Professor Davis (pictured), of the MIT Sloan School of Management and founder of consulting firm Cambridge Family Enterprise Group, spoke recently at a WOBI on Family Business Event held in Sydney and Melbourne.
Having researched and advised family-owned businesses since the 1970s, Professor Davis said that families can both create and lose their wealth through a family business, and that there are some distinct trends between those families who remain successful and profitable long-term and those that reach a peak before seeing their wealth rapidly contract again.
The three factors that maintain sustainability for family operations, he explained, are:
- talent (both within the family and from external staff/advisers)
- and unity (both of the family itself and within the organisation)
He outlined a three-generation path that often applies to family-owned enterprises. The first generation establishes and grows the business, with the second generation continuing to scale the business until it plateaus out, at which point one of three scenarios can play out, depending on the actions taken by the controlling family members: a gradual decline; a drastic fall; or measured, step-like continued growth.
Depending on the actions taken at this peak will depend on the future success of the business and the family wealth attached to it.
So with that, here are some of Professor Davis’ top do’s and don’ts for family business operators:
Do: Consider stop-loss strategies
“You should never wait until things are crystal clear before you act — that is almost loony to do that,” said Professor Davis, commenting on when to act when troubles arise.
He said that several factors can contribute to business owners failing to act early enough when their fortunes slide, including the fear of change and internal disagreement about what to actually do — particularly when the downturn is triggered by a big gamble.
As such, a strong governing framework and pre-set stop-loss strategies can help to minimise any downturn and provide a framework on how to respond in such an event.
Do: Give unanimous decision-making the flick
It is in order to prevent disagreements about how to respond to any challenge that may arise, Professor Davis strongly recommends against the practice of unanimous decision-making, common to many family businesses.
“Families are so consumed with this notion that we all have to agree... [it is] unbelievably restricting,” he said.
“Never agree to unanimous decision-making.”
He suggested that such an approach can severely restrict and delay any action needed to address challenges facing the business, making the damage greater, eroding trust and in turn heaping yet more pressure onto the family.
Do: Consider an operating or holding company
This point may not work for every business, but among the successful business families Professor Davis has worked with, the vast majority — around 85 per cent — do.
Such a structure can provide more flexibility for future growth, both of the business and the family.
Do: ‘Understand the totality of what you have’
Knowing what the business and the family have at their disposal — not just in terms of assets but also people, skills, knowledge, experience, and understanding the requirements — will place a business in a better position for future growth and prosperity.
Do: Aim for consistent growth of 6 per cent
As Professor Davis pointed out, 6 per cent growth over a year, adjusted for inflation, doesn’t sound impressive in its own right. Yet doing so consistently over a decade will mean that the value of the business, and the family’s wealth tied to it, will have roughly doubled.
“You don’t have to make huge returns... steady progress [is key]”.
This, he said, has been a common factor among the list of wealthy American business families who have stayed on Forbes’ rich list between the 1980s and 2011 (with the total number of families on the list falling from 320 in the period of 1982 to 1989 to just 103 in 2011).
Don’t: Consume wealth faster than it’s being created
This one sounds simple, but can be much more difficult to implement meaningfully. But he suggested it is an important consideration for family business operators to get good at.
One of the primary reasons for this, the researcher said, is that the size of the family grows with each generation, meaning there are more people drawing on the family wealth pool and proceeds from the business dividends.
“Basically, the family consumes its assets,” he said.
Deriving additional streams of growth to cater for the growing family often involves venturing into new verticals, or value-creating endeavours, while letting go of some legacy ones.
Professor Davis cited US conglomerate Cox Enterprises as one such example, which began in newspapers and, recognising the dwindling value of these operations, has since reduced its involvement in newspapers and diversified into various media, communications and automotive operations.
Don’t: Dismiss the various contributions of people within the family
Two of the most important traits and personality types in a family business are wealth creators and family unifiers.
The wealth creators are the visionaries who help to steer a business along and navigate both obstacles and opportunities. They may be within the family or strategic external advisers that add valuable insights.
But, according to Professor Davis, it is the family unifiers who “don’t get enough credit”. They help to keep harmony and unity among the family members, and “are just pure gold” to the ongoing success of a family business.
He noted that internal conflict — marriage breakdowns, legal battles and estrangements of close relations — can be devastating for a family business and the wealth within it.
Don’t: Succumb to narrow vision
Professor Davis suggested that it can be easy for family-owned operations to become overly insular, and miss out on insights and opportunities across the broader industry and marketplace.
“You’ve got to get better at seeing beyond your business,” he said.
Don’t: Overlook these four guiding principles
The researcher said there are four key questions that ever “enterprising family” should know the answers to in order to propel them forward. They are:
- What is our mission/purpose as a family? (i.e. what the family is here to do)
- What are our core values? (These set the standards by which the family live their lives and achieve their goals)
- What are the activities in our family enterprise that help us pursue our mission? (i.e. the steps to achieving this mission)
- What are we good at? In some instances, this may involve allowing family members to pursue their own business interests, which may later be merged into the family business.
This article is intended as general information only and does not constitute specific advice.