Insuring the Survival of (Your) Family Business. New York Press Association April 9, 2017

Transcription

1 Insuring the Survival of (Your) Family Business New York Press Association April 9, 2017

2 Quiz What is a family business?

3 Perceptions

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5 Why Family Businesses Will Continue to Matter Family businesses have received an increasing amount of attention of late, and rightfully so. They dominate the global economy, from the corner store to the Fortune 300. As publicly owned corporations grow larger, as political systems grow more fragile, and as uncertainty permeates through many corners of society, family businesses will continue to play a key role in building trust and providing essential services. Exploring recent research and relevant case studies, we spend time understanding what makes family business unique, amply positioned and ultimately well suited to tackle the challenges of the coming century and how your own business compares.

6 Pathway Define, ground rules, disclaimers Family business Advantage or disadvantage? 4 distinct advantages What can you do?

7 Definition of a family business? Ownership control (>15%) by family or partnership of families Strategic influence by family members on the management of the firm Concern for family relationships The dream (or possibility) of continuity across generations Poza, 2007 Succession Checklist

8 Ownership Annual Shareholder Meeting Shareholder Council Board of Directors or Board of Advisors Family Family Council Company Management Business Tagiuri & Davis (1982)

9 Publicly traded any better? Of 25,000 publicly traded companies from , the AVERAGE LIFE SPAN WAS 15 YEARS

10 Evidence shows family companies outperform public companies Family businesses employ 50-60% of the workforce in industrialized countries 2. Family-run companies are valued 10% higher by the stock market than non-family companies 1. Founder-stage family firms are 19% more valuable than non-family firms 3. Family businesses generate higher annual shareholder return annual revenue growth income growth return on assets than non-family firms 4. Publicly traded family firms significantly outperform non-family firms in earnings and stock performance: 5.5% more profitable 6.65% better return on assets 1. 1 Anderson, Ronald and David M. Reeb, Founding family ownership and firm performance: Evidence from the S&P 500, Journal of Finance, June 2003, vol. 58, no. 3 2 Financial Times, Family companies are ready for the worst, October 30, Amit, Raphael and Belén Villalonga, How do family ownership, management and control affect firm value? Evidence from the Fortune 500, 2004, working paper 4 BusinessWeek, Family, Inc., November 10,

11 4 Distinct Advantages Values Patience Entrepreneurship Trust

12 Values

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14 The easiest money to earn is the money we haven t spent When a problem hits, they can act immediately as a team on that has been there before People think we are rich and courageous, but in fact we are cowardly We accepted that we d lose money in the US for 20 years WE HAVE A SIMPLE RULE, WE DO NOT SPEND MORE THAN WE EARN If one sector suffers a downturn, businesses in other sectors can generate funds This feels like I am coaching my son s Little League team

15 Patience

16 Family Business Longevity Kongo Gumi (578 to 2007) Hoshi (Japan 718) Chateau de Goulaine (France,1000) Barone Ricasoli (Italy, 1141) Baravier &Toso (Italy, 1295) Hotel Pilgrim Haus (Germany, 1304) Zildjian (Constantanople, Newton, 1623) Family businesses represent 80% + globally Studies indicate that on average family businesses outperform non family businesses in terms of ROA, ROE, market value creation, as well as other measures of performance (Anderson R., & Reeb, D., Founding Family Ownership and Firm Performance: Evidence from the S&P 500. Journal of Finance, 58(3) ) Mittelstand Not just a freak show

17 Family Business Mortality Many reasons why businesses don t continue from one generation to the next Sale of the business Loss of family interest Unpredictable challenges Industry changes Missed opportunities Mismanagement Succession problems Family conflict Family norms challenge business norms st Gen 2nd Gen 3rd Gen 4th Gen 17

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19 Maybe too much?

