Simple > Insights > From family business to business family

The last thing on a young family business owners’ minds is what to do when they’ve finished running their businesses. From identifying a vision and defining a strategy, to managing operations, family business owners are very busy people. With many jobs to be done, the focus is often on the midterm impact rather than long term legacy. In the majority of cases, the thought of this impending reality may never even cross their minds until it’s time for their retirement. At this crossroads, most envision handing the empire they’ve built down to the next generation as part of their family legacy. Though this next-generation succession may feel as simple as moving from a to b, even the most professionalised and well-aligned families find succession a huge challenge and milestone. What’s more, though succession is often the expected outcome, there are times when life and business do not proceed accordingly. If recent events have taught us anything it’s that today the only constant is change.

‘The best-laid schemes of mice and men go astray’

– Robert Burns

A family may face certain situations that prompt them to sell their primary business or their investments outside of core business may grow more substantially than the company itself. Such changes could necessitate a shift in strategy and a fundamental transition from being a family business to becoming a business family.

Key factors that spark the transition

To buy and sell is the game. When a family has built a successful business, they may consider selling to the highest bidder. There are a number of other reasons which might prompt this decision, however, broadly categorised into the following key factors.

1. Destructive family dynamics

A house divided against itself cannot stand. The survival of family businesses is of course dependent on the family members who run them. These very members, therefore, have a unique influence on the success or failure of the organization. When intense conflict and dissent arises between family members, this professional, as well as personal lives, are jeopardised. Conflict spills over into daily business operations which ultimately suffer. If the situation remains unresolved, even with the help of professional advisors and family dynamics counselors, the only option may be to sell.

2. Leadership is a poor-fit

Even when owners of the family business are able to create a cohesive environment, the preservation of the organization under their leadership can still become problematic. Within their own social circle, they are of course well placed to lead. But what if they lack the skills, competencies, and capacity to lead the family business into the future? Leadership takes work, time, and energy. The effects are not always easily measured and never immediate. A particular leader’s inability to support the business can originate from both internal and external sources – from changing business environments and capital requirements to the desire of the next generation to sustain the business.

3. Mission drift

Do it with passion, or not at all. Most companies require the owner’s full commitment to a mission in order for the business to continue to thrive in a rapidly changing marketplace. This needs to be maintained throughout the entire leadership cycle. Yet time and time again, we see how changing priorities make this kind of long-term commitment untenable. Mission drift can be caused by a change in focus and divergence from core values, or simply from a lack of desire to continue. Families experiencing this can choose to sell the business or maintain it by employing non-family management.

On other occasions, investment savvy individuals may find that investments from business proceeds can grow more rapidly than the company itself. This poses a unique situation in which strategic decisions must be made regarding what the most effective and lucrative way forward for the family will be.

On other occasions, investment savvy individuals may find that investments from business proceeds can grow more rapidly than the company itself. This poses a unique situation in which strategic decisions must be made regarding what the most effective and lucrative way forward for the family will be.

Decisions, decisions

Whether a family experiences a liquidity event or finds themselves in a situation where their investment capital has grown more significantly than their primary operation, they are generally launched into somewhat unfamiliar territory. From defining an investment strategy, setting up a fund, to appointing investment advisors, there are many jobs to be done. The family is often left with substantial liquid wealth and a myriad of decisions.

At this point, the family will also have concerns independent of their primary business. They may have to determine how to preserve and grow its wealth, retain their societal influence, and figure out how to still foster a shared identity. The transition from a family business to a business family is reflective of a change in scope and focus. Without a clear, strategically implemented plan to preserve both its wealth and legacy, the family faces a progressive dispersal and dissipation of its assets along with the loss of family unity, identity, and influence.

Where before it was enough to mostly focus on core business operations – with the additional family activities of investments, new ventures, and philanthropic work as a side concern – the transition to a family office reflects a need to think more laterally. For many, setting up a family office is the answer.

Within these organizations, business families can pursue a diverse range of activities, while still handling all matters related to wealth in-house. Capital can then be used to pursue new investment interest areas, or jointly through co-investment. According to John Veale, Deputy Head of Investments for Stonehage Fleming Investment Management, co-investments enable families to feel more involved when investing in a specific deal, rather than through a fund where they may feel more removed.

Family offices can also help these families to retain the advantages that lie within being a family and leverage these in their investments. Business families have the ability to focus on softer incentives such as purpose and sustainability, which can help them gain trust with both investment partners and next-generation family members.

“Entrepreneurs prefer working with family offices because, unlike VCs, there is no alternative interest and outside pressure for exits. Also, families have deep networks for entrepreneurs to tap into.”’

Herschel Mehta, Family Capital Investor

Embracing both challenges and opportunities

Some family businesses dictate that members must be focussed on a specific area of business or industry. A family’s identity can be consequentially forged with this industry. For this reason, there can be repercussions on a family’s reputation and identity when they exit their primary business. Along with the transition, a family’s identity must evolve and find new ways of self-expression. Identity in family offices is based on heritage and historic values, which can make this transition both daunting and challenge.

How does one rebrand a historic institution to meet a contemporary audience? The answer to this question lies in their ability to see the bigger picture. Volvo provides a useful case study. Whilst of course their primary business for many generations has been automobiles, a way for them to envisage their future has been to focus on mobility. Through realigning their identity from products ie. automobiles to the wider human trends ie. mobility, they are able to pave the way towards a new future. Just as building a strong brand is vital to a business, so too is developing a shared family identity to the continuity of the business family

The transition from a family business to a business family is not an easy one, and often not one that is anticipated by family business leaders. However, this transition when planned for and executed well, can not only keep a family aligned in working towards a wider goal but also agile and resilient enough to build a legacy for generations.