There is wonderful diversity in the business sector we call family
business-huge enterprises like Cargill and local grocery stores, first-
and fourth-generation companies, firms run by patriarchs and cousins. But
the field lacks a typology, which could be useful to everyone from
consultants and direct marketers to owners trying to analyze their firms.
Now, the Massachusetts Mutual Life Insurance Co., of Springfield,
Massachusetts, has defined seven distinct types of family businesses. The
groups are defined by differences in how strategic decisions are made; who
among the owners, successors, and outsiders constitutes the
decision-making group; and how owners have approached succession (or not).
The breakdown comes from six family business experts who analyzed the
results of MassMutual's third annual survey. Responses were received from
1,029 owners of family businesses nationwide, selected at random from
commercial business listings. The survey was conducted by Mathew Greenwald
& Associates of Washington, D.C.
The experts used a statistical technique called cluster analysis to
sort the respondents into types according to the frequency with which they
answered certain questions in the same way. Questions probed such issues
as who was in the company's strategic decision-making group, whether the
members of the group trusted each other, how differences were resolved,
and which family members were likely to control decisions in the future.
By combining the results with demographic data, the experts outlined seven
distinct family business types.
While there are commonalities, "the types indicate major differences in
issues that must be confronted," says François de Visscher of de Visscher
& Co., a consulting firm in Greenwich, Connecticut.
For example, he explains, successful succession in a firm run by
cousins is driven by open deliberation between various branches of the
family, whereas in a "mom and pop" company success depends on picking the
most qualified child and deciding how to train him or her.
The typologies should also help owners who interact with consultants.
"Many advisors think they can handle any family business case, because
they see family businesses as a homogeneous group," de Visscher says. "The
types show that is not the case."
The seven types (and their frequency) are described below. While there
is some overlap, the designations are a first attempt by the survey's
advisory team. De Visscher says the team will refine the categories, and
probe to see which issues are unique to each type and which transcend
Reliance on Outsiders (33%)
Family businesses in which the owner makes the key decisions with more
assistance from outsiders than the family comprise the largest of the
seven groups. Even if the owner's sibling or in-law, say, holds a high
position in the company, the owner places critical reliance on a small
number of trusted outsiders, such as a longstanding lawyer or
The average age of the CEO in these firms is 49. Half are
first-generation companies and one-quarter are second-generation. The
firms average 67 full-time employees, somewhat fewer than the average of
74 for the overall survey group.
The size of the average decision-making group is small (the mean in 3.1
persons), and a majority of the firms have between one and three outsiders
or nonfamily employees in the decision-making group. Family members accept
the role played by external advisors in making key decisions; the survey
reveals a high level of family trust in the decision-making group, despite
the presence of nonfamily.
Mom and Pop (17%)
A spousal team runs these firms. However, the key decision-making group
is not necessarily limited to the spousal pair; in a fourth of the firms,
one of the couple's children participates in the group. Typically, one or
two nonfamily members also participate.
The average age of owners is 52. Three-quarters of the firms are in the
first generation. The companies tend to be smaller than average, with more
than half having revenues under $5 million. The average number of
full-time employees is 48.
Awaiting Transition (16%)
Owners of these firms have their children involved, but have yet to
pass on control. One or more children are in the decision-making group,
and are usually employed as a vice-president or other top officer.
Two-thirds of the families have a written succession plan, which is
prudent since the owners' ages average 62.
In half of these companies there are no nonfamily members in the key
decision-making group. Trust runs strong across the generations, with 76
percent indicating members of the decision-making group "always" trust
each other. Decisions are reached by consensus in 59 percent of these
firms; unlike in other groups, conflict among generations over the
strategic direction of the company has yet to emerge.
These firms tend to be larger than the sample average, with 83
employees. More than 60 percent generate annual revenues in excess of $5
Parental Oversight (13%)
These firms are in various stages of transition from one generation to
another; virtually all are second or third generation. The older
generation has passed on its primary responsibility, but retains some
equity and exercises some oversight. Co-owners exist at 68 percent of the
firms, and their average age is 37.
At least one parent of the owner or co-owner, and in some cases both
parents, are involved in the key decision-making group. For one-third, a
sibling also participates in decision-making. Half have no nonfamily
Inter-generational disagreements over capital investment and the
strategic direction of the company are more frequent for this type of
company than the other six types, probably reflecting resistance to change
or caution on the part of the older generation. Similarly, participants
are less likely to say that members of the decision-making group "always"
share common goals (30 percent compared with 43 percent overall).
