Family-owned businesses contribute significantly to the national economy. However, they also face multiple challenges on a day-to-day basis. Here are certain time-tested ideas that can help owners proactively deal with setbacks and keep growing in the uncertain times we live in.
1. Keep your ear to the ground
Policy and environment changes pose significant risks to businesses across industries. Take the example of telecommunications, an industry where disruptors are challenging the existing value proposition. As mobile data charges fell, pricing pressures in the sector have forced telecom operators to digitise their entire scope of operations and cut costs to stay viable. Similarly, in the restaurants business, as consumers get health conscious and cost-conscious (due to the economic slowdown), Dominos is said to be focusing on the Rs.99 price category to encourage consumption.
Family businesses can deal with tectonic shifts in their environment by watching out for key trends affecting the industry, being a part of industry bodies and gathering information from multiple perspectives. The key points to remember are:
- listen to buyers more closely,
- focus on key policy changes,
- take business decisions based on the worst-case scenario, taking into account the available information and perceived threats to the business, and
- learn from the mistakes of other players in the industry.
In difficult times, this can help businesses course-correct at the right time.
2. Create a war room
In a family business, a ‘war room’ plays the same role as the strategy departments of large corporations. It is where key business metrics are defined and important business projects are monitored. If there is any change in the business environment, action is taken and if needed, the key decision-makers will go back to the drawing board. This is important till the company has a full-fledged board to run the business.
In India, certain family businesses meet for lunches every Tuesday to discuss their challenges and potential solutions. This enables them to build a business rather than be in a reactive frame of mind.
However, many family business owners often don’t see the need for a war room because of money constraints, or because they feel they already have deep domain knowledge. What they don’t realise is that in the process, they may get trapped in day-to-day issues and miss out on the ‘big picture’. War rooms should be run by at least 2-3 people (who may or may not belong to the family) who have been associated with the business for a long time.
The advantages of a war room are:
- The business can be made more relevant and future-ready
- Decision-making tends to be more informed
- The next generation can be groomed systematically to take over the business
- It reduces dependence on owners/promoters and enhances business continuity.
3. Invest for the long term
Family businesses look at the long term, which is why they sustain over periods of economic turbulence with relative ease. A tested and relevant strategy is to create savings outside the business. You can do this by paying near-market salaries to yourself or your family members if they are delivering as per industry norms. Drawing a salary might create short-term taxation issues. However, over the longer term, the people within the family stay with the business as they experience autonomy and wealth creation at the same time if the business grows.
4. Have shareholder agreements in place
It is important to have clear agreements in place between key shareholders (i.e. family members). This ensures that at the time of exit, there are clearly-defined exit norms on valuation.
We knew a business that had acrimonious issues within their family. Such arguments can result in a situation where certain owners may want to go their separate ways. In such a situation, shareholding agreements help in sorting out potential disagreements about revenue or profit-sharing.
A good practice here is to link shareholding through achievement of key milestones. This is especially applicable in the case of second-generation business owners. Enhancing shareholding on completion of certain responsibilities leads to a better sense of ownership, a transparent growth path, and fewer issues if and when a person decides to exit.
Keep learning, keep growing.
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