Healthy Growth for the Family Business
By Jennifer M. Pendergast
Palgrave Macmillan Copyright © 2011 Family Business Consulting Group
All rights reserved.
Introduction: Pathways to Intelligent Growth
Family-owned Wawa, Inc., is one of the largest convenience store chains in the country and continues on a path of aggressive growth, with sales exceeding $1 billion. Based in Wawa, Pennsylvania, the company owns and operates more than 540 stores in five states and plans to open nearly 200 more stores within the next five years. Founded by Grahame Wood in 1964, the chain emerged out of waning Wood family textile and dairy-farming businesses that dated back to the early 19th century.
In 2004, brothers Joe and Ray Fletcher retired, ending the long run of family involvement in a small but popular enterprise on the Potomac River known as Fletcher's Boat House. Under a contract with the National Park Service, the Washington DC concession rented boats and bikes and sold bait and tackle. Although it stayed small, for nearly 150 years it supported four generations of Fletchers, who counted several U.S. presidents among their customers. While members of the fifth generation opted not to continue the family enterprise, its ongoing success shows that small businesses, even without growth, can provide nice streams of profit across generations.
Family businesses find many different paths to success. Some, like Wal-Mart, become among the world's largest businesses. Others, like Fletcher's Boat House happily serve a limited market.
Whether a business remains small or grows large, every family business at some time or another is faced with issues that center around growth. If you are a member of a business-owning family, you may ask such questions as: Do we want this business to grow? Why should we grow it? Is it capable of growing? What sacrifices will growth require? What sacrifices will we make if we don't grow?
How these questions are answered in a family business is different from how they are answered in other companies. Decision makers in publicly traded companies are typically focused on building their own wealth and the wealth of the shareholders. Leaders of family firms take into consideration not just the business, but also that the business's growth will affect the business and the family. Family business leaders want to provide income and wealth but are equally concerned about how growth will affect family members, employees, members of the community, and other stakeholders in terms of their careers, their relationships, and their well-being.
Growth in a family business is a complicated matter. Growth issues may become most critical in times of transition, when a business is grappling with succession from one generation to the next, when family desires for cash compete with investing in company growth, or when trends in the competitive environment necessitate change.
Healthy Growth for the Family Business is aimed at helping members of family businesses sort out the issues associated with growth and arrive at decisions that are best for the business and the family. This book defines "healthy growth" as growth that is sustainable and profitable. While you read the following pages, you will expand the way you think about growth. You will see that growth can mean different things to different people and not just in terms of increases in sales and profits. The ways some family business owners look at growth will offer inspiration and spur creativity as you seek answers for your own company.
Others in your business and the family will benefit from reading this book, and we encourage you to share it with them. They include members of your senior management team, shareholders, your board of directors, family members not involved in day-today operations, and younger family members who may one day be involved as employees or owners. When these people have a better understanding of the issues involved in growth, they can support you in moving the family business in the direction it needs to go.
This book will provide you with practical knowledge. It will help you decide whether to grow and, if so, what type and amount of growth you want. It will enable you to be realistic about your company's potential for growth and about the consequences of the failure to grow. You will learn to avoid the dangers of overestimating your company's ability to grow or under anticipating the company's need for growth. This book will also help you determine how best to reach your growth goals. In addition, it will serve as a useful tool in facilitating the important conversations that you must have with others about issues surrounding growth.
It is not the intent of this book to persuade you that growth is appropriate or the only objective for your business. That's for you and your family to decide. What this book will do is give you some pragmatic guidelines for thinking about the issues and for steps you can take if you decide growth is right for your business. Hopefully, what is offered here will help family businesses thrive and be healthy.
Should We Grow or Stay the Same?
Growth is viewed as an imperative by most businesses.
"Grow or die!" is the battle cry of many authorities on business. "You're either going to grow your business, or you're going to go backwards," says DeNean Stafford III, the second-generation CEO of Stafford Development Company, a holding company in Tifton, Georgia. Having been presented with the opportunity to run his family's company, Stafford insists that "just to manage the status quo would be heresy." Besides, he adds, "It wouldn't be much fun, either."
In his book, Double-Digit Growth: How Great Companies Achieve It—No Matter What, Michael Treacy maintains, "Growth is the oxygen of business, the key to business life or death. Growing enterprises thrive; shrinking companies vanish."
