Getting the basics right in family businesses

family businesses

It isn’t a secret that some of the most successful businesses in the world were started by families. In Australia, family businesses range from local shops to large operations such as Linfox and Visy. In fact, family businesses represent about two thirds of the overall Australian business community.

Running a family business is complex – but it has strong competitive advantages. In many ways the family business system is the optimal business model, providing you have a strategic plan for both the business and the family.

Think about what it takes to get a traditional business up and running. It requires a core set of values – a principle to rally behind and a shared vision to strive for. In a traditional business, the founders often deal with a number of partners, or investors, who all want a say. With a family business, the values and ethos are embedded from the start.

Many family owned small-to-medium enterprises are using Family Constitutions to document their values. This assists the business to articulate what is most important but also allows the family to integrate their own personal values into a commercial framework.

These values can be tested when it comes to handing over a family business to a new generation. Some tension can arise, often due to different generational approaches to strategy and risk.

First generation founders tend to be “prospectors” and more willing to take on necessary risks. But many in the second through to fourth generations are “defenders”. They want to protect the business, and introduce more advanced and professional systems and processes. The founder of the business can be resistant to change.

One of the greatest tensions in family businesses occurs from the first to second generation, when the CEO is older and probably ready to retire, but finds it difficult to hand over control. Here, clear and open communication is key and generational shift can prove to be an advantage. The second generation and its ability to professionalise the business and family can set a smooth transition for third and future generations.

Another key advantage family businesses can embrace is legacy knowledge. In a corporate business, the same mistakes can be made twice because the people in charge leave and knowledge isn’t passed down. The clear advantage of a traditional family business with multiple generations is that this knowledge “stays in the family”. Handling customer accounts takes on a new life, as sons and daughters continue the legacy set down by the previous generation. It’s true that people who work in the family business could get a higher salary elsewhere. But they understand the money is going back into the business, creating a legacy for their family. So they stay and that in turn breeds customer loyalty.

It’s important to remember there is no secret formula to a family business. Each is unique, with specific needs. Therefore, having a solid business structure and strategy, ensuring proper governance and guidance, and giving each family member a part to play, means family businesses can harness their competitive advantage.

Get the basics right, and family businesses can not only thrive – but sustainably outpace the competition.

Dominic Pelligana, Partner in Charge, KPMG Enterprise Melbourne