Doing business with family can be difficult, but family businesses have unique opportunities compared to other companies – once they have proper structures in place.
It isn’t a secret that some of the most successful businesses in the world were started by families. BMW, Cargill and Johnson & Johnson are just some of the bigger names that are either owned in part or have a family presence to this day.
In Australia, family businesses range from local shops to large operations such as Linfox and Visy. In fact, family businesses represent about two thirds of the overall Australian business community.
KPMG Private Enterprise Partner Dominic Pelligana, who is actively involved with Family Business Australia, says running a family business is complex – but it has strong competitive advantages.
“I always say the family business system is the optimal model for running a business – but it comes with an asterisk,” he says. “That asterisk is making sure you have a strategic plan for the business – and the family."
Think about what it takes to get a traditional business up and running. It requires a core set of values – a principle to rally behind and a shared vision to strive for. In a traditional business, the founders often deal with a number of partners, or investors, who all want a say. With a family business, the values and ethos are embedded from the start.
“They’re usually genuine values, and the purpose isn’t just to make money – it’s to solve a problem or fill a niche. It’s almost like their intent is stronger,” Pelligana says.
The KPMG Family Business Survey 2015 recorded a rise in the number of family owned small-to-medium enterprises using Family Constitutions to document their values. This effort means family businesses are able to play the long game, integrating two powerful systems – family and business.
“They’re more willing to invest in ‘patient capital’ – that is, spending that takes a while to realise value – and take long-term views,” Pelligana says.
When it comes to handing over a family business to a new generation, some tension can arise. This is often due to different approaches to strategy and risk.
The KPMG survey revealed 49 percent of first generation founders are ‘prospectors’ and more willing to take on necessary risks. However, it also found 50 percent of those in the second through to fourth generations are ‘defenders’. They want to protect the business, and introduce more advanced and professional systems and processes. The founder of the business can be resistant to that change.
However, that generational shift can also be an advantage. Handling customer accounts takes on a new life, as sons and daughters continue the legacy set down by the previous generation.
“People who work in the family business could get a higher salary elsewhere. But they understand the money is going back into the business, creating a legacy for their family. When customers see that loyalty, they know they’re in good hands,” Pelligana says.
Often, people in family business can mix emotion with their work – perhaps feeling as though they aren’t running things correctly – leading to tensions.
“This is exacerbated when you overlay the family lifecycle (generational change and attitudes) with a normal business lifecycle (growing pains and the need to reinvigorate strategy),” he says.
The KPMG Family Business Survey 2015 found that CEO performance worsens when they reach over 70 years of age. However, the founder may find it difficult to hand over control.
But this tension can be advantageous. When the second generation attempts to improve the business with systems, processes and governance, they’re not working from step one. They understand the business, that perfection is made over time, and the improvements are brought by a team who have been close to the business for years.
It is the second generation and its ability to professionalise the business and family which can set a smooth transition to the third and future generations.
Another key advantage family businesses can embrace is legacy knowledge.
“Often in a corporate business, the same mistakes are made twice because the people in charge leave and knowledge isn’t passed down. The clear advantage of a traditional family business with multiple generations is that this knowledge ‘stays in the family’,” Pelligana says.
It’s important to remember there is no secret formula to a family business. Each family business is unique in its needs. Therefore, having a solid business structure and strategy, ensuring proper governance and guidance, and giving each family member a part to play means family businesses can harness their competitive advantage.
Get the basics right, and family businesses can not only thrive – they could sustainably outpace the competition.