Thoughts and ideas on growing a business

7 Attributes of Enduring Family Businesses

There are c. 200,000 family owned businesses in Ireland.

Recently I was contacted with a query on support for family businesses, and it led me to think about the many family owned companies we work with in Celtar. The high proportion of our family business clients is not surprising.

Family owned and managed businesses have their own unique characteristics, a shared history and experience, loyalty and deep commitment.

In any SWOT Analysis there will be recognition of specific Strengths associated with a family enterprise. In the next column these self same Strengths can also be identified as Weaknesses.

As specialist SME advisers we have worked with first, second and third generation family owned businesses. These include business services firms, specialist contractors, distributors, a private hospital, manufacturers, tour operators, a materials handling company and many more.

Consulting firm McKinsey produced a paper called “The Five Attributes of Enduring Family Businesses” in 2010 (I have added two more attributes). They noted that one-third of the companies in the S&P 500 and 40% of the 250 largest companies in France and Germany were family businesses. Of course the term “family business” does not necessarily mean “small business.” While many of the conclusions McKinsey drew were applicable only to the largest multi-generation companies, there are lessons that apply to family businesses of all sizes and types. In this blog, I’ll describe McKinsey’s key success attributes along with some comments from our experience in Celtar.

1.  Governance and business growth

“As family businesses expand from their entrepreneurial beginnings, they face unique performance and governance challenges. The generations that follow the founder, for example, may insist on running the company even though they’re not suited for the job. And as the number of family shareholders increases exponentially generation by generation, with few actually working in the business, the commitment to carry on as owners can’t be taken for granted. Indeed, less than 30% of family businesses survive into the 3rd generation of family ownership.

“To be successful as both the company and the family grow, a family business must meet two intertwined challenges: achieving strong business performance and keeping the family committed to and capable of carrying on as the owner.”

The number of family members owning or working in the business should not, in fact, increase “exponentially generation to generation.” Inevitably there will be conflict about future direction of the company if there are too many family shareholders. From experience some may look to sell up and asset strip the business, others will take a longer view and wish the company to continue growing, and trading whilst maintaining family ownership.

2.  Recognising the need for external talent

“Family businesses can go under for many reasons, including family conflicts over money, nepotism leading to poor management, and infighting over the succession from one generation to the next. Regulating the family’s roles as shareholders, board members, and managers is essential because it can help avoid these pitfalls. Large family businesses that survive for many generations make sure to permeate their ethos of ownership with a strong sense of purpose…….long term survivors usually share a meritocratic approach to management.”

For business survival and growth, family members must accept that the best people to manage the business are not necessarily members of the family.

3. Raising capital, effects on ownership

“Maintaining family control or influence while raising fresh capital for the business and satisfying the family’s cash needs is an equation that must be addressed since it’s a major source of potential conflict, particularly in the transition of power from one generation to the next. Enduring family businesses hold family councils and regulate ownership issues – for example, how shares can (and cannot) be traded inside and outside the family – through carefully designed shareholder agreements. Raising capital from Venture Capital firms will dilute family ownership and lessen family control.

4.  The struggle for talent

“Family businesses, like their non-family peers, face the challenge of attracting and retaining high class talent to key management positions. In this respect they have a handicap because non-family executives might fear that family members make important decisions informally (over meals in the family kitchen?) and that a glass ceiling limits the career opportunities of outsiders.”

Family businesses do have a problem retaining and attracting talented managers. Non-family executives fear that their contributions are not recognised, and that they are “out-of-the-conversation” when important decisions are taken.

5. Too risk averse?

“Too much prudence can be dangerous. Family owners, who usually have a significant part of their wealth associated with the business, face the challenge of preventing an excessive aversion to risk from influencing company decisions. Excessive risk aversion might, for example, unduly limit investments to maintain and build competitive advantage and diversify the family’s wealth.”

Many Irish family businesses will have invested in our property boom/bubble, so in fact more prudence should have been employed.

