Maximise the Value of your Family Business

By Jon Kenfield LLB CA CPA FIAMA

A Family Business can be a treasure, or a terrible trap, to the family and other stakeholders. Fortunately, there are some Golden Rules you can follow …

What is a Family Business?

For our purposes, a family business must be privately owned and controlled by one or more families, and there must be more than two people from a single family involved in the business on a full, or significant part-time, basis.

Family businesses comprise over 80% of all registered Australian businesses; they constitute approximately 25% of publicly listed companies; employ around 50% of the total Australian workforce and generate over half of our gross domestic product.

A common misconception is that family business = small business. It's not true. Although many family businesses are small, many others are large (over $50M turnover pa), or very large (over $500M turnover pa). It's more accurate to think of some small businesses as being a specific sub-set of family business.

What makes Family Business different?

Ordinary businesses have three types of capital: (1) People (labour); (2) Assets (including plant and equipment; know how and intellectual property; reputation and goodwill); and (3) Capital (money - funding and finance). They can be regarded as three dimensional entities.

Family businesses have all of the above, plus a fourth dimension – emotion . This fourth dimension feeds the passion of proprietors, family members and many employees. At the same time it can be their greatest vulnerability: egocentric myopia causes lack of separation between the family and the business, and low levels of professionalism and objectivity - all of which can have fatal consequences for businesses that operate in competitive markets.

The major challenges to maximising Family Business value

Less than 1/3 of family businesses pass from the founder to a second generation within the family, and less than 1/3 of second generation family businesses (ie: 10% net) pass onto the third generation. Therefore, maximising the value of the business – whether it is to be passed on within the family or sold outside – should always be a priority because, apart from making good business sense, the higher the return achieved for effort and sacrifice, the more options are available to the family behind the business.

As family business strategists and professional dispute resolvers, we come across the same themes and problems all the time. We have distilled 20 years of experience into the following “Seven Golden Rules for Maximising Family Business Value”:

•  Don't get lost amongst the muck and bullets. Probably the single largest challenge to a family business is ensuring that enough time and energy is spent working on the business of being a business, rather than simply working in the business.

•  Lift and separate – the secret of making wise decisions. Recognise and respond appropriately to the fact that Family Businesses are a composite of: (1) a business ; (2) a family ; and (3) individuals affected by both.

Do treat them as a true composite – a mix of three separate items that can work well together when mixed, motivated and used properly.

Don't treat them as an amalgam – a coagulated mass where the boundaries of the individual components merge into each other to make a single, amorphous mass – where, when one part moves, all parts have to move.

Business decisions should be made in the business, wearing a business hat. Family decisions should be made in the family, wearing a family hat. Decisions affecting individuals should be made while considering their likely effect on those individuals, as individuals.

Separate your thinking into these three elements and make decisions using proper decision making / problem solving processes. When the process works you get wise, balanced decisions to benefit the family, the business and the individuals.

•  Get, and stay, focused. We divide focus into three key elements : (1) Business and Family Vision ; (2) Business and Family Strategies ; and (3) Business and Family Plans .

Potentially, families and businesses can go on for ever. Regrettably, individuals can't.

When different generations are involved in a family business, the individuals concerned have different needs and interests, based on individual expectations and where they are in their respective lives. They are also usually affected by profoundly different time frames.

Families, businesses and individuals can cope perfectly well with these differences, provided there's a shared understanding and underlying agreement about their common direction and general destination. We call this: Shared Vision .

Step 1 of getting focussed – make the time and effort to collaboratively develop and commit to a long term vision that projects the future fortunes of the business, the family and the individuals out for at least ten, and preferably more than twenty, years. Do it no matter what the age of the current family members. The process of producing the Vision identifies and clarifies everybody's major personal, professional and financial goals; ensures they're all in the same boat and gets them rowing in the same direction.

Step 2 of getting focussed – now develop strategies to help the business, the family and the individuals achieve their vision by shaping and refining their aspirations into realistic business, family and individual goals and plans. In addition to normal business and commercial issues, these strategies should incorporate the family's needs and interests as a family , and individuals' needs and interests as individuals .

These strategies should include exit strategies from the business – practical, commercial and financial plans for eventual leadership and ownership transition – whether inside or outside the family. Only by identifying, considering, deciding and acting on these issues can measures be implemented to maximise the value of the business, including: succession planning; corporate restructuring and tax planning; consolidation and growth strategies; personnel training and staff/family development; executive and management recruitment; and financial and retirement planning.

Step 3 of getting focussed – develop a Business Plan. Many family businesses have highly inadequate business plans. They often only exist, if at all, in the proprietor's head – where they can do little to motivate, inspire or reassure others!