20 Entrepreneurship

21 Many years ago, as a young chemist working in the company s lab, Samuel Curtis Johnson III, now deceased chairman of SC Johnson: A Family Company, tried to convince his father that he had the formula for a breakthrough product, an insecticide. Reports are that several attempts at convincing his father of the soundness of the idea were rebuffed with a simple Remember son, we are a wax company. Samuel Curtis continued to perform his assigned job faithfully at the lab and carry out his skunk works project on the side. He also continued to bring up his idea and advocate its merits in subsequent meetings with his father, only to receive the same admonition. Finally, young Samuel Curtis reportedly added a tiny amount of wax as an inert ingredient to his formulation for the insecticide. When he once again took the new product, now part of the wax family of products, to his father, it received the go ahead; after all, the insecticide was now wax based. Poza, Family Business 3e, South Western Page 103) 21

22 Entrepreneurial Resources Provided by the Family Debt Capital Access to distribution channels Equity Capital Favorable and negotiable conditions (debt and equity capital) Physical resources (infrastructure, facilities) Industry specific knoweldge No Family Business Family Business Coaching/mentoring related to entrepreneurial activities Introduction to networks Provision of contracts Knowledge about how to lead a business Ernst & Young Coming Home or Breaking Free 2011

23 Transgenerational entrepreneurship the processes through which a family uses and develops entrepreneurial mindsets and family influenced resources and capabilities to create new streams of entrepreneurial, financial and social value across generations Habbershon & Pistrui, 2002; Nordqvist & Zellweger, 2010

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25 Source: pwc 2017 US Family Business Survey

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27 Need it Source: pwc 2017 US Family Business Survey

28 Trust

29 Why family business? 77% of all new business ventures established in the United States are founded with significant involvement of the family in the business. The public views small business as most trustworthy when it comes to spending efficiency. Federal government is viewed as least efficient. 73% people say they trust a family business, however, that number tends to decline after an ownership transition.

30 Take heed Reasons for failure to sustain family wealth or business: 60% lack of trust 25% lack of education & prep 3% lack of financial / tax planning "For empires to fall, all they need to do is exist." Voltaire

31 Extremophiles? Say What? Family businesses that have successfully adapted their internal systems and external activities to the emergences of an extreme environment. So What? Much of the world s future wealth will come from higher risk economies. Economic volatility is quickly becoming the new normal.

32 Why do family businesses make natural extremophiles? Investments extend beyond high risk episode Skilled at tactical triage AND strategic planning Strong ties to a city, country or region, which often pre date the current episode Robust social networks Deep connection between owners and enterprise Necessity is the mother of invention

33 Not so gloomy Families are able to positively affect the resource inventory and usage of their firms (Arregle, Hitt, Sirmon, & Very, 2007; Habbershon & Williams, 1999) Apply a long term perspective allowing for unique strategic positioning (Zellweger, 2007) Have less agency problems and higher firm values (Anderson & Reeb, 2003) Drive new entrepreneurial activity (Kellermanns & Eddleston, 2006; Nordqvist & Melin, 2010)

34 Building Family Businesses That Last Building a family business so that it continues takes ongoing dialogue across generations of owner managers about their vision for the company Family businesses that have been built to last recognize the tension between preserving and protecting the core of what has made the business successful on the one hand and promoting growth and adaptation to changing competitive dynamics on the other

35 The ultimate aim of ANY business is VALUE CREATION!

36 Where to start? Family Family meeting Business Where do we add value? Ownership Business family or family business?

37 One Word If there is one piece of advice we would give to all family firms dealing with succession, it is: communicate. Chrisman, Chua & Sharma

38 "Your company's Instagram is pathetic, dad!" #fambizquotes #nextgen #FamilyBusiness "I will never know as much as my predecessors do..but asking disruptive questions & bringing a fresh perspective is my most valuable asset. "We have a very formalized decision-making process: my father decides everything. "Everyone is very happy. Or maybe just no one has the courage to say anything."

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40 Transition or transformation?

41 What's the best part of your job? "My name is on the door every morning when I come to work."

42 Connect Succession Checklist