30. Family businesses: the most successful, long-lasting and impactful businesses in the world

Rob and Josh are each co-founders of BanyanGlobal Family Business Advisors which advises family owners on business, finance, ownership, philanthropy, and a wide range of other issues.  They are each leaders in the field of family-owned business.  They recently co-authored the Harvard Business School publication: “Family Business Handbook: How to Build and Sustain a Successful, Enduring Enterprise.”

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Links

Why the 21st Century Will Belong To Family Businesses

Build a Family Business that Lasts

Order the HBR Family Business Handbook

Quotes

 

Family Business Myths/Facts

 

Myth: Family businesses don’t really matter.

 

Fact: “About 90% of all businesses in the United States are family owned and they account for about 50% of all employment.”

 

Myth: Family businesses don't last, after three generations, they're doomed to fail.

 

Fact: “Family businesses last longer on average than other forms of ownership. Some of the longest lasting and most successful businesses in the world are family businesses. Why don't Americans know that?”

 

Joe: Josh, why do you think that the myth that family businesses are less successful, that they never get beyond the third generation, why does that persist?

 

Josh: It's a great scare tactic, I think you keep hearing it is because people want to tell you, "You're doomed to fail and therefore you need my help to be able to overcome it."

 

Myth: Family businesses are rife with conflicts - family members are fighting and suing each other and just can't possibly get along

 

Fact:  “Most family businesses struggle not from having too much conflict, but from too little conflict, because it's really hard to raise some of these issues about fairness and compensation and all the things that come in as being part of a family business.”

 

Rob: It's strange, but the celebrity or the business celebrities, when I went to business school, Jack Welch, and he was making a brand for himself. Now, it's Bill Gates or Mark Zuckerberg at Facebook or Elon Musk at Tesla. They seek the publicity. I would say most all of the family business that we know the owners, they shy away from publicity. They don't want to be the face of their family business. They actually know the downside that can come with that.

Josh: Most family businesses are private companies and the word "private" is there for a reason, that they don't want to be public. They see advantages in being below the radar. I was visiting a family business recently in a state out west and I drive up to the headquarters and I was like, "That can't be it. We must have the address wrong. That can't possibly be the headquarters of a billion dollar company." And of course, it was.

“One of the amazing things about family businesses is that they can break the rules in a way and practice business in a way that is fundamentally different than other companies.”

 

“Family business owners can, if they choose, own it for their whole lifetime and maybe set it up for their next generation. It's the difference between maybe renting an apartment or even being in an Airbnb overnight - you're day trading versus owning a home that you're hoping to bequeath to your children.”

 

Unlike other companies,  family businesses actually talk about longevity. How often do you hear companies outside of the world of family businesses talking about how many generations do you last? Do we put like a second or third generation as if that's just a low number, but then you have to multiply it by 20 or 30 years and you realize that a third-generation family business has probably been around for a hundred years.

Josh:  People say: "Oh, most family businesses don't make it for a hundred years and therefore they're doomed to fail." I'm like, "No, no, most businesses last for under a year, maybe five years."

Joe: Their success is actually used as a way of talking about their failure when it's not really a failure at all.

 

What we find in family businesses is that core decisions are really made at the owner level in family businesses, not like publicly-traded companies. If you don't like what's going on at GM, you sell GM and you're out and it wasn't really hard to sell. With a family business you're in. So, you're going to work really hard to make the owner decisions the right decisions.

 

The rights that come with that ownership are profound, the ability to influence the company in ways that are positive and negative are fundamental and learning how to effectively step into that role as owners is essence of the work that we do and the essence of the book that we set out to write.

 

If you're working in a family business or if you're on the board of a family business and you don't understand the owner strategy, like what trade-offs they're making, you're going to be very surprised by the decisions that are coming your way.

 

Leadership Transition

If you've been in this position of leading a family business for decades, maybe your entire adult life, you're not just going to quit that and play golf. In most cases, you need some place to land, some place to go to…. to give that up, it's super scary.  It's psychologically very challenging for some people.

 

Joe: One of the things we talked about earlier … for the person that's been running the family business it is not just a job. It is his or her identity because they're really living their job. I think that provides a perspective of why it's so hard to let go.

 

Rob: That's a great point.  It is their narrative and maybe it's been their narrative since they were five years old, is that they wanted to be the controlling owner or CEO of their family business, and their narrative probably never got to that final few chapters about how they're going to relinquish control over time.

