Family businesses have a competitive advantage: Are you leveraging yours?
by jacquie_dealmeida | May 1, 2016 9:00 am
By Danielle Walsh
As consumers, we tend to attach some kind of mystique to family businesses on the belief they are friendlier, have better employees, and are more caring. As such, they must therefore produce a better product and offer better service. For their part, many family businesses recognize a marketing advantage and are happy to promote this aspect about themselves.
However, I’m here to say it is more than just perception; family businesses do indeed have access to unique ingredients that can provide a lasting competitive advantage.
Unfortunately, media tend to report on family businesses when they are knee-deep in turmoil over sibling and intergenerational rivalries, incestuous hiring and promotion practices, fiscal irresponsibility, and never-ending legal battles among shareholders. This brings to mind McCain Foods, Bacardi, Irving Oil, and many others that have seen their family disputes, conflicts, and legal battles made public. No doubt, countless others have struggled, but have been able to keep things private.
While there are benefits to being a family business, they can vary depending on the size and make-up of the family, as well as its stage of evolution (i.e. first generation, second generation, etc.). As a family business, you need to manage your business and your family; if you can do both successfully, you should be able to benefit from a long-term sustainable competitive advantage.
Here are some of the benefits differentiating family businesses that can help provide a significant advantage.
Loyalty
Although it can sometimes be hard to believe, on average, family members tend to demonstrate a greater sense of loyalty to their business and to one another. They are usually also more committed to the business’s success and more passionate about what it really stands for. In other words, family members are ready and willing to go the extra mile, whether that means running errands, coming in early, staying late, or even filling in for others.
I saw a great example of this with one of my clients. The father, who was president of the family business, had asked his son, its vice-president of operations, to fill in for an employee in the shipping department. I recall getting a phone call from the son around 9 a.m., his frustration clearly audible in his voice. “Can you believe it?,” he said. “Dad asked me, the vice-president of operations, to work in the shipping department today! I can’t believe it! As if
I have nothing better to do.”
What made me laugh was the fact that in the midst of our conversation, I could hear a lot of noise in the background at which point I realized he was already in the shipping department. I asked him what made him go there if he was so upset about it.
He said simply he knew it was the best thing for the business, despite not liking the idea. You would be hard-pressed to find a vice-president of operations of a non-family business filling in for any employee in any other capacity. In a family business, though, this is often done without a second thought. This loyalty and flexibility can lead to a major competitive advantage.
Culture and values
Family business owners actually have the opportunity to teach and pass along their personal and business values to the next generation of family managers and owners. In turn, these family members really take pride in upholding these values and integrating them into their day-to-day work and personal activities. These beliefs transcend into the business and create a strong organizational culture and values. This can create a major benefit for families in business.
Legacy
Families in business have an opportunity to create a lasting legacy, which brings with it a sense of accomplishment and a strong feeling of pride. Building on the efforts of their forefathers is a strong motivator for subsequent generations to become stewards of the family business and carry it to new heights. This lasting legacy also helps create a loyal client base. We often see families that have been buying their jewellery from the same store for generations. It’s clear customers also enjoy this sense of legacy or tradition in their own family.
Access to labour and capital
Multi-generational family businesses have access to a pool of family members that tend to be more loyal and more committed to the business. Another interesting advantage of being a family in business is access to capital from within. We all know getting a bank loan comes with a number of financial restrictions and can often entail a long and tedious process. However, families in business have the additional option of turning to one another for financial support in times of need. More often than not, if family members can help, they will, and this can lead to a major advantage over the competition.
This reminds me of a client that was over-leveraged and could not get additional funds from the bank. Turning to his family for help, he was shown an unbelievable outpouring of support—some remortgaged their homes to put money back into the business, while others who were employees refused their salaries. This support allowed the business to not only survive the next few years, but really thrive. This company is now successful financially and in managing their family component. The third generation is currently leading the business, while the fourth is being groomed to take over in the future.
