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MGT601 SME Management GDB 2 Solution Fall 2012

Are you ready for a starting your own business? If the answer is Yes, then the next step is to find the most suitable route to start your own business. As mentioned in many text books, there are four possible routes to start your own business which are mentioned below:

  1. Establish your own business
  2. Buy a running business
  3. Buy a franchised business
  4. Enter into a family business

It’s a common perception that establishing own business or buying a running business involve more risk as compared to buying a franchised business or entering into a family business. Similarly, within franchised business and family business, entering a family business is considered as an easy and less risky route. To certain extent this perception is endorsed with advantages associated with family business. For instance, the already established business does not require to build the infrastructure of the business, field is already set, all resources including men, machines, money and martial are already in motion and family support and family guidance is an additional advantage in the initial days of  business. It seems an ideal situation for young entrepreneurs but there could be some possible problems associated with family business.

Point of discussion

Let us assume that you are sitting in a friend’s meeting where everyone is motivating you to join family business where as you do not want to join family business for certain reasons. What possible points you will discuss with your friends to convey all the possible risks associated with entering into a family business?

Solution:

The interests of a family member may not be aligned with the interest of the business. For example, if a family member wants to be president but is not as competent as a non-family member, the personal interest of the family member and the well being of the business may be in conflict.

Or, the interests of the entire family may not be balanced with the interests of their business. For example, if a family needs its business to distribute funds for living expenses and retirement but the business requires those to stay competitive, the interests of the entire family and the business are not aligned.

Finally, the interest of one family member may not be aligned with another family member. For example, a family member who is an owner may want to sell the business to maximize their return, but a family member who is an owner and also a manager may want to keep the company because it represents their career and they want their children to have the opportunity to work in the company.

10 Key Family Business Issues

Family business can be incredibly rewarding, as it often can allow you to make a good living for your family, while at the same time getting to share the sense of accomplishment as you grow the business together and pass it on from generation to generation.  Family business can also have its challenges.  The vast majority of such businesses don’t make it past the first or second generation.  There’s a wide variety of reasons why this is the case.  Here we will touch on ten key issues that family businesses often encounter and should do their best to address proactively, before they turn into acute problems.

1.       Lack of Family Mission Statement Connection to Strategic/Tactical Plans

In order to have the Strategic Plan connected to the Family Mission Statement, of course, these two documents first must exist.  While it is true that in many cases, families have not gone through the time and effort to formulate a Family Mission Statement and a Strategic Plan, often times, even when this effort has been expended there is little or no connection between the two.  This can lead to a Strategic (and ultimately, Tactical) Plan that is not completely consistent with or worse yet, highly contradictory of, the written or unwritten Mission Statement of the family.  In other words, the family may be on a completely different page than the Board, who may be on a completely different page than the management team.  When the Board and management team include non-family members, this disconnect may be accentuated further and can lead to a great deal of conflict and ultimately sub-par performance or even failure of the family enterprise.  Thus, it is critical that these documents are well-aligned.

2.       Lack of Well Trained and Qualified Future Leaders

One of the main criticisms family businesses face is that the last name of prospective and current employees often matters more than their ability, training and experience.  This can lead to resentment that undermines the ability of the enterprise to reach its potential.  This situation can be avoided by developing and adhering to paths and policies for employee advancement within the company.  In many family businesses that have successfully addressed and overcome this issue, copied from vu.paktutorial.com younger employees, whether they be family or non-family members, are required to start at the “bottom,” performing basic tasks in many and varied areas of the business, so they learn the operations “from the ground up”.  This approach also gives the other employees an opportunity to interact with and become comfortable with the abilities of the young family member employees, while at the same time giving those employees confidence and a strong base of experience for later advancement.  The keys for success on this issue are the consistency and fairness of the approach to family and non-family employee advancement opportunities within the family company.

