How to Sustain Family Businesses?
The difference between "owning a company …and managing one"
It is logical to understand that in most families, Emotions serve as the pillars of almost all relationships.
In a Business or Enterprise however, it is Economics which defines relationships!
Emotions & Economics are evidently, opposites of each other. Apart from the first letter, these two words hardly have anything else in common. ‘Emotions’ are feelings of the heart … while ‘Economics’ only understands that which is rational and supported by valid theories.
Interestingly, family businesses, are aunique combination of both, Emotions and Economics!
This is why they are a rather delicate form of Enterprise. Un-doubtedly, they hold huge potential, but they also tend to become more & more fragile … with time.
Surprisingly enough, family businesses make up between 80% to 85% of the world’s GDP and fund 85% of all start-ups across the globe!
Not so surprisingly however, the rate at which family businesses die out is alarmingly fast.
70% of family businesses fail to transition into the 2nd generation, from the 30% that survive, only 12% sustain up-to the 3rd generation and from that 12%, a mere 4% are able to usher in the 4th generation.
This means that majority of family businesses are un-able to survive beyond 60 to 70 years.
The challenge here, in-fact, is not in forming legacy businesses, but rather … in sustaining them.
Emotions, are definitely required when an enterprise starts. Raw passion, energy, and a die-hard attitude is vital to make a start-up successful. Similarly, in family businesses too,when the founder starts aventure, and if it is a progressive one, the venture takes the normal route that any successful start-up would and grows at a phenomenal rate in the initial years. However, by the time the second-generation steps in, the growth rate starts declining….and this is not necessarily because ‘opportunities’ in that sector have all been exploited … the business and that market sector still has a lot of potential but for some reason the second-generation (more often than not) is un-able to exploit these opportunities in the manner the first generation was able to. In-fact, many a times, the second-generation owners know exactly what is to be done, but they are un-able to do it.
The business therefore starts plateauing …and by the time the 3rd generation has stepped in, the graph of the enterprise has already commenced its downwards trajectory and sustainability of the family business becomes a serious question mark!
The above, however, does not hold true for professionally managed companies. If the erstwhile Chairman / Directors retire, the next batch is more often than not able to deliver results which are as good as or sometimes even better than the earlier set of leaders ... andthis trend continues (atleast in most cases).
The result is that the life of companies with professionally managed boards far outstrip that of a family managed enterprises. This is a fact.
Actually, the problem here lies in the fact that family business members oftenfail to understand the difference between “owning a company … and managing a company”.
In most family enterprises, the owners themselves are the managers and are (personally) involved in day to day nitty-grittys of the business. Contrary to popular belief, this type of micro-management by an owner is actuallyharmful for a family business, especially if the business is in a mature stage of its lifecycle.
It is true that when a business is in its early stages of life, it definitely requires an “owners” mentality to grow … and this mentality is easily provided by the founder or the 1st generation. However, once the start-up has reached a level of maturity, cash flows are stable& business is growing … the same start-up then requires a “manager’s” mentality to sustain itself!
This is why, an ‘Entrepreneur’ is very different from a ‘Manager’. It’s really not about skills here but more about the character and mind-set of the individual. The way an Entrepreneur approaches a problem is very different from the way a Manager would and this is a vital point which is often missed by most family business houses.
In family businesses, the business always takes centre stage. Business is discussed at the breakfast table, at lunch, over dinner, in the bedroom, and even in the bathroom! The definition of work-life balance for a family business member is different to that of a professional manager.
Family members usually grow up listening to business stories, business problems, balance sheets, new ideas & new ventures from an early age. Their world and definition of earning a livelihood is quite different than those who don’t come from family business houses … at-least this is true for most family business members, if not all. In-fact statistics show that, given a choice, up-to 70% of family members desire to join the family business because of their mind being pre-conditioned to doing so from an early age. It’s just the way things are and there’s nothing wrong about it.
The problems actually begin by the time the business has entered into the second generation and especially when it enters into the 3rd generation. By this time, the business is no longer a start-up and does not require an entrepreneurial mind-set to run itself. Rather it requires a managerial one,and this is preciselywhere most family businesses fumble … because family members turn out to be great entrepreneurs ... but they (often) fail to be good managers!
The risk appetite, mind-set, access to resources, exposure & confidence levels make family members excellent candidates to undertake new ventures, but when it comes to managing processes, family members often lack the discipline, the patience, the skill-set and many a times even the required experience to create, manage and sustain business processes. This is where professional managers and consultants are required to come in and take over ... and indeed this is where the family members need to bow out and delegate. The family members can continue being the owners and even the face of the company (if required), but they need to stop wasting their time in day to day nittygrittys and start utilising their talents in setting up new (greenfield) projects which would eventually serve as excellent diversification platforms to the existing family business and generate immense value to both the family members (personally) and the family business.
After all, creating an enterprise… and sustaining an enterprise are really two very different ball games … and require two very different mind-sets!
Hence, if a family business is to survive the torments of time, an ideal and time-testedpolicy would be allowing the management of the on-going businessesto be led by ‘Professional Managers’ … while (simultaneously) inspiring& motivating the members of the family to become Entrepreneurs!