Saturday, March 28, 2020

Family Businesses and COVID-19 Fears

The COVID-19 pandemic has impacted more lives than any other crisis in recent US history. Tragically, this ailment has led to the deaths of many people. Unfortunately, the damage to society extends beyond these deaths because the panic about the virus has reached epic proportions. The stock market has had its worst slide since 1987. Multiple professional sports leagues have closed down for the first time in history. Broadway theaters have been closed and conferences in every state have been cancelled. Consumer spending on travel and entertainment has dropped exponentially. Most people recognize that this crisis will have a negative impact on the economy. However, few people realize that COVID-19 fears are having a devastating impact on a unique group of businesses that provide the most jobs in the country.

These businesses, which represent the biggest component of the global economy, have been overlooked by policy makers, ignored by politicians and rarely studied by economists. Family businesses, many of whom are being driven to the brink of failure by COVID-19 fears, are suffering because they are “hidden in plain sight.” People spend a large percentage of their money with family businesses yet they don’t know anything about them or even how they survive with small profit margins. More importantly, the proposed COVID-19 relief measures proposed by Congress ignore the need to help family businesses continue to provide the majority of jobs in the United States.

A family business is generally defined as a company in which a single family has majority ownership of an enterprise. There are more than 5.5 million family businesses in the United States. These businesses are responsible for 57% of the country’s Gross Domestic Product (GDP) and employ more than 98 million people or 63% of the workforce. Unfortunately, most family businesses are “mom and pop” enterprises that, because they receive very little tax and regulation relief, have very thin profit margins. These businesses are the largest employers in the United States yet their needs are rarely discussed in Washington because they do not have the “extra” money that big businesses and unions have to hire influential lobbyists.

Family businesses, because their margins are thin and they cannot afford staff turnover, treat employees better than more profitable companies because they cannot afford to lose employees. Many of these businesses pay a higher percentage of employee health care costs than big businesses and unions. Family businesses often treat employees like “family” and pay for medical bills and funeral expenses of the family members of employees. If the COVID-19 fears continue, and there is no economic relief provided directly to family businesses, thousands of local businesses will close, millions of American jobs will be lost, and many individuals will be pushed into poverty.

The legislation that Congress is offering does a good job of guaranteeing free COVID-19 testing, securing paid emergency leave for coronavirus-related absences, enhancing unemployment insurance, strengthening food security programs and increasing federal Medicaid funding to states. However, these provisions will not help family businesses losing revenue because of COVID-19 fears continue to provide much needed jobs and health care to American employees. To address this major crisis, I believe that federal, state and local governments should do the following to minimize the damage from the national quarantine:

1. Invoke something that I call “Suspended Financial Animation” where all rent and mortgage, insurance and other bills for individuals and businesses are frozen for two months. The government subsidies should be focused on supporting those businesses and individuals who are hurt by the Suspended Financial Animation.

2.  Provide municipal based grants to family and small businesses hurt the most by the government’s COVID-19 restrictions.

3.  Provide tax credits to family and small businesses that hire new employees during the current pandemic emergency.

4.  Approve job retention loans/grants to family and small businesses to prevent business failures and the laying off of employees.

5. Establish a Family Business Certification (like veteran, women-owned and minority certifications) that identifies family owned businesses where two or more family members work full-time in the business. This will identify businesses that can benefit from policies supporting the growth of the major job creators in the state.

The COVID-19 pandemic is clearly a very serious health emergency. However, coronavirus fears are causing significant damage to both the United States and New Jersey economies. When Wall Street “sneezes” family businesses get a “cold.” Now that Wall Street has a metaphorical “cold,” family businesses are getting “pneumonia.”  If the government does not provide much needed support directly to family businesses, the country and the state will be in the midst of an economic crisis for years to come even when COVID-19 is contained.

Saturday, March 7, 2020

The Secret of Family Business Succession

As the executive director of the Fairleigh Dickinson University (FDU) Rothman Institute, a family business consultant, host of the Family Business World TV show and a FDU professor teaching “Family Business Management” and researching family businesses, I have more insight than most on the reasons why some family businesses succeed and others fail. One of the most interesting things I have learned is that there is a secret to increasing the probability that a family business succeeds from one generation to another.

The research suggests that 85% of new family businesses fail before transitioning to the next generation. Approximately 30% of those businesses make it to the second generation. Only 13% of these businesses make it to the third generation and tragically only 4% make it to the fourth generation. An even smaller percentage make it to the fifth generation and beyond. It is therefore an extraordinary accomplishment for a family business to make it to the third generation. When I meet a family business that has made it to the third generation, I go out of my way to celebrate them and tell them how amazing it is that they have defied the odds. I also ask them about their secrets of success.

Many people ask me why some businesses make it to the third generation while most of the family businesses don’t even make it to the second generation. I always thought that the reason was simply based on the viability of the business model and the demand for the company’s products. I was convinced that the well managed companies were passed to the next generation and the poorly managed companies failed. However, I discovered that most well-managed companies don’t stay in the family because the next generation was not adequately prepared to take over the business. These well-managed family businesses are therefore sold and are no longer part of the family.