Dominant Owner (12%)
The owner is king (89 percent) or queen (11 percent) in these firms,
averaging age 52. The decision-making group consists of the owner, period,
even though family members work in the company. The majority are first
generation firms, and they are the least likely of any type to have a
board of directors. When there is a board there may be a spouse or child
on it, but most owners in this category did not identify these family
members as participants in the key decision-making group. Although 90
percent have children, fewer than half intend to pass on ownership.
Not surprisingly, the dominant way to resolve differences is discussion
followed by the owner's ultimate decision. In the eyes of these owners,
disagreement among family members is infrequent.
These firms are smaller than average, with 41 employees versus the
survey average of 74. Like the Mom and Pop companies, a little more than
half have revenues of less than $5 million.
Sibling Team (6%)
This type of business is relatively rare, but within it there is quite
an array of ownership structures. Sibling co-owners come not only in pairs
but triplets, and more; one firm has six siblings in its key
decision-making group. In 35 percent of the cases a parent is also
involved in this group. As would be expected, a large majority (76
percent) are past the first generation of ownership.
The role of nonfamily members is limited. For 52 percent of the firms,
no outsider holds a key management position; in 28 percent, only one
There are often many family factions in these companies. Some 60
percent of sibling teams use a democratic approach to reach decisions
between the factions. In most of the rest, one person makes a decision,
for better or worse. Of the seven types, these firms are the most likely
to report that the group's needs "always" come before individual concerns.
Nevertheless, conflicts within the family over the roles and
qualifications of family members occur with above-average frequency.
Mega Firm (4%)
Unlike the other types of businesses, in which the key decision-making
group usually has three or four members, this type has an unwieldy average
of 10 people in the decision-making group. The group is a mix of various
family members and outsiders. There are always nonfamily members in the
group, often four or more. Management consists of owners and co-owners,
including parents (12 percent), children (28 percent), siblings (28
percent), in-laws (12 percent), and extended family members such as aunts,
uncles, or cousins (16 percent).
Half of these firms are still first generation; one-fifth are second
generation, and the rest are third generation or beyond. There is a good
reason for such inclusive management: The companies tend to be much
larger, averaging 347 full-time employees. More than a third report 1994
revenues of greater than $25 million. There is also a cost for such large
decision-making groups, however: Only 42 percent of the firms report that
the members "always" trust each other, compared with 69 percent
Estate taxes prompt action
Now in its third year, the annual MassMutual survey also provides some
intriguing insights into changing financial concerns and responses of
Advocates of reducing tax burdens on business have traditionally
emphasized lowering capital gains taxes. But the survey shows that twice
as many owners are more concerned about the negative impact estate taxes
have on the financial health of their businesses. Some 28 percent name
estate taxes as the levy of greatest concern, versus 14 percent who cite
capital gains taxes. Overall, however, the income tax remains the greatest
burden, perhaps because it has a more immediate impact on their wallets
(see, "The Toughest Taxes," left).
Given this focus, legislation recently proposed in Congress to reduce
family business estate taxes would appear to be on target (see "Big Guns
in Congress Back Estate Tax Reform," page 11). Owners are taking a
wait-and-see attitude about Congress, however; 31 percent think conditions
for family businesses will improve because the new Congress supports
family business, but 29 percent think Congress is anti-family business and
so will do little to help. The rest find Congress "neutral," that is,
neither inclined nor disinclined to help family businesses.
The great concern over estate taxes may stem from the fact that most
families have large portions of their wealth tied up in the business.
Nearly one-third of owners report that 75 percent or more of their net
worth in the firm. Another third report that the business holds between 50
and 74 percent of the family's wealth (see, "Wealth Tied Up in the Firm,"
These factors seem to be motivating more owners to take action. The
ongoing survey shows a significant increase in the awareness of tax
liabilities and in formal succession planning. The proportion of owners
who report having a "good" idea of their estate tax liability is 58
percent, up from 43 percent in the 1994 survey. This awareness is not
limited to owners of larger businesses, either; the number of owners who
have a good idea of their tax liabilities increased for businesses of all
sizes. Perhaps the advice of consultants and educators is sticking.
The number of firms that have engaged in formal succession planning has
also risen dramatically in the last three years. Among owners who say they
intend to keep ownership in the family, 44 percent have a formal
succession plan. The proportion was only 21 percent in the 1993 survey,
and 28 percent last year. It is interesting to note that there is little
difference between young and old businesses. Owners of first- and
third-generation firms are about equally likely to have written plans for
passing on control. Size makes no difference at all; the same percentage
of owners of businesses with fewer than 25 employees, and those with more
than 100 employees, have written succession plans.
By permission of the publisher from Family Business (Autumn, 1995). Family Business Publishing Company, http://www.familybusinessmagazine.com.