20 May 2014  Research & Ideas

Managing the Family Business: Survival’s Secret Sauce

The secret sauce for surviving from generation to generation, says family-business expert John Davis, has three main ingredients: growth, talent and unity.

 

The secret sauce of long-term business success can't be captured in numbers. As the operations manager of a leading and fast-growing Brazilian business recently explained to a reporter, "There's a secret sauce in this business [but] it's almost impossible for a financial analyst to model." Agreed. But long-term success-even for a family company-can be explained in a rather simple, straightforward way. Here are some high points to consider.

GROW EVERY GENERATION

In order to stay alive commercially as a family, you must grow your assets (what's left of your assets after taxes and inflation) faster than your family or business consumes them. Of course, growing families and businesses are both good at consuming assets. For many family companies we have researched, their sustainable real growth rate is 6 percent. That might seem easy to achieve but it isn't. 1

Returns on assets tend to wane over time as an industry matures and ultimately declines. To maintain high returns and keep your family company modern and competitive you need to make well-timed, significant bets in growth businesses. Some of these bets can regenerate your core business, but others might diversify your business activities, moving away from your original business. If you can't consider diversification and entrepreneurial efforts, you are probably not going to survive long-term.

IDENTIFY AND DEVELOP FAMILY WEALTH GENERATORS

I've written several columns in HBS Working Knowledge about how important it is to produce the family talent you need in your family enterprise. You need good family owners to support your company and good family board members to guide the company. You also need one or more members per generation who are wealth creators—who know how to make winning bets that produce the financial returns you need.

I'm studying family wealth creators around the world. The best, like Alex Birman at Arezzo, often show an interest in business between the ages of 8-14. Develop these wealth generators by providing the right opportunities to learn about business, in your core business or outside. These wealth creators need to be stretched beyond their comfort zones in their understandings and capabilities. Give them real projects and don't protect them from failure.

BUILD FAMILY UNITY

I can't overstress the importance of building family unity if you want to succeed over generations. Family feuds that result in ownership splits weaken a family and greatly reduce its assets and returns. You need a program to bring together the family behind the business, to strengthen trusting bonds and build family commitment to your company. A good shareholder agreement is very useful. I don't advocate keeping people together when there are fundamental disagreements over a company's direction. But even these rifts must be managed in a respectful and careful way, ultimately with a commitment to preserve family unity and assets.

The secret sauce for surviving from generation to generation has three main ingredients: Growth, talent and unity. It should be your mantra if you want multigenerational success.

Other articles in this series

Managing the Family Business: It Takes a Village

Managing the Family Business: Leadership Roles

Managing the Family Business: Firing the CEO

Footnotes:

1. The annual rate of real growth (subtracting inflation) that the family must achieve to at least maintain its current wealth, given what it reinvests in its enterprise and family expenses (taking into account how the family is projected to grow, family lifestyle, and family dependency on its business) plus the cost of any non-asset-producing expenses (such as philanthropy).

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    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited.

    These are oft-repeated basics for success. Family businesses are coming out of their traditions which made the head of the family all in all and one whose word would not be questioned. Till quite sometime past this person would not be fairly well qualified and therefore not much attuned to processes which are need of the times. But now the approach has changed and family businesses comprise of people who keep pace with operational and environmental changes taking place in order to take total benefit. Young ones learn how best to go about for wealth creation and remain alert. Yes, disputes do occur particularly when clash of personal interests takes place. In such cases, it is advisable to devise acceptable solutions without letting the issues remain in the pipeline for long.