Anybody who has ever ran a business will tell you that there’s no such thing as a single blueprint for success. What there are, however, are certain key principles which can be applied across a range of businesses.
Where family-owned businesses (FOB) are concerned, there are some unique challenges which arise from the combination of commercial imperatives and familial concerns.
In this article we’ll look at those challenges and the steps that can be taken to maximise success for FOBs, as well as looking at some real-world examples of successful FOBs and how the approach taken to doing business when building a family legacy can yield dividends as well as throwing up challenges.
Challenges
The single biggest dispute within a FOB is the tension which can exist between commercial imperatives and family dynamics. In simple terms, an over-emphasis on family involvement could lead to people being employed in certain roles – up to and including key management positions – on the basis of nepotism rather than their ability to do the job.
If the son or daughter of the founder of a business is automatically earmarked for a director’s role, without their credentials being properly interrogated, there is every chance they won’t be capable of delivering effectively.
Another common issue is hesitancy when it comes to seeking external funding, based on a fear that relying on third party funding might dilute the degree of control which the family has over the business.
The flip side of this, of course, is that relying solely on extra funding sourced from the family could inhibit growth in general, and in particular might impede the FOBs ability to respond quickly to opportunities which arise and which require extra funding.
Speaking of managing or failing to take advantage of business opportunities, a FOB might find itself hampered by overstating tradition and the legacy of the founders of the business, and therefore failing to innovate in the same way as their competitors.
In many cases, it is the structure of the FOB rather than it being owned by a family which is likely to cause problems. If a formal governance structure and strict decision making processes are not in place – in other words, if the FOB makes decisions on commercial matters in the discursive manner of a family choosing something like where to go on holiday – then it’s highly likely that the FOB will be plagued by decision making which is slow, inefficient and all too often compromised by a need to keep all members of the family with an interest in the business happy.
While reaching a consensus is appropriate in many areas of life, in business it can all too often mean the FOB in question is unable to adapt quickly to changes in the market place or pressure from competitors.
Finally, the question of succession planning could have the potential to cause problems for a FOB if it has not been handled professionally. The problems are two-fold: choosing a successor from within the family could lead to internal family conflict, thus negating many of the benefits of a tight knit FOB, while failing to look elsewhere might lead to missing out on the best possible person for the job.
Maximising Growth Potential
What all of these potential problems add up to is a limit on the capability for growth. Understanding the possibility of such issues arising, however, makes it more likely that a FOB will be able to guard against complacency and put in place the kind of structures which embed professionalism and efficiency, at the same time as harnessing the kind of drive and focus which helps to make some FOBs incredibly successful.
First and foremost, a FOB which hopes to achieve growth needs to look outward rather than inward, maintaining an on-going analysis of market trends and seeking to align the way in which the business operates, and its wider offering, with these trends.
By being keenly aware, for example, of what direct competitors are offering, it will be able to spot gaps in the market for offering a similar product/service to a higher standard (or for a lower price) than the competition.
Similarly, the data that pours into a business of pretty much any size in the digital age needs to be harnessed and treated analytically for insights into what customers want more of and what they are perhaps not so happy with.
Many businesses are built around a sense of tradition, and it is often this aspect which helps them to gain a foothold in the marketplace initially. The most successful, however, are those which are able to adapt these traditions to respond to what their customer base is demanding.
The average FOB is smaller than the multi-national entities they might be in competition with, but this can be turned to their advantage in the form of enhanced flexibility and agility, provided the structural decision-making risks mentioned above have been avoided.
When it comes to scaling up and growing, the key to success lies in applying the dynamic and demands of growth to every aspect of that business, having first set clear objectives of what it is that you are trying to achieve.
Individual aspects of the FOB which need to be fine-tuned before any long term, business wide push for growth can be activated include cash flow, the expertise and experience of the team which is in place, offering training for existing employees and bringing in any required skills which are currently lacking, and the streamlining of operations through the application of automation where applicable and workflows which are robust enough to operate if and when the business does scale up.
Relationships
In terms of maintaining the kind of ethos and traditions which enable a business to thrive and establish itself in the first place, it is vital that a push for new customers doesn’t come at the expense of losing focus on existing ones.
More than many other businesses, FOBs thrive upon having an almost personal relationship with their customers. Many operate in a manner which effectively invites people to join the larger ‘family’ of customers, and steps such as offering rewards to loyal customers and maintaining strong lines of communication and feedback will help to keep this customer base intact.
Scaling-up
Once the process of scaling-up operations has begun and is beginning to bear fruit, it is vital that the performance and strategy is monitored and reviewed closely on an on-going basis.
Scaling-up needs to be regarded as a process rather than an event, and regular feedback from relevant stakeholders, alongside running reviews of carefully chosen metrics will mean that the strategy for growth can be tweaked and adjusted as and when needed.
To demonstrate that the growth potential of FOBs is not merely theoretical, we can draw on recent research by McKinsey which indicated that, during the period 2017-2022, FOBs generated an average Total Shareholder Return (TSR) of 2.6%, as compared to 2.3% for non-FOBs, and that the average economic profit of FOBs over the same period was $77.5 million as opposed to $66.4 million for non-FOBs.
As an aside, the report also points out that FOBs account for more than 70% of global GDP and generate turnover of between $60 trillion and $70 trillion annually, whilst being responsible for approximately 60% of global employment.
The report is based on an analysis of 600 publicly listed FOBs and a comparison with 600 publicly listed companies which are not family owned, as well as an analysis of another 600 FOBs which are primarily private, and this analysis took place on a global scale.
The reasons given for the success of FOBs relative to non-FOBs are complex and would warrant an article in their own right, but the approach taken by standard businesses was found to be crucial in achieving success in at least four vital areas:
They placed a focus on purpose rather than profits, with that purpose ranging from the creation of an enduring legacy to a deep connection to the wider community and notions of social responsibility and sustainability.
They worked over the long term and reinvested in the business, utilising the fact that family ownership lessens shareholder pressure and the drive for short-term profits and dividends in order to take a strategic approach to investing.
They demonstrated a degree of caution regarding debt and high-risk investments, using what is their own money to invest in the parts of the business – such as sales, marketing and manufacturing – which offer clear opportunities for growth. This approach is particularly effective when a shock such as a supply chain crisis hits.
They enhance decision making through flexible internal processes and, in many cases, the fact that decisions are being made not through multi-faceted processes working through many stages, but rather a single individual or several key members of the family.
Should you require any advice or support on how best to structure your family business for growth, please contact the specialist family business team at Buckles for a confidential, impartial consultation.
%20copy%20(4)%20copy-Medium-Quality%20(1).jpg)
.png){kind=logo}