6.  Develop your own talent – succession planning

Working in the family business has become a more attractive option for many sons and daughters, as the recession hinders career development and limits job opportunities.

We advise that the family members work elsewhere, possibly the UK, before they join the family business. Away from the family enterprise they learn professional management skills and different approaches – and thus bring new ideas and outside experience to the family firm when they join 4 or 5 years later.

7. Values of family businesses can be different

A fair share of family owned businesses offer a higher then average commitment and loyalty to staff.  I have observed business owners of small companies taking hits in their pockets instead of taking the option to make staff redundant. Larger companies can appear heartless in making redundancies when their sales fall and profits decline. Small family owned businesses are often different. This difference is based on close relationships with individuals built up over years and of working together to serve customers.

In conclusion

The keys to long-term success for a family business are professional management gained from harnessing the experience of outsiders, and keeping the family committed to the responsibilities of ownership.

See the original McKinsey article at

http://www.mckinsey.com/insights/organization/the_five_attributes_of_enduring_family_businesses

To discuss how the issues in this article affect your family business you are welcome to contact me at billy.linehan@celtar.ie

Other resources

http://www.deloitte.com/ie/succession-planning

Deloittes Ireland ‘Planning for family business succession’

http://download.pwc.com/ie/pubs/2012_family_business_survey_findings_for_ireland.pdf

Family business survey 2012 from PWC Ireland

http://www.enterprise-ireland.com/en/Events/OurEvents/Family-Business-Conference-21-May-2013

Enterprise Ireland are hosting a  “Family Business Conference” on the 21^st of May 2013, in Dublin

http://www.enterprise-ireland.com/en/Events/OurEvents/Family-Business-Conference-21-May-2013/

There used to be a family business centre in UCC, www.ucc.ie , but I can’t find any recent links to it.

And there is a new family business initiative from Plato in Cork which I am researching.

Billy Linehan, Celtar, family business advisers Dublin

“Strategy?  Strategy! I never got to where I am today thinking about strategy.”

There are two types of people who run businesses. Those whose eyes glaze over when they hear the term “strategic planning”, and those who are over enthusiastic when the phrase is mentioned and embrace it fully.

Most business owners I work with share the former trait, they are very operationally focused.  Sales and selling, new customers, people performance, maintaining margins and an obsession in meeting customer needs are where they feel most comfortable.

Now is the time of year to stick their heads above the parapets, to gather their management teams to review 2012 and plan for 2013. To get down and dirty, dust off last year’s  SWOT and bring it up to date.  To review last year’s targets and performance, set targets for 2013, first identify and then plan to align resources, and re-plot the path to the long-term objectives.

Yes, that’s what I will be working on – strategy – over the next two months with clients old and new.

See the recent recommendation from Walter MacDonough of property specialist Alan Caren and Partners Ltd.

“Billy Linehan of Celtar business consultants facilitated the development of a new strategic plan for our company. He worked with us in a time of challenge and change and shared a framework for long term business planning, aligning company objectives with departmental & staff goals.

He identified critical business issues to target as part of the strategic review and together we developed a growth plan for the business.

Billy has provided excellent advice to the directors of Alan Caren and Partners Ltd (Property, Facilities & Building Consultancy specialists), and we recommend his services to other growing companies.

Contact us at info@celtar.ie for more information & if you would like an external input into your  company’s plan for growth.

Celtar, business advice in Dublin

Business advice from Dublin

There is an excerpt below from a recent speech by John Perry TD, minister for small business in the Irish government.

The government has recently introduced some financial measures to enable SMEs to access finance.

Measures too late?

Observers will say that these measures are too late, as many small businesses have ceased to trade as they were starved of working capital by their banks. I will keep an open mind, and will encourage clients to access these schemes based on how they might meet their financial requirements.