Business plans take the objectives and directions outlined in the vision and strategic plans and turn them into tangible, interconnected operational plans, covering: business development and growth; marketing and promotion; research and development; revenue and profit targets; cashflows and budgets; investment and development timelines; HR plans; allocated roles, accountabilities and individual responsibilities.

Business Plans should be appropriate to the businesses they serve – small business have relatively succinct plans, large businesses have more complex plans.

Good plans enable businesses to make major events, such as leadership transition, a process, rather than an event . Establishing certainty and maintaining stability in the business over periods of major transition are key elements in protecting and maximising value.

•  Maximise the value of your goodwill - grow your brand, or “business signature”. A family business should be able to stand on its own as a business. It needs its own separate persona. This requires it to know what it is, what it stands for, what its principles and values are, and what its intentions are over the long term. This establishes the image, tone and culture of the business – supporting marketing efforts and servicing and quality guidelines for staff, family and other stakeholders. It also serves to give the business a value of its own that doesn't rely on the continuing presence of the proprietor.

Developing a business signature is essentially the same as “branding” the business. It puts value into the business name that purchasers will pay good cash for, because it represents part of the value proposition that keeps customers coming back for more.

The expectation of future profits is more commonly called “goodwill”. Goodwill can attach to commercial reputation, position in the marketplace, geographic location and personal reputation. Unless all personal goodwill (ie: the goodwill that attaches directly to the proprietor) is replaced or transferred before he or she retires, the element of business value that relies on their actual presence in the business is lost when they step down – and the business value may be seriously reduced as a result.

•  Maximising and Managing Growth. Good family businesses grow, often very aggressively. Inevitably, there is a limit to how much growth can be competently managed by family members. Sometimes they run out of knowledge and skill, sometimes they simply run out of hours in the day. When growth overcomes available resources, the business needs to decide whether to consolidate, or continue to grow by professionalising the operation, its management structure and leadership style.

Businesses at this point need to up-skill their key personnel, or recruit new people.

A useful resource, dedicated to the advancement of family businesses in Australia , is Family Business Australia. FBA is a national, non-profit organisation that helps family businesses to professionalise their activities. FBA has offices in each State and can be found on the internet at: www.fambiz.com.au .

FBA's Register of Family Business Advisers refers family businesses to professional advisers recognised for their experience and skill in working with family businesses.

•  Manage your conflict. Regrettably, Australian history is sprinkled with stories of successful family businesses that have destroyed themselves, and the families behind them, by failing to resolve internal conflicts. Some of the causes of these conflicts are identified above.

Family members tend to take other family members for granted and, when they work together for a long time, a continuing failure to separate and satisfy family, business and individual interests and needs, is a certain recipe for disaster.

Inter and intra generational rivalry can bring a business to its knees very quickly – and competitors don't hesitate to take advantage of the resulting loss of business focus and confidence. As the business slides, its value drops.

Families should always respond proactively to the risk or fact of conflict. If they are too close to the problem to resolve the issues themselves, they should seek external expert help, preferably from a mediator. Again, FBA is a good source of information and expertise.

•  Plan for Transition - the Stewardship function. We advise family business proprietors to consider themselves as stewards of their businesses, rather than as owners , if they seriously intend to pass the business on to future generations of their own family. This helps them to see the business as a family asset that is only temporarily in their care, and perhaps as something where their performance will be judged, and lauded or damned, by future generations of their own family.

Accordingly, every strategic plan should include an exit strategy . What seems like a relatively minor difference in attitude can have a profound effect on the transition process.

Maximising Value - Conclusions

Most of these Golden Rules are standard best business practice measures transferred into the unique environment of family business.

Family businesses provide enormous potential benefits for families to work together, play together, and stay together. For those families that get it right, this is a real part of the tangible value, to them, of their family business.

The best family businesses are used as springboards to help younger (and sometimes not so young) family members start their careers and develop their lives - both inside and outside the business – according to their individual needs and interests. This is the highest and best use for a family business – not as a demanding monster where the egos of a patriarch are never quite satisfied by the sacrifices and devotion of children and other family members whom they dominate, but rather as a stable business base that can generate work opportunities, financial support and personal development for all family members.

About the Author

Jon Kenfield is the CEO of The Solutionist Group, a professional problem solving consultancy that provides strategic solutions and conflict management services to business. A major part of his practice involves working with family businesses.

Phone 0414 816 789 Email: Jon Kenfield Web: www.solutionist.com.au and www.disputesolutions.com.au .