On my TV Show Family Business World (www.FamilyBusinessWorld.com) I have interviewed the leaders of family businesses in virtually every industry. I was surprised to discover that every business that survived two, three, four or five generations did the same thing when introducing the next generation to the business. They made sure that the incoming generation did menial labor for the first few years that they worked in the business. Every next generation CEO of the family businesses that I interviewed started out sweeping the floors, taking out trash, doing boring paperwork or serving as a gopher for their mom or dad. In most cases, they were paid less than the nonfamily employees. They each hated it when they first started in the business.

What surprised me the most is that when the next generation is forced to do menial labor they view the family business as an asset to be treasured and kept in the family. Instead of turning them off to the business, the menial labor surprisingly made them value the business much more than the next generation leaders that started out in executive positions. This may seem like common sense to some people. However, most family businesses start the next generation out as senior leaders because they are too “important” to sweep the floors. This unfortunately gives them a sense of entitlement that makes them undervalue the business and take it for granted. These individuals feel that owning the business is a birthright and take the opportunity to carry on a family legacy for granted. The business therefore rarely makes it to the next generation.

The secret of successful family business succession is a surprisingly simple concept but often very hard to implement. The owners of a family business often want to “protect” their children from the menial work that their parents forced them to do. However, that menial work is exactly what made the transition from one generation to the other successful. My advice to family businesses owners is to get the broom and dustpan out and have your children and grandchildren start sweeping the floors. Your succession planning will be much easier if you do that!  

Wednesday, January 15, 2020

Family Businesses and Entrepreneur Zones

There are more than 5.5 million family businesses in the United States. These businesses are responsible for 57% of the country’s GDP and employ more than 98 million people (63% of the workforce). Most importantly, family businesses account for 78% of all new job creation. Tragically, many policy makers are not aware of the contributions of these businesses to the economy. They therefore unknowingly implement policies that limit the ability of family businesses to grow and hire. These enterprises are the “heart” of the American middle class because they provide the income that residents need to survive in this expensive country. Increasing the number of successful family businesses in the US is the only sustainable way to generate the tax revenue and employment necessary to reduce middle class taxes and increase the quality of life in every part of the country. This is especially true in the poorest urban communities.

The best social programs create jobs. The quickest way to turn around low-income communities is to create new jobs that provide previously poor households with the income they need to pay their monthly bills on time. The most effective way to create these jobs is for states to provide the tax incentives, regulation relief and financial support that entrepreneurial family businesses need to help them increase profitability and employment in the local community. I believe that governor’s offices and state legislatures should work together to create these needed jobs through a program I call “Entrepreneur Zones” within the poorest sections of urban communities across the country.

The Tax Cuts and Jobs Act passed by Congress in 2017 contains a unique economic development and tax incentive called “Opportunity Zones.” This program was designed to encourage long-term private capital investment in low-income communities in the United States. The purpose of this tax incentive is to spur economic development and job creation in distressed communities by providing tax incentives to investors. However, the Opportunity Zones encourage investment in real estate assets, not entrepreneurial businesses in poor communities.

Many of the “Empowerment Zones” created in the 1990s were not successful because of the weak investment incentives, program complexity and lack of focus on creating and supporting entrepreneurs. I am suggesting that Entrepreneur Zone legislation be created to ensure that a significant amount of the money invested in Opportunity Zones is focused on increasing the number of jobs and business tax revenue for municipalities and states. The establishment of Entrepreneur Zones should ensure that investments in Opportunity Zone locations are more impactful than they were in Enterprise Zones.

Businesses located in these Entrepreneur Zones would benefit from lower state and local business taxes and relaxed state regulations. In addition, these businesses would receive tax incentives based on the number of new employees that they hire. Lenders and venture capitalists would also receive favorable tax treatment for loans or investments provided directly to companies in the Entrepreneur Zones. States would make these financial investments attractive by providing tax credits or possibly tax deductions similar to those received for contributions to nonprofits.

The only sustainable way to increase jobs and significantly reduce the unemployment rate is for state and local governments to create Entrepreneur Zones. These zones can provide the financial and other incentives necessary to help family businesses succeed and create local jobs providing sufficient income to pay basic household bills. To incentivize cities to invest in the Entrepreneur Zones, the legislation should empower states to provide supplemental financial support to family businesses in urban municipalities that hire local employees. This will reduce welfare expenditures and motivate municipal and county leaders to make these Zones a priority. The incredibly high poverty rates in urban communities are a major crisis that needs immediate attention. I am convinced that the Entrepreneur Zone program will be supported by Democrats, Republicans and Independents because it will reduce taxes and poverty by providing financial incentives and regulation relief for the biggest job creators in the poorest communities in the country.

Family Businesses and COVID-19 Fears

The COVID-19 pandemic has impacted more lives than any other crisis in recent US history. Tragically, this ailment has led to the deaths of...