are different

Nissan at Canton. Grumman at Pascagoula. Rolls Royce at Stennis. Large, international companies, we read about them and are thankful for their being part of the Mississippi economy. This is what we hear about and we tend to think they are typical of our economy. As welcome as these and other large companies are, they do not typify the business structure of the United States, and certainly not that of Mississippi.

Historically and presently, the United States and Mississippi are primarily made up of family owned and closely held companies, some large as reflected in the annual Mississippi’s 100 largest privately-owned companies list published by the Mississippi Business Journal. Some of our largest businesses are family-created/family-controlled even though publicly owned, e.g., Wal-Mart, Ford. Studies reflect that family-owned businesses contributed in excess of 50% of the gross national product.

All businesses are the same. Correct? Yes and no. They are the same in that they are subject to the same economic factors, but here the similarity ends. Publicly- owned companies are owned by thousands of diverse stockholders whose only common interest is their investment. In most instances, owners of publicly-held companies do not participate in the selection of management, and certainly not in the daily management of the company. Generally, they don’t know one another, or, if they do, their acquaintance has nothing to do with their ownership. Thanks to our stock markets, they can enter or exit ownership when desired by them.

Isn’t this the same with family-owned or closely-held businesses? Not even remotely. Owners are not diverse. They are kin to one another or are part of a small group which chose to be in business together. There is a relationship which is not present in a publicly-held business. Only about 4% of family owned businesses exist to the fourth generation of the owner family. The demise is not because of economics, but rather the failure of the family to deal with issues created by and peculiar to the relationship of kin being in business together. For example, there was a recent report of a decline in the stock price of a family-controlled, public company as the result of public differences between the father and son management team.

Closely- held business owners are not kin, but they share some of the essential relationship issues experienced in a family-owned business — a small, deliberately created group owning and managing a business from which there is no easy exit.

What is the purpose of a business? Nissan would tell you its purpose is to make a profit for its ownership through the manufacture of automotive products. Is the purpose of a family owned or closely held business the same? Perhaps, perhaps not. If profit is the sole motive, why are owners usually hired in lieu of qualified non-owners? For example, is the purpose of a family-owned business to create profit or furnish employment for family members, or both? Is the purpose of a closely-held business to furnish employment for owners? Many never clearly ask and answer this question.

When Nissan needs new management, there is a procedure which controls the selection process. When XYZ family business needs a successor to Daddy, the founder, there is no set or easy selection process. Studies have shown that most family-owned businesses do not have a succession plan or procedure in place. The question is sensitive — do we choose an outsider or a family member? If a family member, which one?

Publicly-held companies have management problems, but not of the type present in family-owned or closely-held companies. Generally, owners, usually the majority interest owners, manage family owned and closely held businesses. How do they decide between family members, or between equal closely held owners, who leads and who manages. Who decides, between managers who are kin, or between closely held owners, how management functions are to be allocated?

Owners of publicly-held businesses may divest themselves of ownership through the stock market. They have an exit devise. In contrast, a traditional and difficult problem of an owner of a family- or closely-held business is how to divest oneself of ownership. Who will purchase my interest? When? For what amount? That question traditionally focused on buyouts at the death of an owner. Longer life expectancy and changes in lifestyle has now expanded that question to how one divests himself of his interest during his lifetime.

Family-owned and closely-held businesses have their unique perceptions. “To you, he is an industry leader and the head of a successful family-owned business. To me, he is the person I roomed with when we were little kids.” Businesses are the same, but some are different. These differences must be addressed; otherwise they can serve as the basis for the demise of the business.

The authors are consultants for family-owned and closely-held businesses at W. A. Wimberly & Associates and can be reached at andy@economicdiscovery.com>.

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