The Art of Survival for Family Businesses
10th March 2016
Following on from last month’s Family Business article for IFB on managing the various hats that family business owners and managers wear, this month Christian Mancier, Partner and Head of the Gorvins Family Business Team, discusses ‘The Art of Survival’.
Since going through the recent economic turmoil, survival has become something of an art form for those family businesses who stayed afloat and pushed through the other side. But what are the specifics that put family businesses in a better place to survive such disastrous economic downturns compared to non-family businesses?
Planning for the Long Haul
The outlook of acting as ‘temporary custodian’ implants a long termism culture where decisions are taken with a long term view for the success of a business and not just about making short term choices. This differs to a listed PLC or private equity backed company who may do a land development deal via some form of sale and leaseback with a developer, whereas a family business may well finance a land development transaction via a 25 year mortgage because they are able to look that far into their business future. The benefit of this is that it keeps the family business in control of the asset concerned which accumulates capital growth over time and promotes a culture where assets are often nurtured and cherished in family businesses rather than being seen as commodity items that can be acquired and disposed of at will.
One of the biggest dangers to a family business relates to succession planning, or the lack of it. Succession is one of those things which if properly prepared can stand the business on an incredibly sound footing for the future where all involved know what to expect without any surprise packages cropping up and the wealth of knowledge held by the older generation can be pooled and passed on to the younger generation. When succession is done badly, or even not planned for at all, the risk of an unexpected surprise making an appearance increases drastically, which results in a falling out between family members. These can become both costly and take up plenty of time to resolve, having a big impact on the daily operation of the business as the focus of the family members is on trying to resolve the dispute and not the actual business itself.
Furthermore, an unforeseen incident can mean that vital business knowledge, often covering many decades, is instantly lost with no way or retrieving or replacing that knowledge to assist the next generation going forward. As Benjamin Franklin said “by failing to prepare you are preparing to fail” and this is truly the case when talking about succession in family businesses.
Family businesses have a much different set of success criteria to listed PLCs, private equity backed companies and the like. In these kinds of companies success is measured by expressions such as ‘shareholder value’, ‘shareholder return’ and ‘return on investment, often with a specified timescales, such as three, five or seven years. Compare this to a family business where quite often the main priority relates to being able to hand the business over to the next generation. This in turn cultivates a mind-set of not being a ‘business owner’ but instead being a ‘temporary custodian’ of the business until the baton can be passed on to the next generation.
One of the unique factors of family businesses is their flexibility and ability react quickly to situations. If a family business decides it wants to do something, perhaps an opportunity has arisen or to react to a market competitor, then a family business can easily take the decision to do that thing without worrying about corporate authority, sign off or even whether or not there is a budget for what they want to do for example. Compare this to a listed PLC or private equity backed company where often budgets will be set 12 months in advance and a variation to those budgets or finding a new budget for a particular activity may involve numerous board meetings and approvals through a variety of management levels to get the necessary sign off to proceed, meanwhile the family business has probably ‘been there and done that’ already.
Quite often family businesses will keep very close to the core of the business they are in and not diversify too much from that core. This does not mean they don’t diversify around their core offering, instead they stay away from the risk of expanding beyond what they know into markets which are unfamiliar to them, thus avoiding the risk that sometimes comes with expanding too far or trying to merge different cultures into one organisation.
When the above factors are brought together they can take a family business from ‘surviving’ to ‘thriving’.