This family business made it through a difficult time thanks to the support provided by family members. However, many of its competitors were unable to do the same, as they did not have the option of turning to family for help. The competitive advantage of being a family in business is pretty clear in this respect.
Key employees
Non-family key employees appreciate and enjoy the unique work environment created by a family in business. The workplace tends to be less formal, as well as more hands-on and personable. It’s not unusual for key employees to be treated like extended family, developing a strong bond with their employers and a loyalty to the business. This often leads to higher employee retention rates, which can also be a major advantage.
Succession
As well as providing career opportunities, family businesses also favour passing the business along to the next generation. The opportunity to be an owner of the family business, or of any business for that matter, can be both motivating and rewarding. Further, family members often become managers and owners at a younger age than they would in a non-family business, as they are groomed for these positions early on. This creates a sense of loyalty and motivation that can lead to a competitive advantage.
Long-term thinking
This is often referred to as ‘patient capital.’ Family businesses tend to focus on the long-term. They are actually willing to sacrifice their short-term gains to achieve longer-term goals. This often has to do with their willingness to create and continue a lasting legacy.
The average tenure of a chief executive officer (CEO) in a non-family business is six years, while in a family business, it’s more like 18 years.1 This can often lead to a stable environment with a strong sense of continuity, which plays an important part in helping family businesses outperform their non-family counterparts. Again, patient capital brings about a number of benefits that can lead to a sustainable competitive advantage for family businesses.
Community and philanthropy
Family businesses tend to be committed to their communities; they, in turn, can benefit from both its members being volunteers and supporters, and the business itself providing employment opportunities and financial support. This commitment to the community tends to permeate through the generations and provides family members with opportunities stemming from ongoing community support. When a family business becomes an integral part of the community, it can help provide a loyal customer base that continues through the generations.
Relationships
The opportunity to work with family members to pursue common business goals can be a very rewarding experience. Years of bonding among family members can create a strong sense of belonging and interdependency.
I have actually had the opportunity to work with my dad for a number of years and know first-hand how rewarding and how much fun it can be. Having experienced the benefits of working with family, I really want other family businesses to be able to integrate its members in a successful way that minimizes conflict, so they can take advantage of these strong relationships. Effectively managing these family relationships can go a long way in ensuring long-term harmony on a personal and professional level.
Financial rewards
Successful family businesses are able to provide financial rewards to both active and non-active family members. It is not uncommon for family businesses to reward its members more than they could obtain elsewhere. These rewards can come in many shapes, whether it is a salary above fair market value, access to jewellery at cost, or additional dividends at the end of the year.
Consider developing a family business succession plan that will help you manage both the family and the business, and, in turn, help garner these advantages to their fullest potential.
One of the clients my father and I advise really understood the competitive advantage he obtained by implementing a comprehensive succession plan that dealt with both the business and the family. But he actually took this to a whole new level when he asked us if we would be willing to sign an agreement stating we would not develop a succession plan for any other family business in his industry. When we asked him why, he said he understood what an advantage he had now that he had a comprehensive plan managing both the business and his family. His idea was to wait until the other family businesses in his industry were struggling, at which point he would purchase them at a bargain price. Since our goal is to help as many clients successfully transition their business to the next generation, we declined his request. However, in the mind of this family business owner, he clearly had a competitive advantage he was willing to try to exploit to the fullest.
Family businesses that are able to effectively harness their unique attributes have the potential to grow in value and create sustainable competitive advantages. Those who have successfully done this can dominate their markets and continue for many generations.
Danielle Walsh is founder of Walsh Family Business Advisory Services, a consulting company specializing in assisting family-owned and operated businesses navigate the rough waters of management and ownership succession. She is a certified public accountant (CPA), chartered accountant (CA), and holds certificates in Family Business Advising and in Family Wealth Advising from the Family Firm Institute (FFI). Walsh developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for the last 25 years. She is also currently teaching the first family business course offered at the undergraduate level at Carleton University in Ottawa. Walsh can be reached via e-mail at danielle@walshfbas.com.
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