Growing the family business

I used to write a lot about family business and also engage in a lot of consultancies for family business, especially in the area of family constitutions. When I stopped teaching in the MBA program of De La Salle University after 22 years of teaching, I also stopped engaging in family business consulting.

Recently, I read an article in the Financial Times that family business has become a major global economic force. I decided to review my old notes and review my previous researches into this topic and share them with my readers.

Even the most successful implementation of a succession plan is worthless if the business that is passed on to the next generation cannot survive. Without passing on an effective growth philosophy and a “change ready” culture, the heirs cannot sustain the business through the change the future will definitely require.

Family businesses, after the start up stage, are often perceived to be risk averse, tradition bound, lacking in “big, hairy audacious goals.” This is one of the principal reasons that the great majority tend to wind down over time under aging leaders and during the next generation. Most studies show that more than 95 percent of family businesses do not survive beyond the third generation.

It is true that family businesses were started based on dreams rather than rational analysis and a growth philosophy. I used to remind my students and clients that if you trace the beginning of a successful family business you will rarely find a business plan or project study as the basis for starting the business.

Many families have discovered that they must eventually shift to formalized management styles if they intend to expand and grow. This aspiration requires the recognition that change is inevitable.

According to Howard Muson, a family business writer, there are three strong reasons why family business owners must seriously examine growth issues.

First, with every passing year, the family is growing. The family enterprise must, therefore, expand to provide jobs and dividends for all members who will require them in the future.

Second, no company can count on maintaining a highly profitable niche for too long in today’s tempestuous global economy. The family company must grow in scale and market power in order to ensure its survival.

Third, nothing imposes a greater strain on the resources of a family business than the approach of a leadership transition. The income needs of the retiring older generation must be met without depriving the successors of the cash needed to run a viable business.

Successful family-controlled businesses are oriented toward long-term goals. Rather than leaping at short cuts or rushed expansion, these businesses focus on managed growth with a premium placed on customer satisfaction.

Successful family businesses care deeply about their products and services and about the general welfare and job satisfaction of their employees. They also benefit from leadership that has developed a tradition of excellence.

The most important tenet of a sustainable business philosophy is the recognition that change is inevitable. Business practices, regional, national and global economic conditions and social conditions that affect niche markets are all in a constant state of flux. Remaining competitive requires continuous renewal of the business.

If a family business aims to distinguish itself from its more impersonal business competitors, the culture of the family business must embrace change rather than resist it. This involves assuming that every product and service can be improved, no matter how successful it appears to be. It involves creating mechanisms for constantly tracking and analyzing change – in manufacturing processes, in technology, in management techniques, in economic conditions and in the different customer segments of the market.

Most important, it involves creating a culture that encourages experimentation and the development of new ideas.

In my different researches and readings on family business, I have compiled six most important challenges facing a family firm’s long-term growth.

First, the inevitability of maturing business cycles. When it matures, family business owners often prefer to nurse the business rather than shift their focus because the business is their creation, their identity and their comfort zone.

Second, the typical family business has limited capital. Further complicating the capital crisis is the desire of some members in a growing family to sell out their shares. They want independence, privacy and emotional freedom. The remaining business owners are usually motivated to buy out these family members to avoid family disharmony or potential fights over dividends and corporate direction. Often this leads to sacrificing needed cash for business growth.

Third, many family businesses do not have available next generation qualified successors. Those that do still have to face the reality of an unlikely business growth because following in the footsteps of a very successful person who is a parent or relative is an intimidating prospect.

Fourth, successful leaders sometimes become fixated on their formula for success. They reject planning as a managerial practice. When times and requirement for success change, these architects of past strategies become inflexible and stifle growth.

Fifth, most business owners pass on leadership to two or more offsprings. Sibling partnerships often end in splitting up the business or forces the sell out of one or more partners. Management processes are disrupted and tremendous capital and growth potential are consumed.

Sixth, sibling- and cousin-owned family businesses (second and third generations) have to reconcile different goals, needs and values of family members. As families expand and grow older, values and goals inevitably become more diverse.

Despite these challenges, the family business must continue to grow if they are to survive.

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