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How to Succeed as a Family Business: A Five Dimensions Approach

In a previous post I discussed how complex it is to run a family business and talked about how the lack of borders between family and business brings challenges most businesses never face. Because of those challenges successful family business are very interesting; to many, the thought that a family can build a prosperous and sustainable business, while staying united and committed, is incomprehensible.

A recent report published by consulting firm McKinsey & Company discusses the attributes a family business must posses in order to flourish. They suggest five dimensions of activity that must work in harmony for that to happen. You can read the full report, but I thought I’d give you the highlights. Here are the five dimensions:

Family—Family conflicts and lack of formal policies can quickly destroy the family and the business. Oral and written agreements and policies about critical business issues such as strategy, compensation, and appointments (to name a few) can diffuse that threat. A meritocratic approach to management is also cardinal. Executives should be chosen based upon their experience and expertise and not because of their seniority within the family. Last but not least, keeping a sense of pride within the younger generations through charity work and family gatherings is critical to the continuation of the spirit and the culture that drives the business forward.

Ownership—Since ownership means greater control and influence on the funds of the business, it is usually a fertile ground for conflicts. Therefore, ownership matters should be clear and regulated. Families should decide together on the way shares can be traded inside and outside the family, or whether to completely restrict trading. Generational liquidity events, where shares are liquefied and funds are distributed between family members, is one way to keep everyone happy.

Governance and the business portfolio—This part includes two success factors that work together: strong boards and a sensible-yet-dynamic business strategy. Strong boards consist of a proportional representation of inside and outside directors. This way, familial and business considerations are combined optimally, while both insiders and outsiders’ perspectives are taken into account. As far as business strategy goes, family businesses tend to seek long-term growth and be risk averse. Also, they usually have lower levels of financial leverage and lower cost of debt. This approach might get in the way of making more money during booms, but a long-term review of publicly traded family businesses showed that this strategy is well worth it because it achieves higher returns for shareholders.

Wealth Management—Because in many cases the whole family relies on the wealth the family business generates, it is important to treat the wealth with great caution. As many family businesses that went through the financial crisis will testify, diversifying the family’s investment portfolio is very important for the survival of the business and the family.

Foundations—Foundations set up by entrepreneurial families represent a huge share of philanthropic giving around the world, and not for nothing. Being involved in charity is a way to keep family members who don’t work in the business committed to it. It is also a way to pass down the values that the family and business are based on down to the next generation.

Small or large, family businesses that remain committed to their family members and stay true to their values are more likely to succeed. I think McKinsey’s five-dimension approach takes that into consideration and provides family businesses with guidelines on how to steer their business and family smoothly. What do you think?

Based on: Caspar, Christian, Ana Karina Dias, and Heinz-Peter Elstrodt. “The five attributes of enduring family businesses.” McKinsey Quarterly. January 2010. Web. 26 August 2012.

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