Study Finds Addiction Creates Problems for Family Businesses
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UPDATED: Jan 3, 2013
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A recent study found that drug and alcohol addictions among family-owned businesses impact their ability to survive in the local and global economy.
The study, conducted by Regeneration Partners and Caron Treatment Centers, included 99 family firms from a wide array of industries.
James Hutcheson, president and founder of Regeneration Partners and author of the study, used his company database from the past 19 years to assist with the study. He discovered that addiction problems are extremely prevalent in family businesses.
“It is something that hasn’t been discussed. It is not common knowledge among professionals working with family businesses,” Hutcheson said to loans.org.
And the impact of drug abuse and addiction is impacting the economy on a major level.
Two-thirds of firms do not make it to the next generation. Each year, across the country, businesses are closing for a failure to resolve internal problems.
“Why are these family firms not succeeding?” Hutcheson asked himself. “Part of the issue deals with addiction: active, ongoing addiction.”
The study found a higher prevalence for addiction in family businesses than in the general population. In a family firm, the study found that there is a 50 percent chance that a senior team member will be dealing with some sort of addiction. And this is full-blown addiction, not just temporary abuse.
“Addiction is everywhere,” he told loans.org. “Anywhere you get love and money associated… there are opportunities for abuse.”
About one-third of the adult population has abuse or addiction problems. Hutcheson does not know why Regeneration Partner’s study found different and higher addiction results.
“Sadly, it’s not uncommon to see addiction issues impact families of wealth,” Hutcheson said in a release. “There are many reasons ranging from children being subjected to the expectations of high-achieving parents to lacking sufficient time with their parents. Too often they turn to drugs and alcohol to cope.”
Dr. Kevin Gilliland, president of Innovation 360, a team of counselors for alcohol and drug addictions, said addiction does not always attack the members most associated with delinquency. Addiction, according to Gilliland, is more likely to be a problem for the leaders of a firm, rather than young employees.
“The situation is particularly difficult on a family-run business if the addict is the founder, patriarch, matriarch, or leader,” Dr. Gilliland said in a release. “When someone abuses alcohol or drugs, the power and influence of the family often protects or enables them by preventing intervention. In some cases, they deny the destructive effects on the individual, the family and the workplace.”
Hutcheson agrees. If the boss is addicted, they can receive extra benefits, time off and coast through the denial phase. In contrast, if a lower level employee faces addiction, it is dealt with quickly because the employee is fired.
“If that is a family business, it might never get addressed. There is a great reluctance to deal with addiction issues as well as mental issues with the ownership group,” he said. “Denial is very powerful inside a family firm.”
The key to moving forward is effective communication and positive relationships.
But even that is not always enough.
“You have to be competent at your jobs. Without effective relationships you will not succeed.”
Hutcheson said success is a mixture of knowledge, relationships and communication.
Left Without Financing and Support
Hutcheson questioned why society discusses mainly global firms when the vast majority of businesses in the United States are small and family-owned companies.
Out of the 27 million businesses in the United States, 21 million are non-employer firms with no payroll, where the owner is the sole proprietor. Of the six million remaining businesses, 90 percent employ less than 20 people, he said.
Small businesses define the country’s economy, but their power is limited by monetary funds. Around 1.3 million businesses gross less than $100,000 each year. This lack of funding stunts their growth.
Although many of his clients have business loans, fundamentally speaking, family businesses generally carry low debt.
“Anecdotally, 80 percent carry low to no debt,” he said.
Part of the reason deals with a hesitation from business loan lenders. Most new enterprises do not survive longer than five years.
Two-thirds of family businesses will not survive into the next generation of ownership. They will close, sell for profit or face an unresolved issue, which, according to Hutcheson “is alarming for a lending institution.”
But this lack of commercial financing and the hesitation to approve new business loans inhibits family owned firms.
“I think there is a dearth of information and resources,” Hutcheson said. “But the reality of it is they simply do not have the resources to hire the best help to pay the best advisors. The business community is geared towards working with successful firms, not struggling ones.”
Hutcheson said he is assisting a firm in Montana that is bringing in only $150,000 in revenue. Without new business loans or outside funding, he cannot afford to bring in help.
“[The owner] has no keen interest in building something more than what his skill set will allow,” he said. “But it’s the American Dream. It’s what people want to do.”
The drive to begin a business is positive for the country, but it does not guarantee success.
“That’s the good news, but the bad news is that many of those businesses will not succeed,” Hutcheson said.
Reasons for Failure
Hutcheson attributes six reasons for business failure:
- Bad concept
- Inexperienced management
- Poor planning
- Undercapitalization, lack of business loans
- Ownership issues
- Poor financial reporting
A bad concept can be the sole reason for a company’s demise. During the dot-com bubble, many new poorly-planned businesses began even though they lacked a solid foundation.
Secondly, poor management can destroy a business.
“Often in a family business you promote people to management that are not really not worthy,” Hutcheson told loans.org.
Thirdly, unexpected surprises can crumble a firm.
“Businesses that do not plan well are subject to be surprised. You do not want to be surprised,” he said.
Fourthly, once ideas and structure are set in place, it all comes down to finances. Hutcheson mentioned a Dallas-based airline provider, Legend Airline. He said that the reason for their company failure had nothing to do with service. They offered full meals, free baggage and a nice lobby in the airport, but it all came down to less financial security than other airlines. Legend Airline did not have sufficient capital to fight off competition lawsuits from American Airlines.
“They did not have enough money to stay in the game,” Hutcheson said. “Being undercapitalized is one of the reasons why businesses fail.”
A lack of funds leads many owners to take out business loans to finance the business. But without a proper support structure and clear direction, the money acquired from those business loans is useless.
The fifth reason for business failure deals with internal ownership issues. If a family cannot resolve small disputes, they will face insurmountable problems in the future.
The final hurdle for businesses is poor financial reporting. Hutcheson said he deals with this often. He visited a client in Kentucky for the first time and asked to see their financial reports. They said they didn’t have them. It was October and their previous year’s reports were still open.
“The person they trust keeps the books, but the person they trust may not have any professional experience. [The books] are not kept at the appropriate level for the type of firm they are,” Hutcheson said.
The ways to fail a company are great, but for most, the main solution is knowledge and acceptance. Denial, whether it is for addictions or failure to repay outstanding business loans, only further inhibits the firm’s growth.
Hutcheson said that first step is simply to understand the magnitude of the business problem. From there, resolutions can occur.