The banks have changed their tune

The banks have changed their tune with SMEs*, and resisted lending to this market for the last 4 years. Now they are engaging in a “love-in” with the Irish SME sector. All are luring owner managers with heavy advertising via many channels including social media campaigns, promising that finance is now available. [These are the same banks who caused the loss of the Irish state’s economic sovereignty. They are kept afloat through the funding of massive bailouts by tax payers. More on this another day]

John Perry starts “Small businesses are a central part of the economy and their ability to succeed and grow underpins our future potential for jobs, growth and prosperity. 98.5% of all firms are small and employ over 650,000 people throughout the country.

As Minister for Small Business, we in Government acknowledge that small businesses are currently operating in a particularly difficult environment. It is important therefore, that we continue to focus on delivering on a practical programme of actions that can achieve positive improvements in the operating environment for small businesses.

This Government is acutely aware of the importance of the SME sector and its potential for generating employment. Our challenge has been, and continues to be, where to best target our efforts and financial supports and interventions to optimum effect, so as to assist the sector.

In particular, access to credit facilities has been the major issue for small businesses. The initiatives taken by the Government to restructure and re-capitalise the banking system was the principal initial response to making credit available.

The Action Plan for Jobs 2012 (see http://www.djei.ie/enterprise/apj.htm) is particularly focussed on assisting the small business sector to cope with the current economic crisis and to prepare businesses for future growth and job creation.

Through the Action Plan for Jobs, we have, in particular, delivered in 2012 a number of measures to ensure that businesses do not face unnecessary obstacles as they attempt to expand and create the jobs, we so badly need. These include:

• the €90m Microfinance Scheme, www.microfinanceireland.ie
• the €450m Credit Guarantee Scheme,  http://www.djei.ie/enterprise/smes/creditguarantee.htm

The Microfinance Ireland initiative was launched on 27th September, 2012 and lending commenced on 1st October 2012.

This Government initiative is designed to stimulate lending to sustainable micro-enterprises and is targeted at start-up, newly established or growing micro enterprises across all industry sectors, employing not more than 10 people.

It will provide loans of up to €25,000 for commercially viable proposals that do not meet the conventional risk criteria applied by commercial banks.

The Credit Guarantee Scheme is the second major project targeted at supporting an additional flow of credit for SME’s introduced by my Department this year.

The Credit Guarantee Scheme, which came into operation on 24th October, 2012, will be will be closely targeted at commercially viable, well performing enterprises that have a solid business plan and a defined market for their products or services which can demonstrate repayment capacity for the additional credit facilities but which cannot secure credit facilities due to market inefficiencies. Ulster Bank, AIB and Bank of Ireland are participating in the Guarantee Scheme.

The Guarantee Scheme will provide a 75% guarantee to banks against losses on qualifying loans to job-creating firms to get the banks’ lending again to industry and entrepreneurs. The minimum permissible loan value will be €10,000 and the maximum will be €1,000,000.”

Such schemes are useful and will meet the needs of some SMEs. But they should not be open ended – banks should fulfil this role of financing business in a free market economy.

Reliance kills enterprise and innovation

And these and all the other plethora of state funded enterprise supports should not infect the “disease” of reliance on government support  - & it’s related illness dependency – in SMEs .

In the long run such reliance kills enterprise and innovation.

Billy Linehan, Celtar business consultants

* SME stands for small and medium sized enterprise. A common term for businesses with up to 250 employees. The majority of businesses in Ireland have less then 50 employees.

Celtar comment

Where to get the best business advice?

New Enterprise Ireland team to aid potential exporters in the Irish Times today http://t.co/xwATN3Wl

Another positive initiative from Enterprise Ireland arising out of the Jobs Action Plan BUT one influential group is often ignored in supporting EI activities to stimulate economic growth – professional business advisers.

 These are professional and certified business consultants and other professional services advisers who assist companies in determining – and attaining –  their strategic goals.

Most leading management and business consultants in Ireland are members of the Institute of Management Consultants and Advisers, see www.IMCA.ie . Many hold the internationally recognised CMC* accreditation. These trusted advisors are often left out of the loop regarding building growth orientated SMEs, and they are ready and able to play their part in turning around our economy.

