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Lessons on the rise and fall of family business

- April 16, 2021 4 MIN READ
Lessons on the rise and fall of family business

A globally recognised expert on family enterprise and family wealth, Professor John Davis have been studying the changing nature of family business since the 1970s. As the founder of the Cambridge Family Enterprise Group, Davis has advised and educated families all over the world on how to achieve longevity and success.

Over the years Professor Davis discovered significant patterns that can affect the accomplishments of a family business. He coined the three-circle model of the family business system, which is used by businesses across the globe.

In Australia he spoke at the WOBI on Family Business, and explained the ingredients at the heart of multigenerational family business success. History proves a great starting point. According to Davis, family businesses consistently outperform other businesses for a number of reasons.

Three generations

“Family business have a range of natural strengths,” Davis explains. “They are driven by passion and persistence, they take a long-term approach. People are invested in the. business and there is loyalty to the business. Family businesses often focus on values and community and have a steady pace of innovation.”

However, Davis suggests these same strengths can leave a family business open to vulnerabilities. In the early days of a family business, control is often focused on one person. Liquidity can also be a problem as assets get consumed by the family over time. Family conflicts can lead to business disruption and traditional production and location loyalties can prevent expansion.

Wealth can also “fall like a rock”, advises Davis, with the majority of family businesses going under within three generations.

“When you are at the top of the curve, you don’t really know it’s going to go down,” Davis explains. “To some extent that is understandable. It’s not mysterious – it’s hopeful – but as it slides, someone should be sounding the alarm. They should be saying ‘we need to do things differently’. I often like to say families run downhill – and when they do they accelerate.”

Resistance to change

Davis suggests in about 20 percent of cases this is what happens to family businesses. The return on the family’s assets peak and the activity of the family business stops producing high growth values. This is when a family business can get into problems. History shows time and again where families have failed to diversify and the business suffers.

Why, then, when it finally becomes clear that they are in trouble- why don’t families change?

Professor John Davis

Professor John Davis talks through the cycle of success, at WOBI on Family Business. Image: Supplied

According to Davis, fear of failure and fear of change are often the twin evils preventing a family from moving forward. He also points the finger at internal conflicts. Failure to have the right governance or decision-making processes in place can be the downfall of a family business.

“Families are consumed with the notion that they all have to agree,” says Davis. “Never agree to a unanimous decision-making rule as it can leave your business stuck in no man’s land.

“Families tend to be overly loyal, overly prideful and not overly analytical of the next bet – they wait too long to pull out. Pride and ego get in the way. So, a family business needs to put things in place, like a Board, that can challenge you. Stop-loss policies are also a good way to fix this. They force you to rejustify the bet you are making or get out.”

Know when to fold ’em

Davis cites the Vanderbilts of New York as a case where the family failed to see the writing on the wall.

“The Vanderbilts had 10 mansions in Manhattan. They had 100s of servants, But by the fifth generation, no one could afford to live in them,” he explains. “In 20 years, the family spent in today’s dollars around $10 billion – over a million a day consumption. By this point, the family is on permanent vacation. Sure, they endowed a university, they built hospitals and libraries and they did some great philanthropic things – but they spent it. They went from their returns being high and consumption low, to low returns and high consumption. And no one could see disaster was coming.”

Today the Vanderbilt’s vast fortune is long gone. Sixth-generation Vanderbilt, Anderson Cooper told Howard Stern, “My mom’s made clear to me that there’s no trust fund.”

Don’t lose sight of your purpose

So what sets one family business up to flourish and another to fail? Davis suggests just like the Vanderbilts, many family businesses are guilty of turning a blind eye to their failings. They double down on a bad bet rather than pulling the plug.

“Everybody that is successful is good at something and bad at others,” says Davis. “So what you need to do is figure out where you are weak and where you are strong. Get help for where you are weak.”

Most of all he says, “don’t lose sight of your purpose”.

“Ask yourself, what is our purpose what are we trying to do? What are our key values guiding us as we do business; what are the activities that we do together?  And finally, what are we good at?”

The author was a guest at WOBI on Family Business. You can find out more about the World of Business Ideas at www.wobi.com

This post was originally published on www.kochiesbusinessbuilders.com.au