Editor's Note: Take a look at our featured best practice, Digital Transformation Strategy (145-slide PowerPoint presentation). Digital Transformation is being embraced by organizations across most industries, as the role of technology shifts from being a business enabler to a business driver. This has only been accelerated by the COVID-19 global pandemic. Thus, to remain competitive and outcompete in today's fast paced, [read more]
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“Many family business owners who come to us for help complain that they always have a scarcity of time and money,” according to leading family business expert Don Schwerzler. “In fact, that is why many family businesses never achieve their true potential. They get so caught up in the ‘tyranny of routine’ that they fail to ‘Dream Big!’ When that happens, it is a type of ‘entrepreneurial burn-out,’ where the business is no longer producing the intellectual satisfaction for the business owner,” says Schwerzler. “The business is no longer fun…”
That could be a major reason why so many Merger & Acquisition firms seek out family businesses for investment. They know that family businesses tend to be “under-performing assets.”
One of our goals when we start working with a family business client is to understand what would be required to grow the business quickly and significantly. What we discover in this process is that the business has many potential growth opportunities–many of which are “low-hanging fruit” that inspire strategies that can be quickly executed and produce excellent results. To get started we pose this question: if the family business owner were to identify the factors he/she perceives are constraining the growth and profitability of the business, what would result? Some of the usual answers include:
- Expand the work space to be more efficient.
- Purchase new machines and upgrade their transportation fleets.
- Expand the customer base and territory (by acquiring other businesses).
- Install an ERP system to better understand and manage the business.
- Hire executives who have experience in exponentially growing a business.
- Develop strategic partnerships for horizontal and vertical integration strategies.
According to Schwerzler, it doesn’t take long for the family business owner to start getting excited about his/her business–a re-invigoration that comes with “dreaming big.”
How to make those dreams a reality?
One of the resources many family businesses do not have as part of their professional service team–a family business financial expert. I am not talking about an investment advisor to help manage the owner’s portfolio. I am talking about a financial expert who understands how to apply new capital (money and expertise) into a business–and who has the contacts in the investment and banking communities to match the needs of the family business.
At a recent family business roundtable attended by a group of family business owners, Schwerzler led the discussion about capital needs that many family businesses may require to grow and to remain successful.
In years past, family business entrepreneurs tended to rely on family and friends to raise money to start and operate their business. Many were immigrant families, where their financial “bankroll” was sweat equity–long hours and hard work!
As the family’s business grew, some were able to use a local community bank to get a loan or a line of credit. But, as the local banks were swallowed up by the larger regional and national banks, banking relationships for many family businesses became more formal and less user friendly.
Going back in time, traditional banks had a terrible reputation after the Great Depression when so many small businesses, farms and ranches were forced into foreclosure or bankruptcy.
Those family businesses that survived the depression and those family businesses started afterwards were usually very risk averse when dealing with the financial aspects of their business–a paranoia that many business owners had about the security of their livelihood that became part of the family’s DNA and passed down to future generations!
As the business took root and became profitable, the growth of the business tended to be financed internally – purchases came from cash flow, not money borrowed from the bank. “Do not borrow money” became part of the process for passing on “wealth and wisdom” to the next generation.
“Not having access to capital created a glass ceiling for many family business,” said Schwerzler, “they never were able to achieve the true potential of their business.”
Research indicates that only about 30% of family businesses successfully transition to the second generation; about 12 % successfully transition to the third generation; and only about 3% make it to the fourth generation.
“One of the major problems – not being able to deal with the financial issues associated with the unique and complex issues that confront a family business dealing with succession planning and succession management.”
Schwerzler began studying and advising family business entrepreneurs in 1967 – a career span of nearly 50 years. He is the founder of the Atlanta-based Family Business Institute and their web organization Family Business Experts.com
Like the Bob Dylan song, “the times they are a-changin” said Schwerzler. As family businesses are being readied for the transition to the Nexters, financing is becoming more crucial to the on-going success of the family business.
Family businesses now tend to consider a wide range of alternative business loans, including factoring and equipment leasing programs.
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