James Olan Hutcheson is founder and president of ReGENERATION Partners. firstname.lastname@example.org
Too many people are put off by alarming statistics that surround the start-up of new business initiatives, argues James Hutcheson. Although prudence and caution are desirable assets, sometimes it pays to take a chance and ignore the gloom merchants
Did you hear the one about the Nova? It seems General Motors tried and failed to market its compact automobile in Latin America because its name was read as "no va" — which can be translated in Spanish as "won't go." It is a story that has been used to illustrate countless essays on the dangers of multicultural marketing.
The only problem is, it is not true. GM sold loads of cars in Latin America under the Nova nameplate. And, if you think about it, who goes around separating words into syllables and looking for weird meanings? And if they did, so what? After all, "coke" was the word for what happens when you heat coal in the absence of air long before it was the name of a pretty popular soft drink.
The Chevy Nova story is a myth of business. There are many more. The famous story about the customer who returned a set of tyres to a Nordstrom's store for a full refund, even though the retailer never sold tyres, has appeared in countless texts and talks on the importance of customer service. However, the best that can be said about the tyre story is that it is unconfirmed. Given the way the details about it have shifted over the years, it is likely another urban legend of business.
The legend of the short-lived family firm
Family business also has its share of myths. Probably the oldest, best known, and most influential is the one about family business survival statistics. The figures vary, but the most common version has it that fewer than one-third of family businesses make it to the second generation. It goes on to say that about 10% last until the third generation, and only 5% go until the fourth generation.
If you are a family business owner, the odds are that you have been informed of these daunting statistics by your business consultant. It would be nice at this point to say the statistics are not true.
However, the basic stats originated in legitimate studies more than 20 years ago, and similar studies since have confirmed them in general outline: If you start a family business today, chances are probably about one in 20 or worse that it will still be around for your great-grandchildren to run.
The problem with the family business survival myth is not the numbers, but the words around them. Often, a family business consultant, or the marketing brochures he hands out, will use terms such as "fail to survive" and "only 5%" when talking about this topic. These terms are misleading and misrepresent the findings of the studies of family business survival. Saying that a firm failed to survive conjures images of padlocks on the front gates and auctions on the courthouse steps. The truth in many cases is different.
Rather than "fail to survive," the marketing materials should say "fail to remain in business with no change in ownership." That's because the studies of family business survival do not count family businesses that are sold to another firm, that go public, or that become sole proprietorships. It is safe to say that a substantial proportion of the firms counted as non-survivors are flourishing in any number of forms other than being owned by multiple members of the same family.
There are many valid reasons why a firm goes from being counted in the family business survivor studies to being counted out. Is it a failure when a family decides to sell at an attractive price? Is it a failure when one of the founder's offspring buys out all the other family shareholders? Is Ford Motor Co. a failure? It is still family-controlled but, because it is a public company, would not be counted in many survivor studies.
Before buying into an alarmist, "the sky is falling" tale about your family business's chances of lasting a long time, consider that it might be based on an urban legend, not the real story.
The myth of the monster tax
Family business survival stats can get your attention, but they do not seem to spur anything like the outrage that attaches to the estate tax. The shrillness and volume of the outcries against the "death tax" that is "killing family business" are the sort you would expect to find surrounding something like a political convention.
Perhaps that is not so strange, given that the estate tax involves giving a lot of money — $23.4 billion in 2004 — to the government. Few people relish forking money over to Uncle Sam.
It is odd, however, because the claims make no sense. Granted, this is a controversial issue with strong proponents on each side, so perhaps it is more of a political issue than a regular urban legend. But common sense, as well as a decade of experience advising family firms of all sizes, suggests that the estate tax is not the villain some would like us to believe.
The biggest problem with the idea that estate taxes kill family business is that only about 0.03% of people die leaving a taxable estate in which a family business makes up most of the estate value. The average small business is worth a little over $700,000, well below the point at which estate taxes are levied. If this is killing family businesses, it is not killing very many.
Similar numbers apply to family farms. A 2005 report by the Congressional Budget Office showed that just 300 farms owed estate tax — and all but 27 of those estates had enough liquid assets to pay the tax. The estate tax seems to be doing a poor job of killing family farms. And it is going to do even worse.
For 2006, the CBO report estimates just 123 farms would pay estate tax, thanks to the threshold for taxes rising to $2.5 million. By 2009, only 65 farm estates would exceed the $3.5 million threshold that would then be in effect. Considering that there are 2.2 million farms, the family farm looks like it may survive despite the estate tax.
