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Common traits of successful family business: why some thrive, while other fall aside

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How families build structures and process for managing the business and the family matters in the continuation of their family business. In this paper, Browne & Mohan consultants share common traits that associated with families that have survived multiple generations.

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Common traits of successful family business: why some thrive, while other fall aside

  1. 1. Page 1 of 4 Common traits of successful family business: why some thrive, while other fall aside Dr TR Madan Mohan and R.M. Sanjay Abstract: How families build structures and process for managing the business and the family matters in the continuation of their family business. In this paper, Browne & Mohan consultants share common traits that associated with families that have survived multiple generations. Family run businesses are a significant segment of any nation’s industrial structure. 5% of US GDP is contributed by family businesses and 35% of Fortune 500 is family owned. They generate close to 50% of employment and 59% of all new job creations (Institute of Family owned business, 2011). In India 95% of business are family run, and 30% of BSE listed companies are family owned (CII, 2010). Many SME companies are family owned or family managed. According to RBI and SME Chamber of India estimates, MSME provide employment to 43.3 Million people, contribute to about 45% of Industrial output, 40% of exports and produce more than 8000 quality products for domestic and international markets. Multi-generational family run business are commonly involved in trading, textiles, hospitality, healthcare, accounting, agro-based industries. According to Small Business Administration Office of Advocacy, only in one in three businesses succeed in making from one generation to other. There are no official figures for closure/exit rates in India, but informed estimates are one in five businesses survive beyond second generation. Many family run businesses life span is highly correlated with their founder. A Harvard school study quotes that 70% of the business fail or sold before the second generation becomes engaged. Studies across different geographies indicate 9 out of 10 business close within 5 years after the death of founder and only about 3 out of 10 survives second generation. However, data from Indian business houses and family business indicate there are certain families that have bucked this trend. Tata, Birla, TVS, DCM, Lakshmi Mills, Thapar, Mahindra are fine examples of large pre-independence multi-generational firm that are thriving. While size does help the large companies to mitigate the growth associated pangs, Dabur, Kamat, MDH, etc offer finer insights how small and medium companies can sustain entrepreneurial relevance and growth with successive generation. Based on our analysis of mostly SME across India, we summarize the common traits of successful inter-generational business. Our experience indicates successful family run businesses have few things in common. 1. Have clear roles and process for Family and business Successful family business follow positions: they fall into either family owned and family managed or family owned but not family managed. With clarity on roles, successful multi- generational family businesses define the processes that define “family affairs” and “governance affairs”. They have clearly laid out roles for effective communication, reporting, fora and rules governing meetings, accountability, dispute resolution and administrative institution.
  2. 2. Page 2 of 4 2. Preserve roots and diversify Many successful family businesses their unique competitive advantage stems from their “Culture”. Culture is built around the personalities and interests of each generation. Sustainable family businesses enshrine and celebrate their pride, security, and business continuity by preserving and extending the charisma of culture. The idea is similar to a Bricolage, allowing each generation to add and extend the enterprises and cash-in the relational assets built across generations. Some of them devised simple mechanisms for breakouts or cashing out by next generations and designed appropriate methods to preserve multigenerational legacy and continuity. A third-generation jewellery family in Chennai, had a peculiar problem. It was located in traditional area of Chennai, most of its current clients were in the age group of above 50’s. They had three traditional gold jewellery shops that had crafted pendent, chains, etc. against an order and with newer make-to- stock Kerala based jewellers entering the market they were unable to attract newer customers. Their current generation wanted to look beyond traditional business and the family invested in two businesses, traditional attires and other traditional art. The clients for all the three businesses were common, 73% of them being multi-generational clients for the parent. Brand recall, upselling and economies of scope across generation are the benefits gained the family gained. 3. Create an institutional mechanisms to buffer for growth, innovation and challenging times Like families saving for the rainy days, most successful family business believed in investing for a corpus to fund expansion and growth. The funds were administered by a professional investment group and the inter-generational leaders had mandates to plough in x% YoY as the corpus. They set explicit rules for dipping into these reserves and what process to follow. Setting up of family offices that help to manage investments, and diversification is a common approach. Key in setting up family offices is to ensure the young inheritors are actively engaged in family offices and its activities. In one family business they have rules to be in business that yield a net profit of 11%, innovation fund is restricted to 14% of the turnover and cost of family to the company can’t be higher than 7%. Family office reports on the parameters to de-risk from free ride of next generations and risky ventures. 