 

Some do it, and some do it with such aplomb, it's really quite amazing. We're trying to learn from those people about what it is that gets them to the other side of that transition.

 

Getting to the next generation, the hardest thing often is the current generation! It's like letting go of the reins and really talking. We have some clients who it's fairly easy for, but they're the exception.

 

 

“One of the hardest things to get right in a family business is family employment. One of the things that causes the most conflict in a family businesses is who gets a job, who gets paid how much, who gets promoted, who gets the CEO spot. And it's really hard to navigate those issues.”

 

“Once your (family) business gets to a certain size, the value you get from the right independent directors is almost always going to be worth the time and investment that you make into them.”

 

 

Big Ideas/Thoughts

 

The kinds of things that family businesses are able to do in terms of investing in their employees, investing in their communities that they believe and see paying off in their company, they would never be able to do them if they had to focus on quarterly earnings.

 

It's so interesting, when CFOs come into family businesses from public companies or from private equity, they have to be retrained, just retrained about what the priorities of the family owners are.

 

 

Managing Expectations

Another one of the things that people say about family businesses is that families grow faster than businesses, so therefore a family business is doomed to fail because at some point the size of the family will outstrip the ability of the business to support it. That's where expectations come into play because that's a choice.  Should family members actually expect to live off the business or do you expect them to find other ways and treat the dividends they get as a nice bonus to buy something, to buy a new car, or maybe if it's a great year, to get a new house, but not to treat it as sort of like the foundation of the family living on.

 

The Wall Street Journal is a great example of expectation driving decisions. The family (that owned the WSJ) lived off of a very profitable business, a growing family over time. And then as the digital age came in and disrupted newspapers, it was no longer as profitable anymore. And so the family was in a position where they either had to drastically cut their lifestyle or drastically cut the reinvestment in the business, putting them almost in a no-win position that Rupert Murdoch took advantage of and made an offer that they really felt like they didn't have a choice, but to accept.

 

Dividend policy and debt are two of the things that families have to grapple with, and that often leads to their demise.

 

Regarding debt: You go to business school, and they'd say, "Oh, look at all of the great benefits of leverage. You can get a much higher return on equity. Interest payments are tax deductible." So,  you come out of business school saying, "Lever up, baby." and there are also these LBOs going on.

 

You go into the world of family business, and it's so, so different. Many of our large clients effectively have zero debt. And in fact, we had one client, it was in the agricultural business, and they had zero debt and they had two full years of operating expenses on their balance sheet. And we're like, "This is not what we learned at business school."

 

 

 

Family Business Goals

 

From an ownership perspective, there are three main things you might want. You could want to grow the value of the business - let's go from a million to ten million to a billion and so on. You might want to do that just because you want to be richer, or maybe you want to influence the world and you see your business as a platform to do that.

 

The second thing you might want as an owner is liquidity, and here we mean taking money out of the business. So, you might want to do that because you want to lead a nice lifestyle, or you want to give it away to charity. Or you want to have something that is yours and not belonging to your entire family.

 

And the third thing you might want is control, and control is sort of like you have it until you give it up. So, if you take on an equity partner, you are giving up some level of control. If you take on outside debt, you're giving up control because now someone else is in the room with you and has some influence over your decisions.

 

The most common path to building a successful family business is the mixture of growth and control. If you look at the largest family businesses in the world, most of them have been built in exactly the same way, which is that they make a dollar, and they reinvest 99 cents. They give themselves enough money to pay the bills and they put 99 cents right back into the business. They do that over and over and over again until they've built something very significant.

 

The growth and control is at the expense of liquidity.

 

 

Owners Room/Importance of Owner Decisions

In family businesses on top of the boardroom sits the “owner room” and here there are very few decisions, but this is about the longevity of the firm.  What’s being traded in this room isn't the competency that's traded in a management room or the wisdom in a boardroom. It's actually power and influence. It's the power that if 51% of the voting shareholders do it this way, that's where it's going to go. But it's also the influence that if you stick it to your sister and she goes to her dad, oh, it may come back to haunt you somewhere else.

 

So what part of what we say is the owner room needs to have both the vote, the 51% we talked about, but really important to have the voice. Sometimes it's okay to be out voted if you had a voice in the matter and people have taken seriously what you have to say.