| September 9, 2013

The Importance of Family-Owned Businesses

Two of my boys are in the midst of reading Laura Ingalls Wilder’s Farmer Boy and Little House in the Big Woods. The older boy, who is always trying to minimize work and maximize play, has commented several times that farm kids must sweat a lot since they are engaged in so much physical labor. The younger boy sees the similarities our family shares with Wilder’s families. Since he is homeschooled, he spends all day working with his siblings and parents just like Almanzo in Farmer Boy.

We’ve talked a lot in our household about the value of owning your own business. Although we don’t have a brick and mortar business, we try to discuss entrepreneurship on a regular basis with the children. We want them to understand the risks and rewards associated with building your own business. We have them ask questions of local business owners to help them assess what is required to build and maintain a business.

Although many businesses fail, we let our boys know that if they succeed they will have built an income stream that can care for their needs into their old age and then be passed on to their children. We also let them know that if they share the risk of building the business with their siblings, they will have lifelong business partners. In full disclosure, there is also a selfish motivation: if we want our children to raise their families near us, we need to provide them with some income opportunities so they don’t have to chase jobs all over the country.

In the Sept. 18, 2010 issue of The Economist magazine, Professor Joachim Schwass noted that “beyond the public company, private partnership, and the state-controlled company, the other big survivor is the family-owned business. Often forgotten and underestimated yet big GDP and employment contributors, family companies are driven by a very different type of reward: handing over a healthy, performing, and sustainable business to the children. The vast majority would not dream of an IPO.”

In fact, according to a 2003 study by Astrachan and Shanker, family firms comprise 80 to 90 percent of all business enterprises in North America. In other words, most of the wealth in the U.S. is held in family businesses. The authors find that independent family-owned businesses contribute 64 percent of the GDP or $5,907 billion ($5+ trillion) and employ 62 percent of the U.S. workforce. (Unfortunately, family firm data are very limited; this 2003 study of U.S.-owned family businesses in the Family Business Review was the most current data that could be found.)

If you walk back in history 100 years, most people grew up in the family business: the farm. With the family intact and everyone having a valued role in the family’s survival, society and the economy prospered as a result of the farm. Children learned how to provide necessities like food and shelter. They also learned what was most important to society’s advancement: how to take care of their own family instead of looking to someone else to assume their responsibilities.

Virginia farmer and self-described libertarian Joel Salatin is one of the most prolific activists in favor of the renaissance of the family farm as part of the solution to reversing America’s social decline. Salatin skillfully addresses how parents can foster passion for the family business in their children.

For example, a 2012 lecture by Salatin at Grinnell College, “Working With Your Kids So They Will Want to Work With You,” is based on the premise that most family farms lose continuity because of the lack of rewarding economic, as well as emotional, relationships between parents and children. With his suggestions about ways to cultivate the persistence and innovation needed to make kids love working with mom and dad as well addressing ways to structure and scale the farm to make room for future generations, he provides much-needed advice, by example, of how to build a sustainable family business.

[For those readers who would like to hear from Salatin in person, he will be one of the keynote speakers at the State Policy Network’s annual meeting on September 25th in Oklahoma City. Contact OCPA’s Jennie Kleese at 405-602-1667 for more information.]

The solution to the rebirth of declining agricultural and mill towns is what initially built these towns: families with strong economic ties to their community. Parents and children need to have a stake in their communities in the short and long run if the community is to be viable. That “stake in the community” is not just a property tax bill which pays for the town school, but perhaps a business that provides for the family’s economic needs as well as provides a valuable service to the community.

OCPA research fellow Wendy P. Warcholik (Ph.D., George Mason University) formerly served as an economist at the U.S. Department of Commerce’s Bureau of Economic Analysis, and was the chief forecasting economist for the Commonwealth of Virginia’s Department of Medical Assistance Services. She is a co-creator (with J. Scott Moody) of the Tax Foundation’s popular “State Business Tax Climate Index.”

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