Family Business: The Art of Survival

Following on from last month’s Family Business blog where the theme was “hats”, February’s theme is “The Art of Survival”.

For many family businesses that have survived the recent economic turmoil, survival has become something of an art form. But what is it that makes family businesses better placed to survive such economic turmoil compared to non-family businesses?

Success Criteria

Listed PLCs, private equity-backed companies and the like have very different success criteria to family businesses. In these types of companies success will be measured by phrases such as “shareholder value”, “shareholder return” and “return on investment” (or ROI), often with a specified timescale of 3, 5, or 7 years.

Compare this to a family business where quite often the number 1 success criteria relate to being able to hand the business over to the next generation. This in turn cultivates a mindset of not being a “business owner” but instead merely acting as a “temporary custodian” of the business until such a time how come where the baton can be passed on to the next generation.

Long Termism

The mind-set of acting as “temporary custodian” also instils a long termism culture where decisions are taken with a long term view. Whereas a listed PLC or private equity backed company may do a land development deal via some form of sale and leaseback with a developer, a family business may well finance a land development transaction via a 25 year mortgage because they are able to take that long term view.

This in turn keeps the family business in control of the asset concerned with the benefit of 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.

Core Values

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.

Flexibility

Notwithstanding the fact that family business often stay close to the core of their business, one of the unique factors of family businesses is their ability to be flexible and react quickly. 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 things such as corporate authority, sign off or even whether or not there is a budget for what they want to do.

Compare this to a listed PLC or private equity backed vehicle 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.

Succession

Often the biggest risks to any family business relate to succession. Succession is one of those things which if properly prepared can stand the business on an incredibly sound footing going forward where everyone knows what to expect, there are no surprises and the wealth of knowledge held by the older generation can be shared and passed down to the younger generation.

When succession is done badly or not planned for there is always a risk of an unexpected surprise arising, which results in a falling out between family members. These can become time-consuming and costly to resolve and have a big impact on the day-to-day operation of the business as the focus of the family members is on resolving the dispute and not the actual business itself.

In addition, an unexpected event can mean that vital business knowledge, often covering decades, is instantly lost with no way of 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.

When the above factors are brought together they can take a family business from “surviving” to “thriving”. For more information on the Gorvins Family Business Team, please do not hesitate to contact Christian Mancier via christian.mancier@gorvins.com  or follow Christian on Twitter @mancier.