Facts About Family Businesses

I grew up in a family business. My father and brother still run that business today. So, you could say there is a soft spot in my heart for what family businesses represent and the enormous role they play in the U.S. economy. For example:

• 64% of the U.S Gross Domestic Product (GDP) comes from family-owned business
• 62% of the U.S. works for a family business (the ranks of those family businesses include Walmart, Lowes and Ford)
• Family businesses have a 6.65% greater Return on Assets (ROA) than non-family businesses
• The average lifespan of a family business is 24 years. That’s right, 24 years!

Yet for all the wonderful things about family-owned businesses as a whole, there are some statistics that are on the alarming side. For example:

• 47.7% of transitions in a family business are precipitated by death
• 29.8% of family business failures are due to the owner’s death
• Only 29% of family businesses have estate plans

How a family business transitions to the next generation is only one of the challenges a family business owner faces. Perhaps a more important one we covered in a previous blog—closing the gap.

Closing the gap refers to the amount of money it will take a business owner to live the lifestyle they want in retirement and how much their current passive income from investments and other sources is now. Even if retirement is not in the plans for another five to 10 years, business owners should be planning their business and growth with closing that gap in mind.

The very nature of a small family business can run counterintuitive. Many family business owners don’t pay themselves a salary. They merely take what they need to live. Without a real focus on closing that gap, that can leave little for retirement.

How the family business owner passes on the business greatly impacts retirement. Many will just pass the business on to their kid or kids without receiving fair compensation. Or, if they receive financial compensation, it’s in the form of a periodic “retirement” payment from the company. It’s a little difficult to fund a retirement in that type of setup because you are at the mercy of your children’s business acumen.

Focus on the marriage of day-to-day and an exit strategy. The two actually go hand-in-hand and can result in a more profitable business from year to year if done that way.

*Statistics taken from the Family Business Institute.