4. Diligent accounting and thrust on profitability Most successful multi-generational family businesses believe in managing with numbers. Often the family dinner times are quick and dirty review on day-to-day basis and a formal business review monthly. Major expenses are reviewed and risks are discussed. In a novel method, one of the Sindhi family made this a ritual to be discussed in their prayer room and all major financial discussions were done under oath. 5. Succession based on capabilities and passion, NOT on tradition or gender In cultures where first-born enjoys higher share and is considered a natural leader, many families build their succession on the tradition. Most successful families created space for the elder siblings to graciously side-step and allow younger, more focused leadership to emerge. Family elders played a significant role in establishing the business parameters, discussed and communicated the same
  3. 3. Page 3 of 4 across multiple interest groups to buy the succession plan well in advance. Case in point is a Bangalore based trading and real-estate business family, which realised despite being a Charted Accountant, the elder sibling of the family of six, did not have the zeal or intensity to carry the business to next level. The third sibling with background in engineering, good admin skills and ability to network with power be was identified as the next family leader. The elder sibling continues to be invested with all the ritualistic values in a traditional Marwari family, and the business growth has multiplied many folds. 6. Plan and go geographically Going regional and international is very important for family business. One they offer spread of existing business, but more importantly hold the interest of next generation to continue and expand the base. The promise of new land and new country helps in continual investment in the family business, but also can add reverse flows to the parent overtime. A leather company in Agra over two generations has pursued a simple strategy of moving its eligible next generation family member into key cities in India first. Over time, it moved couple of newly wed families to Russia, UK and USA. Over time, each of these nodes not only do substantial imports from Indian parent, but also have diversified into exports to India and other markets. 7. Empower and mentor early Once a future leader is identified, successful family businesses start mentoring the person through on-the job exposure and empower him to learn and implement changes. An IT company into 3rd generation ownership has an interesting triad of mentoring process. Two CEO’s who had grown the business doing an informal mentoring and an external professional guiding the designated leader on formal process and decision making. 8. Create rituals and processes for multi-generational bonding. The adage family that eats its meals together stays together is apt for success of family business too. Successful business families used festivals and rituals to bond, create relationships and preserve the club. Families also used these occasions to mollycoddle elder siblings who have been replaced on business front, and reinforce their positions and value in family tree. One Gujarati family into timber business for last 3 generations had an interesting Hundi concept. All branches of the family contributed 2% of their revenues which was used for three purposes: education, pilgrimage, and investment. Only 15% of the contributions could be used for education and pilgrimage. The allocations were chaired by the senior most siblings of multiple generations to ensure all family members get their turn to tour and rest. However any investment required formal family votes by all the family members. 9. Plan and infuse professionals Successful family business realise the value of bringing in professionals. They can bring transparency, drive and divergence to the business and can propel new directions. Many business families also bring external professionals to mentor their wards to give them the advantage of 3rd party neutral insights. Successful family business brought in professionals after a thorough vetting my multiple
  4. 4. Page 4 of 4 generations and actively encouraged dual reporting (to two different generational leaders) for the outside professional to ward any leanings and quicker induction. Bibliography Barach, J.A. and Ganitsky, J.B. (1995) ‘Successful succession in family business’, Family Business Review, Vol. 8, No. 2, pp.131–155. Chien, C. (2012) Work Toward Reward: Building Business Value Today for a Well Deserved Future, Universe, Cassia, L., De Massis, A. and Pizzurno, E. (2012) ‘Strategic innovation and new product development in family firms: an empirically grounded theoretical framework’, International Journal of Entrepreneurial Behaviour & Research, Vol. 18, No. 2, pp.198–232. Collins, J. and Hansen, M.T. (2011) Great by Choice: Uncertainty, Chaos, and Luck – Why Some Thrive Despite Them All, HarperCollins, New York, NY. Dyer Jr., W.G. (1986) Cultural Change in Family Firms: Anticipating and Managing Business and Family Transitions, Jossey-Bass, San Francisco, CA Miller, D. and Le Breton-Miller, I. (2005) Managing for the Long-Run: Lessons in Competitive Advantage from Great Family Business, Harvard Business Press, Boston, MA Neubauer, F and Lank, G.A (1998) “The Family Business: its Governance for Sustainability”, Routledge, New York. Ward, J (1987), Keeping the family business healthy, Jossey Boss, CA

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