3.       Competition from Entrance of Multinationals

All companies (other than monopolies) face challenges from competition and in particular, from large multinationals.  In the case of family businesses however, the problem seems more prevalent.  This occurs because family businesses often engage in businesses that have been around for a long time and are, or at least once were, high margin business, catering to the daily needs of mainstream consumers.  These industries and markets are often viewed as attractive targets for consolidation and also for infiltration of larger domestic and international companies.  What defenses does the family business potentially have?  In reality, it is very difficult to compete head-to-head against a much larger, better capitalized company with more developed resources.  Many families have been able to compete effectively though, typically by employing key technology advances, focusing on profitable and sustainable niches, and/or by using their superior knowledge of the local market to deliver a solution that is copied from vu.paktutorial.com better received by customers.  Another approach some family businesses have taken in this situation is to acquire other similar companies to gain the mass they need to compete effectively.  Although it’s typically seen as a last resort, some family companies also have ultimately made the decision that the investment, risk assumption and energy expenditure necessary to compete against larger competition was not worth the price, and they have either closed their operations or sold the business.

4.       Poor Communication Between Generations and Branches of Family

The issue of communication exists in every aspect of life and in every business, of course.  Effective communication is critical to the success of any relationship, most any undertaking, and certainly any company.  The challenge in family businesses is that what in a non-personal, non-familial setting may be straightforward and simple, given the frequently charged emotional setting of the family company, becomes a monumental task.  In order to overcome this obstacle, it is important to put into place a series of simple, but regular and non-negotiable, communication protocols and procedures.  An example is to have a regularly scheduled family meeting that all family members working in the business must attend to discuss:  the performance of the business, the strategies for future success, expectations of dividends, as well as any other issues about which family members may copied from vu.paktutorial.com have a concern.  Open, honest communication must be encouraged and rewarded – the attendees must see this venue as a safe place to put sometimes sensitive issues on the table for discussion.  For the extra-sensitive issues that cannot be aired in a setting with a relatively large number of attendees, senior generation members of the family must encourage successor generation members to bring any and all issues to light.  This may take the form of one-on-one or small group meetings and it may also include an advisor, where appropriate, to keep the discussions productive and on track.  Poor communication and festering issues between generations and branches are like a cancer in the family business and they must be dealt with directly and conclusively.  History has proven that this issue of poor or non-existent communication is one that can take a family business down more quickly and more dramatically than any other.

5.       No Plan for Exit, or if not Exit, Effective Succession

Not many of us like to face our own mortality.  With entrepreneurs, even more so.  We’re also typically not too keen on admitting or believing that there are others who could do what we do, perhaps even better.  Family businesses are no exception – it is often the case that the founder(s) of the company, the so called “senior or founder generation” will come into the office well into their seventies and sometimes even their eighties!  If this is what they want to do, more power to them; they have undoubtedly earned this right for all the blood, sweat and tears they have put into building the company over the years.  Their desire to be there is not the issue.  The challenges arise when the founder(s) doesn’t, as he or she approaches retirement, properly train, groom and delegate key responsibilities to successor generation members and non-family managers.  There are far too many instances in the history books of senior generation members who did not properly prepare their successors and then met some unfortunate death or injury that left them incapacitated.  It is certainly not pleasant to think ahead on this matter, but it is essential for the founder who wants to be an effective steward of what they’ve built and ensure that their company will continue on many years after them.  While it is not a simple task, there are some relatively straightforward planning steps that can be taken to ensure that one’s company does not fall victim to inevitable, but unpredictable events.

6.       Lack of Interest in Business by Successor Generation

This issue is a double-edged sword.  On the one hand, most senior/founder generation family business owners would like to see their progeny take part in and eventually assume leadership of the business.  On the other hand, having family in the business raises many of the issues mentioned elsewhere herein.  The reality is that if the younger generation is not interested in working in the family business, it is of little use for the senior generation to push or force the issue.  The prudent approach is to bring in professional, non-family executives and allow the younger generation to pursue their dreams elsewhere.   With this approach, they may come back to the business later, but only after having explored the work world and likely having picked up useful skills and experience that can be deployed in the family business.  If they do not come back to the family business, at least the senior generation can take comfort in the fact that they will not have jeopardized their personal relationship with their children in an attempt to force them into the family business setting.