Failure rates for small firms
The biggest myth about family business goes even beyond family businesses to cover all small businesses. It is also the more mysterious because it seems to have no reason to still be believed. Unlike both the estate tax and family firms survival myths, it has no established constituency with a vested interest in keeping it alive. Also, rather than being substantiated by most studies, it is refuted by a number of reports going back to the 1980s.
So why do people continue to repeat the myth that nine out of 10 businesses close in the first year? If you talk to researchers in entrepreneurship, they cannot tell you where this originated, only that it has been around a long time. It is well established. Until recently, even the US Small Business Administration widely reported the figure.
It is also scary. There is no telling how many people have been wrongly discouraged from starting businesses because of these frightening statistics. How many potential peers of Bill Gates and Michael Dell are today employees laboring in cubicles because they understandably back off their plans to start a business in the face of these odds? We will never know. One thing we do know, however, is what the odds really are. And they are far from being terrifying.
Consistent results from studies of the success rates of new businesses show that something like 75% last two years or more, half make it to four years and 40% keep going for six or more years. This number varies depending on what type of business is being studied. For instance, firms with employees tend to be larger than average and last for longer times.
Companies started by someone who had previously started a company last longer than those begun by newbies. But the central fact that all of them confirm is that 90% failure in the first year is far off the mark.
The happy ending
Numbers are the vital statistics of business, so it is not surprising that so many of the urban legends of family business are dressed in the trappings of studies, reports, and percentages. What the legends of family business suggest is any family business leader who is presented with a number that seems striking ought to consider it carefully.
First, consider its source. Does the person you are hearing it from stand to benefit in any way if you believe the number? A political fundraiser who suggests to you that your family business is in grave danger of going under unless you contribute to an anti-estate tax organisation may be skewing the statistics a little bit. The same goes for a family business consultant touting abysmal inter-generational survival rates.
Second, look for any kind of emotional hook. Hard facts do not need appeal to stick around. They are considered reliable and useful because they have been tested and tried. Urban legends, on the other hand, owe their survival to something within us that wants to believe them. There is no other explanation for the long life of the spurious small-business failure rate statistics. Why else would organisations like the SBA continue to spout them in the face of debunking by well-regarded experts? If a number
or supposed fact makes you grimace, squirm or feel scared, be wary.
Third, does it seem to have a real source that can be checked out? If you ever played the Telephone Game, in which a group of people tries to transmit a whispered message from one person to another, you know how thoroughly distorted information can become during the process of transmission. The way relatively minor changes in legal organization and ownership of family businesses is construed as "failure" by some people illustrates how much more seriously actual facts can be skewed when it's being done intentionally.
Finally, rely on your own experience. An expert can be anybody who has a degree, written a book or a few articles on a topic, been interviewed on national television about it or, according to one only partly ironic definition, is from more than 50 miles away. None of these is necessarily a criterion for true expertise.
And where is that expert going to be when the results of your acceptance of his or her advice come to fruition? You will have to take responsibility for your decisions, so you might as well make them based on what you have learned through your experience and feel in your gut.
Seeing through the myths of family business can give you a real competitive advantage. Many people have heard these and similar myths, believed them and acted according to their dictates, spending no telling how much money on over-funded insurance, pointless consulting engagements, and impotent political contributions. If you are smart enough to question the legends you hear and track down the truth, you will have that many more resources to devote to solving real problems.
Of course, not everything you hear that could be an urban legend is untrue. And some of them are not only fun, they are informative. Take the Alka-Seltzer story. Did the maker of the indigestion remedy rapidly nearly double its unit volume sales by urging dyspeptic consumers to take two tablets instead of the one tablet they'd previously recommended?
That one could be a myth. Consider: 1) It has a number in it — sales supposedly doubled. 2) it has definitely got appeal — who would not like to double sales by changing "Plop, Fizz" to "Plop, Plop, Fizz, Fizz" or the equivalent? And, 3) who really knows what the source is? Miles Laboratories, the pharmaceutical company that sold Alka-Seltzer, was bought by Bayer AG in the 1970s and is no longer around. But that story is true, at least in basic outline.
Now, to test your new skills, did you hear the one about the new car that got over 200 miles to a gallon of gasoline? It seems it went in for service at the dealership and, although nothing appeared amiss when it was returned, it never got more than 15 mpg after that.