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Family Business Course - The need for a Strategic mindset in Family Businesses - Session 4.pptx

Family Business Training - Session No.4

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The need for a Strategic mindset in Family
Businesses
Silvan Mifsud, Chairperson Family Business Committee
THE MALTA CHAMBER
OF COMMERCE, ENTERPRISE
AND INDUSTRY
Whattype of FamilyBusiness do you want?
Before speaking about Strategy, family businesses need to produce
tangible outcomes that are aligned with the values of the same
family business. So to form the basis of any Family Business
Strategy, family businesses need to be clear on the following:-
1. Define value in terms of growth, profit distribution and control
2. Articulate a compelling purpose
3. Translate that purpose into specific goals
4. Defining safety checks & boundaries to keep the family business from veering off
course
Putting yourhomeinorder- Helpingfamilybusinessesreachnewheights:
Defining Value: Growth, Profit Distribution, Control
If you fail to define clear objectives for your family business, you risk losing your raison
d’être for being in business together, especially as the business grows and makes the
transition to new generations. That path often leads towards the end of family ownership.
Putting your home in order - Helping family businesses reach new heights:
Do you want to pursue growth
endlessly?
As an owner, you might wish to
constrain growth. Several family
businesses have deliberately avoided
growth in favour of creating a strong
culture built on a healthy work–life
balance for the owners and
management. Growth after all brings
with it further commitment and stress.
How much profit will you distribute?
Owners need to decide whether to re-invest
their profits or pay them out in dividends.
Family businesses exercise this right in different
ways, including payouts of 100% of the annual
profits to the owners and no dividends for
decades with all profits reinvested in the
company. The right to make that decision rests
with the owners, either directly when they are
closely involved in decision-making or
indirectly through the policies they set for the
board of directors.
Defining Value: Growth, Profit Distribution, Control
If you fail to define clear objectives for your family business, you risk losing your raison
d’être for being in business together, especially as the business grows and makes the
transition to new generations. That path often leads towards the end of family ownership.
Putting your home in order - Helping family businesses reach new heights:
What level of control do you want to maintain on the family business?
Owners need to decide whether the company is to operate only with the resources
it can generate internally or to access other equity partners or debt. Many family
businesses resist accepting equity capital from outside investors because they want
to maintain full control over their decisions. With such control, the owners can make
decisions that benefit their family and that an outside investor would rarely allow.
Family Business owners also tend to worry that debt will reduce their control over
their own destiny, since borrowing usually comes with rules and restrictions.
Through there influence over growth, profit distribution and control, family business
owners shape their company’s strategy
Defining aPurpose for the Business
Many family business fail to define a purpose for being in a Family Business. Any defined
purpose needs to give an answer to the fundamental question; “Why do you choose to
own and be in business together with your family members?
Putting your home in order - Helping family businesses reach new heights:
When I ask that question of family business, I many time get superficial answers like “We need
to maintain our father’s or grand father’s legacy.” or “It makes better financial sense to remain
in business together.”
Such answers are ultimately not compelling. If your family business is bound together only by a
superficial purpose, it’s unlikely to last in the long run. It’s not enough to live someone else’s
dream or maximise profits.
Better answers to that question is by identifying a compelling reason shared by all family
owners to own the business together - some families prefer to talk about their mission, vision or
values. Whatever terms you use, you need to define your purpose by giving answers to these
questions: Do you own the business together to grow it? Do you own the business together to
take money out of it? Do you own the business together to have autonomy over your lives?
FromPurpose to Setting Goals
Owners must balance their goals when deciding how fast to grow, how much profit to
take out of the business and how much control to retain. There are trade-offs to be made.
Putting your home in order - Helping family businesses reach new heights:
Growth and Control
If you value growth and control, you
primarily grow through retained
earnings, paying low (or no) dividends.
You also have low (or no) external
equity or debt, since answering either
to outside investors or to borrowers
requires surrendering some autonomy
(control). The owners of growth-control
companies need to manage the
expectations of family members about
distributions, since the distributions can
only be paid at a level that does not
deprive the business of the capital it
Growth and Profit Distribution
If you value growth and profit
distribution, you are focused on
expanding the business but also on
paying out money to the owners. You
are therefore ready to have your
business capitalised by outside
investors (equity) or leans (debt), giving
up some control as a result. The owners
of growth-profit distribution companies
need to manage the extent to which
they are losing control of decision-
making to equity partners or lenders.
Ad

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Family Business Course - The need for a Strategic mindset in Family Businesses - Session 4.pptx

