Aviva is the Managing Broker of Sonenreich & Co, a third-generation commercial real estate broker, owner and investor in Denver, Colorado.
Working in the family business — industrial real estate — I can’t help but encounter an overwhelming number of family businesses on both sides of the table. As my family decided to pass the baton of its legacy to the next generation, the history of family businesses in the U.S. intrigued me. The idea of the family-owned business began in the manufacturing industry in the 1870s, making it one of the oldest forms of business organization. Gradually, as it spread into the capital-intensive industries, a shift in its management structure became inevitable.
In the years to come, corporates flourished with an increased demand for investment and financial sources. Collectively, it marked the beginning of an era of managerial enterprises, where family members remained with vested interests alone. Although mainly technologically driven, this transition from family firm to professional management was far-reaching.
Later, fueled by the USA’s competitive advantage in the global economy, the rise of modern business enterprises saw a drastic change in the way businesses worked. Family ownership and control started to decline. Still and all, at the end of 1980, 95% of U.S. companies were family-owned. Families and dynasties continued to play a significant role in the big, capital-intensive corporations of the second and third industrial revolutions. And at the end of the 20th century, 17% of the top 100 companies in the nation were family businesses.
(It’s worth noting that different economists have different definitions of a family firm. It is a subjective term, there’s no doubt, thanks to the diverse structures of family businesses. And so, any data relating to these businesses is limited to subjectivity too.)
While family businesses were prominent during the first industrial revolution and pre-industrial period, their presence remained in specific economic systems. Moreover, family firms’ presence depends on several factors, including technological, legal, political, financial and market conditions.
Even today, a family firm — usually carrying the three elements of kin, property and control — varies in size and structure. Some family businesses are small and medium-sized with flat organizational structures. Some are large and dynamic, operating with a mix of traditional and modern characteristics.
But like any other form of business, family businesses bring with them several advantages: long-term commitment, knowledge, trust, reduction in uncertainty and low operational costs, to name a few. That’s not to say there aren’t any disadvantages of this form of business organization. Many family businesses, especially large ones, are seen as traditionalists in terms of development and investment — which is often linked to their failure to grow and innovate.
A somewhat different viewpoint finds family-run firms as much more profitable and growth-oriented than managerial enterprises. However, short-termism can be a headwind for family businesses, bringing them to a virtual standstill.
As I see family businesses around me, I find “transition” to be the most critical success factor. But when companies move from one generation to the next, transitions aren’t always methodic. Managerial indecision, remonstration, familial conflicts and, ultimately, stagnation reign over an otherwise thriving business.
Per contra, the failure of leadership succession can be avoided. What’s needed is adequate succession planning and training of new generations. There is much room for failure in this endeavor, and each business will walk a fine line to get the balance needed. This is more so a matter of creativity as opposed to a right or wrong answer. Personally, my family business found success by creating an environment that the farm was not just dropped in the lap of the successors. Rather, we were encouraged to find our own farms as a rite of passage first.
After finding my own way, Dad finally admitted that he was learning more from me then he could have ever dreamed of. This was harmonious, as I needed his experience to learn how to transact. This worked for us. What in your experience or research has worked for you?
There’s also a sort of shifting controversy surrounding the impact of family firms in modern advanced industrial economies. While family businesses are often touted as those ruled by emotions over economic reason, resilience and efficiency found within a family business shouldn’t be overlooked.
Either way, the future for family enterprises doesn’t look bleak. The past and present give me hope. Family-dominated businesses must capitalize on their ability to tune-up and continue to seek new survival strategies. My advice to all real estate firms new and old is to not fear marketing tactics of the future. We are in a day and age where we can now access the world at any time. Use that to your advantage. Don’t get comfortable in tactics that worked decades ago. Let your newer generations take the reigns of the internet and ride it into the sunset of success. After all, isn’t that the point of passing the torch?
Family members must bridge their aspirations in light of the constraints that competition, institutional and legal frameworks usually bring in tow. And not merely surviving, they should find new ways to thrive, too. The goal to succeed can be achieved if there’s enough room for effective succession planning and the zeal to keep family values alive.
The longevity of family firms can and must be increased. After all, nobody wants a collection of beautiful bricks-and-mortar to turn into a house of cards.