Professionalizing the Family Business Part 1

Through the years, I have come across consultancy service requests coming from family run businesses that we fondly call the “mom and pop” companies. Many either want to sell their companies because their children have no interest in pursuing the business, or because the owners are already keen to enjoy the fruits of their labor in retirement.

For some family owned firms, the children certainly want to take over but are unable to do so because the company’s patriarch is yet unwilling to pass them the baton. In certain cases, new management ideas injected into the firm by the second generation entrepreneurs are stonewalled by the “old school” mindset.

Some family-owned companies have operated for at least two decades and their products or services remain in demand. These companies are successful by their own rights, being the product authors. If you look closer, their future market potential remains strong and bright. However, business growth may not be that aggressive given a few limitations.

So when the entrepreneurs decide to call it quits, they discover the value of the business is weaker than expected. The long years invested in building the business and its brands come down to almost nothing. This is truly lamentable.
If these founders are considering retirement within a five year period, they need to prioritize continuity and improving value by investing in professional management and operations. They should be willing to bring “outsiders” into the company. The first outsider should be a qualified consultant who can bring the various strands of the business together.

Family businesses were created for the following reasons:

  • The Sideline Syndrome – As a second source of income in case one spouse is not formally employed or as an opportunity presented itself which generated an interest to start the firm while being gainfully employed
  • The Parachute / Cushion – The business idea was pursued as a preparatory move for retirement or as a departure from corporate employment was contemplated
  • The Pastime – A product was invented by either spouse or relative from a hobby or recreational passion, which eventually saw its demand appeal grow beyond the inventor’s imagination
  • The Talent Pool – The skill level of one or both spouses presented a clear opportunity to create a business they could call their own

Threats And Weaknesses

Meanwhile, other “mom and pop companies” do not share the same luck. The key threats to sustainability are product / service weakness, market volatility, insufficient liquidity or operational flaws. These threats, when recognized early can be mitigated had the owners been equipped to plan ahead. Let us delve into the issues.

  • Product / Service weakness – usually the result of an unavailability of objective information, such as a formal or informal research which could help owners appreciate their customers and the shifts in the marketplace with regards to their products or services. The lack of market intelligence blindsides them and leaves them unprepared to meet competition or the changing market conditions.
  • Insufficient working capital – many families remain conservative and do not want to approach bankers for the funds that the company needs to aggressively grow the business. Whether out of choice or for lack of confidence, family owned businesses still hesitate to borrow funds for new equipment that could improve manufacturing capability and lower production costs, develop sales channels or fund their customer collectibles and maintain a strong cash liquidity position.
  • Waning business aggressiveness – in their golden years, owners develop the tendency to slow down and avoid stress associated with risk-taking. They become content to just make the right amount of money that funds a modest lifestyle which might include the annual vacation abroad. The “business as usual” attitude is infectious and soon even the company’s marketing people become complacent to allow competitors to take a larger share of the marketplace.
  • Crowing operational inefficiencies – most family businesses are run along centralized, top down lines. The entrepreneurs hold decision making power on issues, large or small. So that when owners fall ill or are preoccupied with key projects, the company operates in a limited way and often literally stops when a major problem arises. In such companies, the YES MAN attitude permeates in all of the employees and creativity and initiative are stifled.

Transforming The Company

Professionalizing the company should be seen as a work-in-progress. It takes considerable time to complete the process. From my experience as an adviser to SMEs, an 18 month span is a reasonable period to consider.

Select A Professional Consultant

You would want to pick an individual or a consulting company with a good track record and strong grasp of theory and practicality. Production and finance functions will involve a lot of number crunching. While marketing, human resource management and general operations involve practical, people-focused skills. Choose someone you are comfortable working with. He or she should be able to listen well and asks a lot of pointed questions.

Define Rules of Engagement

Put everything in writing. Your contract should include the list of services that will be rendered to your company, the extent of your working relationship, the deliverables e.g. written reports and documentation, and the time frame of engagement. This way, the professional expectations of both parties can be managed from day one. Remember to write a non-disclosure or confidentiality clause into the service contract.

Orient The Consultant

After you have made your selection and signed a service contract, it is time to sit down with the consultant to tell your story. This is the assessment phase. Devote between 2 to 4 whole days for this event. Organize the documents beforehand which you will give the consultant so that he can match your story with the hard facts. Walk the consultant through your business process so that the actual business operations are clearly seen and noted. Let the consultant talk to department heads so that he can hear the employee version of your story.

After the orientation is done, the consultant will prepare a position paper that will tell you how the consultant sees the company and its internal process, the product, and its short and long-term market potential. This is your company’s report card as viewed by an expert. The general and specific SWOT (Strength, Weakness, Opportunities and Threats) matrices and a set of recommended measures will be included in this report card.

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