  • 1. The need for a Strategic mindset in Family Businesses Silvan Mifsud, Chairperson Family Business Committee THE MALTA CHAMBER OF COMMERCE, ENTERPRISE AND INDUSTRY
  • 2. Whattype of FamilyBusiness do you want? Before speaking about Strategy, family businesses need to produce tangible outcomes that are aligned with the values of the same family business. So to form the basis of any Family Business Strategy, family businesses need to be clear on the following:- 1. Define value in terms of growth, profit distribution and control 2. Articulate a compelling purpose 3. Translate that purpose into specific goals 4. Defining safety checks & boundaries to keep the family business from veering off course Putting yourhomeinorder- Helpingfamilybusinessesreachnewheights:
  • 3. Defining Value: Growth, Profit Distribution, Control If you fail to define clear objectives for your family business, you risk losing your raison d’être for being in business together, especially as the business grows and makes the transition to new generations. That path often leads towards the end of family ownership. Putting your home in order - Helping family businesses reach new heights: Do you want to pursue growth endlessly? As an owner, you might wish to constrain growth. Several family businesses have deliberately avoided growth in favour of creating a strong culture built on a healthy work–life balance for the owners and management. Growth after all brings with it further commitment and stress. How much profit will you distribute? Owners need to decide whether to re-invest their profits or pay them out in dividends. Family businesses exercise this right in different ways, including payouts of 100% of the annual profits to the owners and no dividends for decades with all profits reinvested in the company. The right to make that decision rests with the owners, either directly when they are closely involved in decision-making or indirectly through the policies they set for the board of directors.
  • 4. Defining Value: Growth, Profit Distribution, Control If you fail to define clear objectives for your family business, you risk losing your raison d’être for being in business together, especially as the business grows and makes the transition to new generations. That path often leads towards the end of family ownership. Putting your home in order - Helping family businesses reach new heights: What level of control do you want to maintain on the family business? Owners need to decide whether the company is to operate only with the resources it can generate internally or to access other equity partners or debt. Many family businesses resist accepting equity capital from outside investors because they want to maintain full control over their decisions. With such control, the owners can make decisions that benefit their family and that an outside investor would rarely allow. Family Business owners also tend to worry that debt will reduce their control over their own destiny, since borrowing usually comes with rules and restrictions. Through there influence over growth, profit distribution and control, family business owners shape their company’s strategy
  • 5. Defining aPurpose for the Business Many family business fail to define a purpose for being in a Family Business. Any defined purpose needs to give an answer to the fundamental question; “Why do you choose to own and be in business together with your family members? Putting your home in order - Helping family businesses reach new heights: When I ask that question of family business, I many time get superficial answers like “We need to maintain our father’s or grand father’s legacy.” or “It makes better financial sense to remain in business together.” Such answers are ultimately not compelling. If your family business is bound together only by a superficial purpose, it’s unlikely to last in the long run. It’s not enough to live someone else’s dream or maximise profits. Better answers to that question is by identifying a compelling reason shared by all family owners to own the business together - some families prefer to talk about their mission, vision or values. Whatever terms you use, you need to define your purpose by giving answers to these questions: Do you own the business together to grow it? Do you own the business together to take money out of it? Do you own the business together to have autonomy over your lives?
  • 6. FromPurpose to Setting Goals Owners must balance their goals when deciding how fast to grow, how much profit to take out of the business and how much control to retain. There are trade-offs to be made. Putting your home in order - Helping family businesses reach new heights: Growth and Control If you value growth and control, you primarily grow through retained earnings, paying low (or no) dividends. You also have low (or no) external equity or debt, since answering either to outside investors or to borrowers requires surrendering some autonomy (control). The owners of growth-control companies need to manage the expectations of family members about distributions, since the distributions can only be paid at a level that does not deprive the business of the capital it Growth and Profit Distribution If you value growth and profit distribution, you are focused on expanding the business but also on paying out money to the owners. You are therefore ready to have your business capitalised by outside investors (equity) or leans (debt), giving up some control as a result. The owners of growth-profit distribution companies need to manage the extent to which they are losing control of decision- making to equity partners or lenders.
  • 7. Defining SafetyChecks & Boundaries Aligning your priorities through your purpose and goals is a good start, but it’s all just lip service unless you translate them into specific measurements that the leaders of the family business can use to make decisions. Checks & Boundaries will help you ensure that those running the business day-to-day are directing their energy and resources to what you , as the family owners, care about most. Putting your home in order - Helping family businesses reach new heights: • Financial checks- Set specific standards of performance to align with the outlined goals. They identify the right metrics for evaluating performance and the minimum or maximum threshold for each metric. • Nonfinancial checks define outcomes for which owners are willing to sacrifice financial performance. These checks assess more abstract aspects of the company.
  • 8. DefiningNon-Financial Safety Checks –Deeper View Putting your home in order - Helping family businesses reach new heights: • Leadership: Does the company need to be led by its owners, even if they are not objectively the most qualified? • Business sectors : Are there particular businesses (e.g., tobacco, firearms) or places that the owners wish to avoid investing in or, conversely, are willing to sustain even if the businesses are unprofitable? • Harmony: Will any decisions be made or avoided to preserve family harmony? Some family firms will keep a division or some business operation open despite its poor financial performance, because it is led by an owner and closing it will upset the broader harmony of the family. • Business practices: To what extent are you willing to sacrifice financial performance to align business practices with your values?
  • 9. Bringingit all together – The Family Business Strategy Putting your home in order - Helping family businesses reach new heights: Finally, to capture and express all the points mentioned so far, the Family Business Strategy should be a document that articulates your purpose, goals and checks. This strategy document becomes a sort of reference book for your family business. It should answer the three main questions we started with Purpose: Why do you want to own a business together with your family? Goals: What trade-offs will you make between growth, profit distribution and control to achieve your purpose? Checks: What metrics and boundary conditions do you need to provide to the board and management to help them understand and implement the outlined goals?
  • 10. The Needfor aStrategic Mindset Putting your home in order - Helping family businesses reach new heights: • Develop family and company missions that focus on creating value. Continue to recognise the importance of operational excellence in the company, but only in activities that grow the value of the company. • Develop an integrated strategic plan for the family and the business over time. • Develop family and non-family talent to support value creation. Make sure that the right investments are being made in developing such talent. • Move thoughtfully into new growth opportunities that have a good chance to grow the value of the company by learning to experiment. Strategic experiments for a company involve making measured investments in new activities and knowing when to increase your investment or pull out. Also identify what your company or family needs to be good at to excel in new value-creating activities. • Challenge businesses and other activities that destroy value but remain due to old attachments, a sense of tradition, or conflict avoidance. • Detach (more quickly than you are comfortable doing) from practices and people (even family members) that aren’t adding value. Loyalty is admirable, but loyalty to activities and people