Does your family business have an end game?
The Globe and Mail
Published Tuesday, Nov. 11 2014, 5:00 AM EST
Last updated Monday, Nov. 10 2014, 3:20 PM EST
For family businesses, strategic planning really begins and ends with a single powerful question: Why are you in business?
The answer to this question will affect the quality of decision making by business families, as well as the bottom line. Does the family want to secure its prosperity and sustain its wealth over generations? Without a long term plan, things fall apart.
Businesses of all sizes are facing immenses technological disruption. The challenge is to adapt with sufficient speed to preserve wealth – which isn’t easy. Innosight’s 2012 study indicates that the average lifespan of America’s S&P 500 companies has reduced substantially since 1958 and projects 75 per cent of current companies won’t exist in 2027. What does this mean for family business?
“Studies have shown the long-term investment horizon of a business family can be a competitive advantage,” says Colin Brown, partner of McNally Brown Group, a firm that specializes in family business. “When family businesses realize they can sacrifice today to go for their ‘moon shot’ vision, that extra energy will encourage growth. Equally, the business strategy must continue to match market opportunities and the investment risk preferences of the family shareholders.”
The advantage of sticking to a long-term vision can become a liability if a family fails to recognize trends that they are in a declining business. Mr. Brown reports that too many family businesses fail to realize the hard truths of declining demand until it’s too late.
When stakeholders think of their legacy beyond their own lifestimes, and realize they can change their business, then more opportunities open up. “The possible sale or exit from the business should be one of many options considered, with the endgame being firstly, the preservation of family relationships and, secondly, the wealth built over the generations,” says Mr. Brown.
One particular family business came to an abrupt end once it reached the third generation because of the lack of definition around the family’s endgame, according to Mr. Brown. The family was in the construction industry, and owned equally by four brothers and their families.
The shareholders were increasingly at odds regarding the future of the business. Two of the brothers felt that the market was mature and offered limited opportunities for profitable growth, while the other two wished to stay in the traditional business. Mr. Brown says they had three choices: become more aggressive in their existing markets, expand to other markets or, exit the business.
Ultimately, two brothers took full ownership and pursued expansion, taking on substantial debt in the process. The other two took their money off the table and deployed it in assets that were less risky. While the decision to stay in the business temporarily preserved a long-established construction legacy, the company ultimately failed as one brother died and the other fell ill. The family endgame of preserving wealth and trying to implement a transition to the next generation was no longer an option.
This unfortunate scenario highlights the delicate balancing act that family businesses often face. To overcome this challenge, there are tools that improve the likelihood of success. Developing a vision and setting out a mission statement and principles in a family constitution, can be given life through a representative family council. Setting up that family board and holding regular meetings develops that otherwise elusive culture of open communication.
Regular meetings help family members get on the same page. If there’s a regular place to air issues, preferably with a family expert on the board too, it reduces the risks of just maintaining the status quo while building up bitterness. Instead, the vision can remind everyone what success means to the family, be it to continue the legacy of the family business, or be custodians of the family wealth. Defining a new legacy and having meetings would have helped those four brothers in the construction industry. Instead, they did not address their issues until they had a crisis, by which time it was too late. The family’s soft issues from the past became the hard facts.
Don’t wait for a crisis before taking action.
Jacoline Loewen is director of business development of UBS Bank (Canada). She is also author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.