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The Challenges Facing Family-Run Businesses by John Davis
What is Healthy Growth for Family Companies?
By Pascale Michaud, Ph.D.
Family Business Advisor
President, PMXOffice
Montreal, CANADA
Twitter: @PascaleMichaud_
Part 1
December 06, 2014
Once invisible and misunderstood, family-owned businesses have been increasingly celebrated over the past twenty years for some of their unique strengths. On such account, research demonstrates that family companies tend to surpass non-family companies performance during economic recessions. To the extent that non-family companies that share some traits with family-owned businesses (such as family-oriented values towards employees and customers, and a long-term view of the business) have proven to share similar performance behavior to family companies.
Research also demonstrates, however, that few family-owned companies are capable of passing the stress test of survival and growth across generations. Very few family companies succeed the transition from the first to the second generation, and from the second to the third generation (as remaining vitally growing and keeping in the family). Some long-term advisors to family companies point out to controlling patriarchs and a sense of entitlement among key members of the family as causes for a lack of vitality over time. Resources are consumed and not regenerated at a pace that is sufficient to remain strong and competitive.
Hence, it appears that when family companies are good, they are really good. They align a set of ingredients and mix them in a way that makes them uniquely strong. It also raises the questions: Can we collectively help the number of successful, multigenerational family-owned companies to expand? What kinds of strategy can a family develop overtime to protect and regenerate their wealth and assets, and to sustain growth in business while being united as a family? And what are the policy implications for governments in supporting this positive longevity?
Let’s begin addressing these inquiries with a simple correlation statement: since strong businesses typically require strong owners and leaders to remain vital and successful in the long run, it is expected that strong family businesses require the perpetuation of strong family owners and leaders over time.
There are multiple facets to strong family ownership and leadership, and we will explore them over the coming months, but let us focus our attention for this first blog on one specific set of questions:
What are the conditions for a family company to grow over time?
What is a healthy growth rate for a family company?
Do growth conditions and rate differ from non-family companies?
Grow or Shrink
In 1999, Tom Peters, co-author of the best seller In Search for Excellence, published a book entitled The Circle of Innovation: You Can’t Shrink Your Way to Greatness. I remember at the time the C.E.O. of a successful second-generation Canadian, publicly traded family-controlled enterprise, repeating these words incessantly -- ‘You can’t shrink your way to greatness.’ If your company does not embrace its full potential in an industry or in a product or a service line, someone else will see the opportunity and over time, will weaken your business and your market position, and the valuation of your company will decrease. This applies to any company, and in the case of a family-owned company, the family owners’ financial position will be diminished, which may affect their overall ability to revitalize their wealth and assets over time, while their family may expand and require more spending resources. Business revenues will not match business costs; and family revenues will also not match family costs or spending.
In some families, the choice of growing the business to its full potential requires lots of negotiation, over very long periods of time that may affect their ability to embrace critical windows of business opportunities. When there is more than one family owner and leader, or when there are periods of transition from one set of owners and leaders to another (for example, from parents to children), aligning goals and ambitions can become a tenacious exercise. Some family owners of different age and ambition levels might not like the potential consequences of rapid or intense business growth. They may feel that such strategy will increase risks, and potentially affect their future retirement and financial security. They may also dislike the idea of a growing headquarter, with many new faces around, many new processes and procedures required to manage complexity, and might fear losing the human touch and craftsmanship that characterized their company in the first place.
The lack of alignment can gradually forge itself into a precipice if owners and leaders who wish to achieve substantial growth increase points of pressure on those who feel discomfort. One cannot address or solve an emotional issue among family owners and leaders with facts and logics. Even if you repeat your rational message a thousand times… If fears of growth, or fears of change are behind some of the most conservative positions among family owners and leaders, than the true underlying reasons for fighting against growth must be addressed. With respect and care. And also, with creativity and innovation, as there might be ways to break down risks and business operations in order to meet everyone’s needs and expectations. Let us pursue our discussion.
...To be continued