Family-owned businesses are the backbone of the American economy. They account for 64 percent of U.S. gross domestic product and generate 62 percent of the country’s employment. They span from two-person mom-and-pop operations to family-controlled Fortune 500 enterprises. Family enterprises are also crucial to the local economy.
Economic stability and job creation. Family businesses create stable, long-term employment opportunities. Unlike large corporations that may relocate or close branches based on market trends, family businesses are often committed to their local areas. These businesses also tend to invest their profits back into the local economy, further supporting local development and economic stability.
Nurturing local talent. About 78 percent of new job creation nationally is attributed to family businesses. And family businesses often prioritize hiring local talent. According to a Harvard Business Review study, family businesses retain talent better than nonfamily businesses, with annual turnover of 9 percent vs. 11 percent. That’s often the result of strong internal cultures and family-owned businesses scoring higher than nonfamily business in areas such as worker motivation and leadership.
Philanthropy and community engagement. Family businesses frequently engage in philanthropic activities, contributing to local charities, sponsoring community events and supporting public services. A PwC study found that 75 percent of family businesses are involved in philanthropic activities. Their personal community connections often drive them to be responsible corporate citizens.
Innovation and Adaptation. While family enterprises are often associated with tradition, many are incredibly innovative and adaptable. In fact, 90 percent of family businesses own more than one business, and 20 percent control five or more. The mean family business changed industry 2.1 times, added 2.7 businesses through M&A and spun off 1.5 businesses. Family enterprises also tend to have long-term vision, allowing them to invest in innovation and sustainable practices without the pressure of short-term gains. This innovative mindset is a key contributor to family-owned businesses delivering a higher average total shareholder return over nonfamily businesses (per McKinsey in a recent 20-year study).
Survival challenges. About 30 percent of all family-owned businesses make it to the second generation; 13 percent to the third generation and only 3 percent to the fourth generation. While these numbers can be concerning at face value, when compared to nonfamily businesses, generational success does quite well.
However, PwC’s survey has shown that strong governance, clear succession planning and a focus on core family values are key to ensuring the survival of family businesses over generations. Yet, this same survey suggests nearly half of family business owners have no succession plan, and only two-thirds have clear governance structures in place.
Family business resource. Case Western Reserve University recently launched a Center for Family Business dedicated not only to empower family enterprises to survive, but to thrive as they build a multigenerational legacy.
Family businesses benefit from education on crucial topics such as succession planning, peer forums allowing for sharing of ideas and experiences, and connecting with a community of family business owners who share similar aspirations. CWRU also provides new data-driven insight and evidence-based practices to ensure family businesses are well-equipped for the future.
Laura Bonnet is Director, Center for Family Business at Case Western Reserve University’s Weatherhead School of Management