I suggest that accessing business consultants from overseas does not guarantee better quality support (and contributes to economic displacement).

“If you want quality business advice, go to professional business consultants, who have  indepth experience in offering practical solutions.”

Volunteer business mentors with no training, codes of professional conduct and no consultant insurance cover are not the answer for Enterprise Ireland, local chambers and other business development organisations.

“You pay for what you get” as one client remarked to me.

If you wish to access expert business consultants anywhere in Ireland check out www.IMCA.ie . On the site you can search for consultants by area of expertise, or make a general enquiry.

Billy Linehan, CMC 

billy.linehan@celtar.ie 

*CMC, Certified Management Consultant, accreditation from the International Council of Management Institutes, see www.icmci.org

 Kenny & Bruton introduce job support plan today

It will take a while to absorb this integrated list of actions on creating jobs announced today by the Coalition government.

As a supplier to the county and enterprise boards I am interested in what is going to replace them, and when.

35 CEBs with 35 CEOs and 35 deputy CEOs never seemed to make sense to me. But it is internationally acknowledged that advisory services to micro businesses are best delivered locally. Enterprise Ireland has raised its game in supporting exporting companies, but what about the 90% plus of businesses who don’t export? And delivering business support through the network of local authorities? An unreformed section of the Civil Service – with a culture far far away from an ordinary decent S , M or E! No futher comment until the details are revealed.

The Government has launched an ambitious jobs plan that aims to create 100,000 new positions by 2016 and a further 100,000 by 2020.

The full programme includes a total of 270 measures (download from the department site at http://www.djei.ie/publications/2012APJ.pdf ) to be delivered this year in 15 Government Departments and 36 State agencies.

The process will be policed by a monitoring committee of three Departments with think-tank Forfás.

In an effort to address the difficulties small companies face accessing credit, the State is to guarantee 75% of loans to small and medium businesses. That measure is expected to be operational by the second quarter of this year.

The plan will include a Development Capital Scheme for companies with prospects of jobs and export growth. It will be backed by €50m State investment, which is expected to leverage up to €100m.

A new Micro Finance Fund will supply investment in small companies seeking less than €25,000. The fund will be €10m every year for ten years. The European Investment Bank will supply some of the equity.

The plan proposes a finders’ fee of “up to €4,000″ for people of Irish extraction abroad who succeed in bringing major job projects to Ireland.

The Taoiseach said that people who wanted to introduce a business would contact an appointed operator. The new company would have to be one that is not already working with the IDA. [tokenistic if not simplistic activity, which will cost more to manage then it will produce - BL]

There will also be a facility for the diaspora to contribute to investment in new enterprises, which is modelled on a similar scheme in Israel.

The plan includes steps to encourage more mobile international entrepreneurs to start businesses in Ireland through a €10m State fund for investment in start-ups, improvement in immigration arrangements, a targeted marketing campaign and greater use of IDA network.

A Strategic Investment Fund will match private sector investment with money from the National Pension Reserve Fund. The NPRF will commit €250m and a further €1bn will be sought from institutional investors in Ireland and overseas for infrastructural investment.

A corporation tax exemption will be extended for start up companies until 2014.

City and country enterprise boards will be dissolved and a new unit will be created in Enterprise Ireland that will work with local authorities in aiding firms.

The Government will establish a health innovation hub to encourage transforming new technologies in health and life sciences into commercial enterprises.

Checkout www.rte.ie for further updates and www.djei.ie

Billy Linehan is MD of Celtar business consultants, and has worked with small business owners and directors for 25 years.

(Experience includes; Certified Management Consultant, mentor for Dublin City Enterprise Board, Enterprise Ireland mentor, Intertrade Ireland industry expert. Previously manager of consultancy services for a central London Business Link, manager of enterprise agency in east London & programme manager at London based training and enterprise council)