7.       Lack of Understanding and Documentation of Corporate Governance

Like most entrepreneurial ventures, most family businesses begin with relatively little structure and formality, surviving and growing based on the iron will and ingenuity of their founders.  But like most other ventures, family businesses often struggle to professionalize and formalize as they grow.  Eventually, the business becomes complex enough that “shooting from the hip” becomes increasingly risky, as the dynamic nature of the enterprise makes running it without structure like trying to hit a constantly and rapidly moving target from great distance.  What is required at that stage is a least a modicum of formalized governance of the enterprise, or so called corporate governance.  In the family business, the biggest change at this point is that while there is still a CEO (usually the founder) who makes all final decisions, there is also an active Board of Directors, a Family Ownership Group, and a professional management team that helps ensure that the CEO has the correct information to make informed decisions.  This “correct” information includes the Family Mission Statement, which as noted above, should be the guiding light consistent with which all strategic and tactical plans are formulated.  Further, in a corporate governance setting that is working correctly, there must be an awareness on the part of all family and non-family Board members and executives that they have a fiduciary duty to the family shareholders to optimize their return consistent with their wishes.  We use the term optimize here, instead of maximize, as the equation is not one of simple maximization of a single variable, but rather maximization of returns,  consistent with a well-defined site of criteria documented in the Family Mission Statement.

8.       Lack of Formal Budgeting and Planning Process

The lack of formal budgeting and planning goes hand-in-hand with the lack of good corporate governance and it occurs for many of the same reasons.  Given the strong business acumen of the senior/founder generation, it is likely the case that for a good portion of the life of the family business, there was no real or perceived need for formalized budgeting or planning.  The founder(s) were able to keep most everything in their heads and given their exceptional abilities to grow the top line revenues of the business, any budgeting or planning deficiencies never really came to light.  The challenge arises as the organization gets larger and there are more people involved in both revenue generation and expense control.  At that point, it is absolutely critical that the company budget both revenues and expenses, realizing that such an exercise will never produce exact estimates.  It will, however, provide a baseline for comparison of actual revenues and expenses to those budgeted, facilitating the process of ongoing marketing and expense management and “course correction”.  The same can be said for the formulation of a strategic plan:  while it is not likely to ever be perfect, it allows the organization to explore options and develop a baseline or benchmark for the results achieved.  It also permits the development of a more detailed series of tactical plans that can be tied back to the budget, allowing more timely and reliable correlation of results to activity and investment.

9.       Lack of Board and Management Outsider (non-family) Representation

Most successful entrepreneurs become successful based on their belief in themselves and their ideas.  As a group, entrepreneurs, including those who found and grow family businesses, are not known for relying heavily on the ideas or input of others.  For this reason, it is not a trivial decision for a business owner, particular in a family business setting, to allow outsiders to provide input on their business.  The Boards of most family businesses are comprised of family members exclusively, or, if there are outsiders on the Board, they typically do not raise much resistance to the ideas of the owners/founders – they are often referred to as “rubber stamp” Boards.  Similarly, founders of family business are often reluctant to bring non-family members to key executive positions within the company.  In both cases though, the family business owner may be committing an important error, depriving his or her company of much needed objective advice from outsiders with critical knowledge and experience.  Those family business owners who address this issue best are those who bear in mind that regardless of outside input, barring extenuating financial circumstances, they will always have the final say and should not feel threatened by the input of non-family members.  The best also seek Board members and executives that are the most qualified they can find, rather than those who will simply say yes to the whims of the owner(s).  They seek those that are willing to ask the tough questions and confront the tough issues.

10.   Lack of Access to Debt and Equity Capital for Growth

The credit markets have tightened up significantly in recent years, making access to much needed growth and working capital harder to come by.  This has forced family business owners to look further than traditional asset-based debt lenders to the non-traditional markets, such as private equity.  This world is foreign to them, as the typical, “we’ll lend you x dollars at x percent interest with these assets as collateral” is the not the way of the non-traditional financing markets.  They may say, “we’ll lend you x dollars at x percent interest, based on projected cash flows, with an option to purchase x percent of equity in your company over this period of time”, or “we’ll provide you x dollars in exchange for a 40 percent equity position in your company, with an option to purchase a controlling position at some future date”.  This is a very different world for the family business owner to navigate, with numerous implications for the future liquidity and ownership of the company.  Given the numerous permutations of possible financial transactions with alternative financing sources, any family business contemplating such an approach would be wise to have a CFO with expensive experience or this area, and/or hire knowledgeable advisors to help them navigate the numerous pitfalls.  This will allow them to remove at least a portion of the risk of such an alternative financing transaction.

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  • Mutteh Ur Rehman

    very nice