The Many Perils of Keeping the Business in the Family

The late nights and crushing workloads of most family-business owners are often fueled by one thrilling prospect: someday handing the reins of the company to a son or daughter.

But from Fortune 500 companies to corner delis, many business owners find their dreams deflated by poor planning or family squabbles. While two-thirds of family-business owners say they hope to pass on their enterprise to a relative, statistics show that 77% of all such firms do not survive through a second generation.

“You have to teach your children what a rare and wonderful thing a family business is,” said Marshall B. Paisner, author of “Sustaining a Family Business” and founder of ScrubaDub Auto Wash Centers Inc. “If you’ve got one, you should look at it as a very valuable commodity.”

The Institute for Family Enterprise at Bryant College in Rhode Island has published a list of the oldest family-run business in each of the United States.

The study found scores of businesses, from farms to funeral homes to piano makers, thriving under the ninth or 10th generation of leadership. Tuttle Market Gardens, founded in 1640 and believed to be the nation’s oldest family enterprise, is run by the 12th generation of Tuttles in Dover, N.H.

Of course, the majority of businesses run by members of one family can’t rival Tuttle’s longevity. Like any business, they may sink under poor economic conditions or may be snapped up by a larger rival.

But family businesses are especially vulnerable to a host of very specific threats, from crippling taxes to sibling rivalry.

“We are the third generation, and we are very proud of that,” said Michael Coyne, co-owner of Tuckerton Lumber in Surf City, N.J. “But about 10 years ago, we had to decide whether we would be able to make this thing go.”

Coyne said the business, started in 1932, struggled under the weight of the estate tax imposed after the founder, Coyne’s grandfather-in-law, died. The estate tax, which typically equals 37% to 55% of a business’s market value, is imposed on estates valued at $650,000 or more. It raised about $23.1 billion in 1998 for federal coffers.

“A lot of people get busy with the day-to-day operations of their business, and when the time comes, the only way to raise that money is to sell some assets or sell the whole business,” he said.

Still, Ross W. Nager, the executive director of Arthur Andersen’s Center for Family Business, said tax woes are often easier to manage than some sticky emotional issues surrounding succession.

“Estate taxes can really be dealt with through proper planning,” he said. But from large enterprises like Koch Industries to the tiny mom-and-pop pizza restaurant on the corner, countless family businesses have been hampered when family ties come undone.

Some business owners hesitate to choose a successor, experts say. It’s an unsettling reminder of mortality. They may fear a loss of prestige or power. Parents often dread the thought of choosing between children.

“The same characteristics that make great entrepreneurs can make it difficult for them to let go,” said psychologist Ralph M. Daniel, who runs the Center for Family Business Development in Santa Barbara. A fierce work ethic and pride in ownership can keep a business owner hard at work long after peers in corporate America have retired with their gold watches in hand.

The next generation, meanwhile, may fall prey to sibling rivalry or in-law angst. After years away at college or in a corporate setting, they may have no interest in returning home to run the business.

Experts say it’s easy to choose a successor if there’s one clear candidate; it can be brutally difficult for a business owner if no one is ready to step up or if several relatives covet the business.

Paisner, who wrote his book after turning his business over to two sons, said there is no correct solution for every family business. “You can’t treat a family business like the corporate world,” he said. “They are nothing alike.”

He said many entrepreneurs may achieve the greatest peace of mind and financial security by selling the business. Still, his pride in the second generation to run ScrubaDub is unabashed.

“The next generation can take the work of an entrepreneur and take it to a whole new level,” he said. “It can be very rewarding for that generation, but also for the entrepreneur, who gets to sit back and watch it grow.”