Standing the Test of Time: Part 1
A family business reality check
What does it take to make a business last? To not just survive but to thrive for decades, long enough to pass the baton to a new generation of management? Is it luck, product mix, or adhering to a strategic vision that propels some businesses to long-term success?
The answer lies in the hearts and minds of many hardworking individuals in companies large and small. In this first of a three-part series on sustaining a multigenerational business, we will examine the benefits and potential threats of running a family business.
Building A Legacy
The phrase “legacy business” has been somewhat tarnished in recent years. Once meant to indicate the proud carrying on of a business tradition, often from one generation of a family to the next, in some circles it has come to imply an antiquated or outdated business model. In today’s world it is often synonymous with bricks-and-mortar retail—considered a waning approach to selling, superseded by new methods of management, growth, and ultimately, success.
Many businesses aren’t even intended to last; some startups are designed to scale up quickly, accumulate value, then be sold and absorbed into larger entities. But building value depends on having a type of strength or unique quality many young businesses are unable to cultivate.
The result, according to a study by the Exit Planning Institute, headquartered in Lakewood, OH, is that as many as two-thirds of businesses fail to develop an effective selling strategy, and do not recoup the substantial capital investments made by owners or investors.
For the purposes of this article series, we will define a legacy business as one that has maintained significant continuity over time with a consistent brand name or image; has maintained the same core operational model within an industry; and has been run with a clear line of succession.
With many businesses initially conceived, especially in the early days of the twentieth century, as a means of providing security, employment, and intergenerational wealth-building, it’s no surprise family firms are often considered the default image of American business.
It is estimated by the U.S. Small Business Administration about one in every five companies is family owned; in the produce industry, nearly 17 percent of businesses are run by a single family. Because family ties represent a preexisting personal stake, these individuals already understand the importance of company success since their family’s livelihood is tied to it. As many would say, “it’s in their blood.”
Questions of loyalty and commitment are often moot, which is quite different in companies where ownership may be a distant investment firm and employees are bound together by little more than a paycheck. And although not all employees in a family business may be related, the bond and atmosphere are often more close-knit than other companies.
Being born into a business, however, is no guarantee of engagement. According to a recent report by Deloitte, younger members of intergenerational companies are very driven by the need to innovate, and cite it as their top issue when working in the family business.
Older generations in ownership are aware of these aspirations, but are less eager to pull the trigger; only 40 percent of those surveyed were willing to take on the risks associated with substantial change to the business model.
For those preparing to assume leadership in a multigenerational company, a third said they had been planning to take part in leading the company since childhood and 44 percent had been preparing for a leadership role even before they actually started working in the business.
Family firms are also slightly more likely to succeed than other types of companies, with a higher survival rate over the first two years by almost 5 percent. So how much of this has to do with blood ties versus other factors?
For Fred Duckwall, president of a shipping business in Hood River, OR, it cuts both ways: he believes “the sternest measuring stick of all” is employee pride, workers—whether family or not—have to care. “You support what you believe in.”
Even the most successful longtime companies—family-owned or otherwise—are vulnerable to change precipitated by significant events. Any business without a written succession plan is at risk. While multigenerational companies may rely on informal agreements, this can cause conflict and even jeopardize the business when there is no formal plan concerning who will run the firm and what his or her responsibilities will be.
As many as 64 percent of family business owners take on the mantle of leadership without such written plans, representing a significant degree of risk. Tim Vaux, a strategic planner for consulting firm FreshXperts, states that leadership in all aspects of operations is crucial, but even more so in family businesses.
“Writing and regularly updating job descriptions for key positions is a must,” Vaux insists. “Seniority in the family is not necessarily the key to the executive suite; honest discussions must be held to sort out who is best in each key position.
“Ownership and equity for each family member should be equal unless there are extenuating circumstances,” Vaux continues, “and if someone wants to opt out of the business, a buy/sell agreement is important to understand how shares will be transferred.”
Vaux also emphasizes the need to develop contingency plans in the event senior members decide to leave the business or die suddenly. A death in the family is always devastating, but it’s even more so if it precipitates the demise of a company that both family members and others depend on.
To make sure a company is prepared for such events and its fate rests in the hands of those best qualified to run it, Vaux recommends the creation and maintenance of a pool of potential replacement candidates, revisited annually by executive leaders.
Having taken this reality check of the family business, our next article will consider the keys to longevity.