Improving Family Business Performance
Understanding the Family Business
by Gerald L. Sherman
Some family owned businesses (FOBs) have a long-term history of consistent profitability. Others, however, have a similarly long-term history of weak performance. The obvious question is why.
Having worked closely with hundreds of small and medium sized family owned businesses for over two decades, it has become clear that there are a small number of salient factors which are critical.Ultimately, these factors coalesce into a series of “Core Business Values” which can substantially determine the FOB’s performance throughout the entire course of its existence.
The Concept of “Core Business Values”
The management of every family business requires that decisions be made about a myriad of issues. The totality of these decisions become, in effect, the family’s core business values. Of particular importance are the FOB’s core values regarding the training of family members entering the business;the future;finances; and the accountability of family members. Depending on the circumstances, the family may adopt these values consciously or unconsciously, or for that matter, willingly or unwillingly. Regardless, the functionality of the FOB’s core business values is crucial to its performance, both short and long term.
Several years ago I worked with a small distribution company owned and operated by a father and son. The company was extraordinarily profitable and it quickly became apparent that the two owners had adopted several core values around finances. First, they had a simple motto, “If we don’t make, we don’t take it.” Second, they were very careful about how they spent their money.
I will always remember each of them proudly showing me the desks in their respective offices. One was bought at auction for $50, the other was an old kitchen table that had come out of the father’s home. This is an unusually clear example of two family members consciously and willingly adopting several core values which were functional for them. The business thrived as a result and they hadgreat comfort with this style of management.
Critical Core Business Values Impacting Family Business Performance
Given that every family business has its own dynamics, it would be impossible to definitively identify a list of core business values in order of their importance to all FOBs. Nonetheless, it has been my experience that four dysfunctional core values tend to be particularly common to under-performing companies. Specifically, these involve the training of the successor generation, the family’s outlook on the future, accountability and finances.
Every severely troubled family business I have worked with has done a poor job of training the successor generation(s).For some reason, the need for sound training is often overlooked on a regular basis in FOBs. In part, this is because of a surprisingly common belief that a college education and a little bit of exposure to the business should be enough to prepare an in-coming family member adequately.
Most particularly, there are two areas that are consistently overlooked in my experience. First, the benefit of working for a meaningful period of time outside of the FOB is typically under appreciated.
For example, I recently talked at length with the CEO of a $20 million company. He talked at length about his own feelings of inadequacy and pointed to the fact that he had never worked for another company before joining the family business. He was well educated and could understand that he lacked a broader perspective. At the same time, he also seemed frustrated in his attempts to improve both his performance and his company’s.
The second area that is typically overlooked is the training that should take place once a family member joins the business. In particular, the benefit of substantial exposure to every critical aspect of the business is not recognized. Additionally, there is generally no formal effort to continue with outside training, be it through additional course work, workshops, industry based programs, etc. Particularly in today’s fast moving and competitive environment, the need for consistent training experiences is vital.
When visiting a troubled company for the first time, one of the most common phenomena is the feeling of having gone back 10 to 20 years in time. For any number of reasons, these businesses have tended to have little real concern about the future and the necessity of preparing for the business changes that are inevitable.
There needs to be a core value adopted that fundamentally says that the family believes that the future will be different and that the family must consistently make efforts to plan for and manage change pro-actively. In my experience, the failure to do so has led to the demise of many FOBs that had been very successful at one time.
Over the past several years, I have worked closely with an FOB with both father and son present. The son began his career at the company handicapped by weak work habits. Further, he had never been given clear goals or had his performance evaluated. Rather, he has largely been able to do whatever he has wished.
As a result, while he has exhibited some professional growth, he has not contributed at a level consistent with his inherent potential. More importantly, the company has not gotten the contribution from the son that it truly has needed. Overall, the company’s progress has been materially impacted.
The simple act of establishing performance criteria and periodically evaluating performance relative to those criteria is a relatively simple task. At the same, it is one of the most difficult tasks the FOB faces. Even more difficult is the issue of dealing with poor performers. In my experience, almost every under-performing FOB has little or no true accountability.In today’s highly challenging environment, however, it is virtually impossible to compete effectively over an extended period of time without it.
Many FOBs adopt core values around finances that are the polar opposite of the “If we don’t make it, we don’t take it” philosophy. As a result, these FOBs tend to be chronically cash poor. Sometimes, this core value is the result of greed. Often, however, it’s the result of an insufficient understanding of the need for and benefit of retaining cash within the business.
Regardless of the reason, these companies generally don’t have the funds needed to operate effectively or invest in the future. Clearly, this tends to result in chronic under-performance. Further, these companies are highly vulnerable to business downturns and other types of setbacks. Many, if not most, eventually fail.
Other Critical Core Values
Many other core values can also often have a critical impact on a FOB’s performance. In particular, these values tend to involve decision making processes, internal communications, methods of conflict resolution, methods of compensation and the formality of the FOB’s operating procedures. Depending on the circumstances, if any of these core values is sufficiently dysfunctional, they can have a substantial impact on performance and long term viability.
Addressing the Issue
Every FOB wishing to improve its performance can take a structured approach to addressing the issue through a careful examination of its core values. As a first step, each family member should independently evaluate the FOB’s core values and determine for themselves if they believe each core value is functional or not. This evaluation should consider all of the values addressed here as well as any others that appear to be meaningful.
More specifically, at a minimum, each family member should evaluate the FOB’s core values concerning training, the future, accountability, finances, decision making processes, internal communications, methods of conflict resolution, methods of compensation and the formality of the FOB’s operating procedures.
For example, each family member should develop their own evaluation about the sufficiency of accountability within the business. Further, to the extent that any family member believes that the business would benefit from greater accountability, they should develop recommendations as to how accountability could be improved.
Once each family member has completed their own evaluation of the FOB’s core values, a series of meetings should be held to discuss each of the family members thoughts and recommendations. Eventually, action plans can be developed to improve each area which the family has identified as requiring attention. These action plans should be quite specific and include time lines for completion. Lastly, the family needs to commit itself to aggressively following through on these action plans.
For some FOBs, their core values can be significantly dysfunctional, making it impossible for the family to systematically consider these issues. In those cases, the families will require outside assistance by competent professionals in order to develop and implement a truly effective action plan. In those cases, the work required can be rigorous and even painful. At the same time, the benefits in those instances can be most significant, sometimes the difference between viability and ultimate failure.
On the surface, addressing an FOB’s performance through the systematic consideration of the family’score business values might appear simplistic. In many respects this is, in fact,true. Sadly, however, that is the irony of the chronically under-performing FOB. Many, if not most of the problems are not terribly difficult to identify or even rectify. At the same, some FOBs just don’t ever quite solve their problems. In the end, a simple structured approach to core values can make a significant contribution.
Gerry Sherman began his consulting practice in 1982. Today, he specializes in the areas of turnaround management, corporate revitalization and debt financing. Previously, he was an officer of the Shawmut Bank of Boston.Mr. Sherman has been a lecturer at Boston College’s Small Business Development Center since 1983. He has also spoken widely on a variety of management and financial topics for organizations including the Family Firm Institute, The University of New Hampshire Family Business Center, The Massachusetts Society of CPA’s, and the U. S. Small Business Administration. Gerry was the 1992 President of the New England Chapter of Turnaround Management Association (TMA).