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Family business and the ‘familiness advantage’

Jonathan Small for Progressive Dairyman Published on 29 February 2016

Only 30 percent of family businesses survive the transition to the second generation. The odds of getting to a third are a tiny 13 percent (hence “shirtsleeves to shirtsleeves in three generations”). And yet, family business outperforms non-family business at almost every level.

Why is that? This advantage is often termed the “familiness advantage” and is the unique bundle of resources a firm enjoys because of the interaction of the family, its individuals and the business with one another. These advantages are worth fighting for and include:

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  • Patient capital (long-term decisions and a 90 percent reinvestment rate equals low debt)

  • Decision-making (quicker, no public shareholders)

  • Reputation (pride in the name over the door)

  • Alliances (build with like-minded families)

  • Leadership (generational, continuity)

  • Employee loyalty/treat employees better (easier to find and keep good people)

  • Customer loyalty (customers like to do business with family businesses)

  • Commitment (willing to work those extra hours because it’s yours)

  • More supportive of/supported by their community

  • Unconventional strategies (no shareholders to bring on-side)

  • Ownership X management alignment

However, the prevailing model in farm succession is that farms are either split up among children (losing many of those F factors), and non-farming children (or just those for whom there is no room) are disenfranchised from the family business in (the sometimes fruitless) pursuit of harmony.

The reasons become apparent when you understand the decision-making styles that tend to be in use in family businesses, especially farms, that are in the hands of controlling owners. Early on in its life, the family business is typically owned and operated by Mom and Dad, and the decision-making model that works is that of an autocrat (aka a benign dictatorship). Mostly (but not always), Dad leads and everyone follows.

When the kids are small, this works just fine. The problem is: Those kids only ever see one example of how it is done from their earliest (and most formative years). No surprise, therefore, that as they become adults and prospective successors on the farm, they know exactly “how it is done,” after all they watched Dad and Mom do it that way for 20 or more years.

The problem comes the moment one sibling tries to “autocratically” make a decision affecting another sibling. The cry, “You’re not the boss of me” goes up and the wheels, as they say, come off.

In fact, it usually doesn’t require that things even get to that point; siblings know from an early age that while they are OK with that style from Mom and Dad because, well, it’s Mom and Dad, they will never accept such authority from a sibling (much less a cousin).

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This explains the rarity of brother-brother (sibling partnership) farm operations and even fewer cousin-cousin (cousin consortiums) operations, but there are some out there. What did they have the others didn’t? Interestingly, when you get down to looking at it, they almost always were families where there existed a culture of discussion and consensus-building at a family level. In short, great communication at a family level.

Ultimately, instilling into the next generation that same collaborative/consensus-building style by using it yourselves is one of the best defenses against farm breakups. It can be learned later in life, too, but it’s easier if that’s just the way you grow up.

The challenge with “later” is, of course, it’s usually at the time of the transition itself in that period when the kids are now in the business, possibly even beginning to own some of it, when they are working with their parents as business partners and no longer as employees.

Everyone then has to learn the new style, and that can be tough on success rates and relationships. Faced with that, many families opt instead for the “easier” path of splitting the farm or fulfilling the hopes of only a few.

Certainly, it is hard to learn new ways to make decisions, especially when you are older or even when your children are small and may seem to lack the wisdom to “discuss” the farm. But, as the saying goes, if you go on doing what you have always done, you will get what you always got.

Whether the farm always goes from controlling owner to another controlling owner or whether it can progress to a sibling partnership and ultimately cousin consortium depends upon this.

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It is surprising sometimes, the passion with which the latter options are rejected because those raised in the autocratic style simply cannot accept that it can ever work any other way than a single strong leader, but then they have never witnessed anything else.

Family business is a single system

The thing about systems is: All of the parts are connected to each other. It is easy to imagine that transitioning the farm is a matter of just transferring the ownership or responsibilities. Nothing could be further from the truth and, in fact, there are few things more complex than transitioning a family farm because they are more than the sum of their parts.

Few other types of business have as their head office the place where the successors themselves (and maybe even a parent) grew up and where all of their childhood memories reside. This makes for far-from-straightforward decisions. Add to that the very advantageous tax rules aimed at family farms and the complexity of farming itself, and you have a system with many moving parts.

You can liken solving this puzzle to the famous ’70s puzzle invented by Erno Rubik. The secret of that puzzle is that it too is a system; all of the parts are connected to each other and you cannot solve it one square or one colour at a time. You have to solve it all at once (holistically). So too for farm succession; there are many parts and they all affect each other.

Broadly, the three major parts – ownership, business and family (the so-called three-circle model) – are all connected, and if you make decisions about one of those, you will have non-linear (disproportionate) effects on the others. These effects are what typically defeat families.

The secret, just like with the Rubik’s cube, is to have a good process that has a clear end goal in sight. Therefore, the place to start on your plan is, paradoxically, at the end. Start by defining clearly what everyone’s goals, hopes, dreams or expectations are.

Don’t get hung up on what may or may not be possible, or you will end up in the weeds of the detail and lose sight of the end goals. Just get that vision out there on the table so everyone, including your advisers, is looking at the same goals (and not assuming what everyone else’s are).

You will be surprised what experienced succession planners with the right expertise at their fingertips can accomplish if you can clearly articulate what it is you want them to accomplish. In fact, until you can create that vision, it is very hard for even the best experts to develop the right plan with you, however much you are prepared to spend.  PD

Jonathan Small, B.Sc., PAg FEA, provides management consulting services to all types of family farms as part of MNP’s agricultural team. Small spends about half of his time actively involved working with farm families and their transition plans. He was awarded the FEA designation (held by fewer than 160 individuals in Canada) in the fall.

Jonathan Small
  • Jonathan Small

  • Farm Management Consultant
  • MNP Red Deer
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