Trevor Dalling, principal of ERA Dalling & Dalling Realty, a family owned real estate company in Mt. Vernon, N.Y., has firsthand experience with today’s credit squeeze. “When you’re so small, the banks tend to not want to lend to you, so you don’t have access to capital to expand and develop,” he says. He dips into his savings and retirement accounts to meet financial demands and to put something toward growth. He has also cut costs by switching to online advertising from print.
Even before the recession that began at the end of 2007 and became full blown in 2008, access to capital was a persistent problem for small businesses. It has worsened since then and African-American entrepreneurial families have been hard hit. “One of the biggest issues facing Black family owned businesses is access to affordable and sufficient credit,” says Walter Gowens, a certified public accountant and enrolled agent with Prudential Vanguard Financial Services Inc. in New York City. “In addition, interest rates charged to Black and other minority-owned businesses have traditionally been higher than those charged to white-owned businesses. That higher cost of doing business hurts those who can least afford it.”
Family owned businesses, ranging from mom-and-pop stores to multinational corporations like Esteé Lauder and Dupont, are the lifeblood of the U.S. economy. About 28.2 percent of the firms that responded to the U.S. Census Bureau’s 2007 Survey of Business Owners, the most current, were family owned, with 20.7 percent of them owned by minorities. Family owned firms accounted for 42.7 percent of all firms’ receipts in 2007.
The census survey shows that the number of Black-owned businesses increased from 2002 by 61 percent to 1.9 million in 2007. Of these, 106,824 had paid employees, with most of them (55.4 percent) employing one to four workers. Like Dalling, these small operators are doing their best to ride out the recession, but find themselves facing challenges similar to those claimed by their larger counterparts: access to capital, finding and retaining qualified employees, and establishing a solid succession plan.
Challenges notwithstanding, family owned enterprises are driving employment in the country. When Family Enterprise USA (FEUSA) queried owners of family businesses for its 2011 annual survey about hiring and retaining employees over the next 12 months, 52 percent of respondents said they planned to add additional employees, and 42 percent said they intended to keep their current staff numbers despite the sluggish economic recovery, underscoring the finding that family businesses are less likely to lay off employees than non-family businesses. “Overall, business-owning families are more concerned about long-term sustainability than short-term gains,” says FEUSA President Ann Kinkade. “This type of thinking is part of the reason why family businesses will likely lead our nation’s economic recovery.”
Strange as it may seem when the national unemployment rate hovers around a whopping 9 percent, business-owners complain of difficulty in finding qualified employees. Finding employees who are the right “fit” is especially difficult for smaller, family owned businesses, which often do not have the luxury of a human resources department.
Recruiting the “right” workers was a frustrating exercise for Ruthie Whitaker when she launched Fairyland Daycare five years ago in her tri-level home in Madison,Wis., she found hiring a very frustrating exercise. “Although candidates would have impressive résumés, they turned out to not be ‘kid-friendly.’ When you’re working with kids, you’ve got to be calm, be someone who listens, and you’ve got to get into their world,” explains Whitaker. She began to focus less on impressive credentials and more on temperament. “If they have the right temperament, I can send them to school to get some education.”
Her new approach must be working. Whitaker plans to open a second location — also in Madison, six blocks away — in the fall and is already recruiting staff. Between the two locations, Whitaker will have four part-time employees to care for a maximum of 16 children from 7:30 a.m. to 11:30 p.m., seven days a week. Her son and daughter work in the business, but they are not paid. Whitaker offers her small staff paid vacation and holiday time, but says she’s cannot afford to offer them health benefits.
Benefits have huge bearing on retention. Between his real estate and mortgage companies, Dalling has four full-time employees, mainly as clerical support. “We can’t offer our employees an overall benefits package,” he says. “How do we match or even compete with a Fortune 500 company who offer benefits packages, even if employees have to pay more into them?” He offers his employees a 401(k) plan instead. “Although they may have a less attractive paycheck, they can share in the profits of the company, so their performance ties back into their compensation.”
On the face of it, the Small Business Health Insurance Tax Credit seems a solution for businesses that cannot provide employee health insurance. Part of the 2010 Affordable Care Act, the tax credit is available to eligible small employers — those with 25 or fewer full time employees — who provide and pay for a portion of health insurance coverage for their employees. However, family members of owners and partners may not be counted as employees for the purposes of this credit.
“If you are a family businessowner who has ten employees but five of them are considered family members, you would only be eligible to take the credit for five of your employees,” explains Kinkade of FEUSA. “Little attention has been paid to this provision as it relates to family businesses. However, the credit is very complex and there is a push to get rid of it or completely overhaul it. As the credit is debated, FEUSA could make an effort to repeal the provision that excludes family members,” she says.
Dalling’s goal is to pass his eight-year-old company to his two sons, one of whom currently is in college and the other in high school. “The intent behind having a family owned business is to create generational wealth for your family,” he says. That means having a clear succession plan in place.
“Lack of succession planning happens more times than you realize,” says Robin Lisa Douglas, president and CEO of the African American Chamber of Commerce of Westchester and Rockland Counties, New York. “Many senior members are afraid to pass the business on to the younger generation because they feel their level of passion [for the business] is not the same. We’re only a generation and half away from segregation and Jim Crow, so the younger generation is not going to bring the pain to the table that their parents did, just by virtue of time and experiences.”
Genevia Gee Fulbright, CPA, author of Make the Leap: From Mom and Pop to Good Enough to Sell (Infinity Publishing) and president and chief operating officer of Fulbright & Fulbright, CPA, PA in Durham, N.C., advises businessowners work with an estate planning professional to identify and prioritize decisions about, say, “What do you wish to leave (financially) and for sentimental value to various people? Who are your alternate beneficiaries? Do you wish for the business to continue or to be acquired or sold upon your death, disability or departure? Who should be in charge?”
Based on current federal tax codes, family businesses with less than $5 million in assets ($10 million for married couples) may pass to the owners’ heirs tax free. Businesses with assets above those amounts will be hit with a 35 percent estate tax. To reduce it, Gowens says, the owner can sell or give to each employee under consideration $13,000 of stock each year, which would remove part of the business from the estate.
Succession planning is a must, regardless of the size of the family business, Douglas warns. She says, “By not doing anything, you’re throwing your family into a situation that is unnecessary. Why do Black businessowners have to die out of their businesses?”