What Can Evergreen Companies Learn From Family Businesses About Long-Term Survival?
Spencer Burke, The St. Louis Trust Company
March 27, 2017
Being a multi-gen family business is no easy task. The death rate (either through merger, sale or other means) is so high that this may mean that there are no general rules for survival, only exceptions. The principle of Survivorship Bias applies — maybe multi-gen survival in the family business context is a random phenomenon, in which case, this article may not be of much use.
What makes the study of family business interesting is just how highly differentiated the best practices are among successful multi-gen businesses. What works for one family may be anathema to another. Yet, the collective best practices form a mosaic from which we can discern some key strategies and themes. Those are what I wish to share with you today.
Before we start on this journey, you should ask yourself if being perpetual, or multi-gen, is really an appropriate goal at all. What will perpetual existence accomplish? Is this just about you or is there a larger Purpose? Businesses come and go. Fast-growing businesses and large businesses generally have increased risks of failure. Is what you are seeking realistic, sensible, shared?
As this question relates to family businesses, realize that many multi-gen family businesses in existence today were not predestined to become multi-gen. Much depends on timing, luck of the draw and the fit of offsprings with an opportunity, in terms of both age and stage. Necessity also plays a major role, as in a founder becomes ill and the next in line just takes over — that is how families work. I am sure many multi-gen success stories would embrace the statement of “had we known how hard this is, we would never have tried doing it.” Words worth remembering.
Here are the top 10 lessons (inverse order) that family businesses have to offer:
10. Good hygiene (and we don’t mean in the personal sense). This means that all of the equity ownership is controlled by a single person or entity that has a very long life. And make sure that there are no forced sales of equity to liquidate estate tax liabilities or other third-party liabilities, such as a divorce. For family businesses, this is a sine qua non. Fight procrastination.
9. Embrace professional management at all levels. This is particularly hard for family businesses. You must have first-rate human resources processes, and cultural fit is a big issue. You also need rigorous compensation and employee performance evaluation rules. For family businesses, the rules governing family hires need to be spelled out and followed.
8. A liquidity mechanism must exist for nonbelievers. No family can keep all of its members happy all of the time. A way to buy out family members on an acceptable basis (note: I did not say fair basis) is almost always necessary. Likewise, family situations change and a structure that prevents the exercise of free will is doomed to fail. Having an escape mechanism that is available, though never used, may be the key to maintaining solidarity.
7. Strong governance is essential. This is a process, not just an occasion. There must be a board, and it must function. Having independent directors with relevant industry and leadership expertise is very important, although some family businesses survive without this. Good governance that assures the alignment of the interests of stakeholders and managers is essential.
6. You must plan for the predictable life cycles of business and ownership. There will always be ownership and management succession issues — you must plan for them well in advance and have processes in place to address them.
5. Embrace Deans’ Twelve Questions. Is it a good idea not to sell or go public? Know what you are foregoing and why. Do this on an annual basis. Make the stakeholders commit in writing to the plan.
4. In the context of a family business, you must procreate but not too much! You also need the right kind of procreation — preferably passing on the “good” DNA of the founder of the business and little else. For an Evergreen company that is not a family business, this means you must have a way to perpetuate ownership for the future — either sale to management or other employees or donating stock to a nonprofit entity or some combination of these. Someone who shares your vision must always own and control your business — not easy, but examples exist.
3. For family businesses, family harmony is extremely important. For companies aspiring to be Evergreen, you need harmony among all stakeholders — have you identified them? Don’t forget spouses and the families of key constituents … unhappiness is highly contagious.
2. Have a purpose or reason for existence other than longevity itself. Family businesses that survive and thrive have a purpose that motivates all participants to work together for a common goal. More money is not a purpose. Have a mission that motivates the behavior you want. For families, legacy is often a driving force. Stewardship is a key concept.
1. Have a good business. Avoid cyclical industries, avoid leverage. A slow-growing business in a defensible niche may be just the ticket. Profitability needs to be sufficient to enable stakeholders to achieve financial independence outside of the business.
Spencer Burke is the Executive Vice President at The St. Louis Trust Company.