In many cases a business must grow to survive. But many family businesses, such as Fletcher's Boat House, prefer to remain small and do so successfully. One of my colleagues recently identified over 3,000 family businesses in the United States that have survived for over a century. Those businesses averaged 30 employees. They have survived while remaining small. You have a choice, and this chapter will help you explore what's right for you.
A heavy an emphasis on the "grow or die" attitude can put pressure on a family business to focus on growth at all costs and not necessarily for sound reasons. Many businesses have grown themselves into risky situations, which can result in lower profits, reduced distributions, or having to sell off part of the business to survive.
"I was taught never to grow for growth's sake. Volume does not equal profit," says Jon Deeny, the third-generation leader of Deeny Construction Company in Seattle. "Some of the biggest construction companies have drowned in red ink."
Growth that's too rapid can get out of control, putting undue strain on the business, management, and employees. But lacking any sense of pressure to grow can also be equally unhealthy. When owners feel no urgency to grow, they may not be taking the necessary steps to improve the business. Owners may become complacent about growth because they have been successful in the past. If a family business has enjoyed protection from competition, the owner may not be aware of changes in the marketplace and may wake up one day to find that the business is too far behind the competition to catch up. Consider the family hardware stores wiped out by Home Depot and Lowe's because they weren't able to find a way to successfully differentiate themselves.
What is needed instead of either extreme—an attitude of growth at any cost or complacency about growth—is a balance between these points of view. This means taking into consideration how much growth (if any) is right for your business and how you're going to achieve it.
The starting point is to think through the reasons for either growing or maintaining your business without growth.
Considerations Unique to Family Firms
There are solid reasons for business growth that are applicable to both family and non-family firms. Both find that growth generates career opportunities, which helps attract and retain talented employees. In many industries, businesses understand that their competitors are focused on growth and unless they are too, the competition may steal their customers through superior service, better product offerings, or more aggressive sales tactics. Furthermore, customers continue to make new demands and businesses must grow to meet them. Growth also provides economies of scale allowing businesses to be more competitive.
There are a number of reasons for growth that are unique to family firms:
1. Growth creates jobs for qualified family members and helps them to fulfill their aspirations.
2. Profitable growth offers the business the ability to support the family financially as it expands, increasing the family's financial worth and providing financial opportunities to family members who may not want to remain as owners.
3. Growth can help assure sufficient funds to allow family members to cash out. As a business transitions through generations, not all owners will want to remain as owners. Inheritors of stock may wish to sell their shares so they can pursue other goals.
4. Growth expands the owning family's exit options. If a family decides it wants to sell the business or spin off part of it, the company needs to be of a sufficient size to attract outside investors or buyers.
5. Growth enhances a family company's ability to attract excellent non-family employees.
Managers of non-family firms may have good reason to envy their peers in family firms. These managers may feel pressure to grow the business in ways that are outside of their control. Investors in either private or public non-family companies push for growth to meet their investment expectations, often regardless of the businesses' ability to grow or the potential damage that rapid growth can cause.
Owners and managers of family businesses, on the other hand, have more control over their own destiny. Owners and family members in the business usually have a long-term perspective and are concerned about the damage from too rapid growth. They exercise more patience when it comes to getting a return on their investment.
Deciding Not to Grow
Despite the attraction of expansion, many family business owners choose not to grow. They tend to be more "risk averse" as most of their families' wealth is tied up in the business.
Another common reason for not growing is because the company's leader wants to retain operational control. Growth may require bringing in people from outside the family to help run the business. That could mean sharing private information and letting others make decisions. Such things may require more trust than some family business owners can muster.
Family business owners' desire for control may also extend to financial and ownership matters. It's often not possible to grow a business without bringing in money from outside in the form of investors or debt. Not all owners want to take that step. In such cases, the business's growth is limited by how much cash the business can generate internally. If substantial growth requires building a new plant and the business owner is unwilling to borrow the money to build it, the plant will not be built, and the expansion will not be realized.
Still another major deterrent to growth can be that the owning family just doesn't know how to grow the business. If a family member working in the family firm has never worked anywhere else, they may not have gained the skills needed to oversee a larger enterprise. "How could I manage that many employees?" they ask. "How could we possibly support that many customers?" Perhaps they haven't automated or invested in new technology to the extent required to grow a business because they haven't experienced or seen it done previously. Having the opinion, "doing things the way we've always done it," will eventually limit growth.
Growth can also be slow or nonexistent in some companies because the family has emotional ties to a particular segment of the business and is unable to let it go. One somewhat diversified family company we know could grow faster if the owners divested itself of its now-unprofitable small string of movie theaters. The business started as a movie theater generations ago, and the current owners are unable to give up the theaters because they see them as their "legacy."
Some families businesses don't grow because family members don't want their enterprises to become so large that a family member can't be CEO. In other cases, the owners are making enough money to support the family's lifestyle and don't see a need to take on the additional pressures required to expand. Still other owners simply don't want to make the sacrifices necessary to invest in people and infrastructure that are essential for growth.
One particularly good reason for not growing too large is that being small and family-owned differentiates a business from larger companies. Many family firms sell themselves to customers and employees on the notion that "you don't want to go with a large corporation that doesn't know who you are; you want to work with us, because we care about you." And, all else being equal, customers often feel better doing business with a family enterprise. "I trust it," they reason. "I think it will have higher integrity and higher quality. I think the family will stand behind their name because I know that they're at risk if they don't." If a family business grows too big, it may lose the personal touch and its ability to differentiate itself from the larger company down the road.
The Many Meanings of Growth
When we think of business growth, we usually think of growth in terms of revenues. We want to know, "How much more did the company earn this year compared to last?" Or, "How does revenue this year compare to five years ago?"
But there are other ways to think about growth, and you, your family, and senior managers may find it helpful to explore these alternatives in your own deliberations.
Increasing profitability is a very important measure of growth. A business cannot survive without profits, so many owners use profitability as the standard by which they gauge growth. Some family businesses look at profitability with a twist. They add back to profits any compensation or other benefits owners may take out of the company that are above and beyond what would be taken out under different ownership. The purpose of this is to give a clear sense of the profit generating capacity of the business. If the compensation of key non-family managers is based on profitability, it is important to consider removing extra compensation the family may take, so that managers are not discouraged by their inability to control profitability.
Another family business may measure growth in the number of employees on the payroll. One of the values of this family is to create jobs for the community in which it is located. Family businesses in very competitive markets may look at growth in terms of the market share. They may be more concerned about losing customers than about other financial measures.
DeNean Stafford uses a variety of measurements of growth for Stafford Development Company. "Cash flow is our common denominator. We look at retail and office development as a square footage business," he says, noting that the company manages and owns about 3 million square feet of retail and office space. He measures the construction equipment segment of the business by top-line revenue, but he also measures growth in terms of employees, which numbered about 250 when he became CEO in 1997 and has increased to 850. Finally, he measures growth geographically. His father founded the company in south Georgia in 1947. Today it has operations throughout the southeast United States and in Ohio.
But growth means more than numbers to Stafford. "It's more of a measuring stick of success." For him, it means creating long-term value, developing a new property, creating a new business, which, in turn, provides "a great opportunity for our associates so they can raise their families and enjoy what they're doing." It also provides a venue for the growth of family members. "Growth is not only numbers," he explains, "but the personal development of the members of the family and the understanding of their place in the business—whether or not they're involved in the daily management of the business."
If you choose not to grow in size, you can still grow by improving systems and processes, a requirement for businesses that want to increase revenues, profits, and all the other numerical measures. Management psychologist Edwin A. Hoover says, "Grow-or-die strategies often overlook other opportunities for meaningful and positive change." Aside from growth in sales, he suggests four other growth options:
1. In competence (understanding what differentiates your company and "serves as your strongest foundation for continued success")
2. In strength (getting better at determining the company's best customers and suppliers and becoming more disciplined)
3. In integrity (becoming more proficient at doing what you say you'll do, showing respect to stakeholders)
4. In performance (providing the best customer service and responsiveness)
When you expand your definitions of growth, you may find that where once you were reluctant to adopt a growth strategy, now you are excited about doing so. If in the past, growth meant only an increase in size or numbers, you may have viewed the risks as too large to make attempting growth attractive. Now, if you think of growth as improving performance or strength or enlarging the business's ability to make a contribution to the community, you may discover a whole new world of opportunity. You will also find that thinking of growth as growing better, not bigger, is an effective way to protect your family business against the competition. But, if you are the kind of person that thinks "grow or die" means that you have to grow financially year after year, you may overlook meaningful growth opportunities that are not financial in nature. (Continues...)
Excerpted from Healthy Growth for the Family Business by Jennifer M. Pendergast. Copyright © 2011 Family Business Consulting Group. Excerpted by permission of Palgrave Macmillan.
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