Growth. Liquidity. Control. Pick Just Two

How do you get your family business to ‘run well’?

It starts with ownership alignment.  It is incumbent upon the owners to define success and convey that message to the board who in turns hold management accountable to achieve the desired results.  This is key to the organization’s success.  When there is confusion and dysfunction at ownership level, it all rolls downhill into the business.

There are typically three possible outcomes for the family business. These are the first tenants of an owner strategy:

  • Growth in the business and maximize its value
  • Liquidity so that there are cash flow distributions to the owners
  • Maintain control so that decision making authority remains within the ownership group

A way to think about these options is to see each one as a point on a triangle.  You can have any two, but you can’t have all three. So here are your options:

  • Control & Growth. The message here is grow the business, but with as little outside financing as possible so you can maintain control.  It is imperative that you manage expectations of family on distributions – no debt means you will use cash flow to fund growth, leaving less for distributions.
  • Growth & Liquidity. The message here is to grow the business, but also pay out distributions to the owners.  Using outside financing to fund growth means less overall control by the owners (meeting loan covenants, etc…).  It is important to pay attention to terms of equity partners or lenders to minimize the impact of losing some control.
  • Liquidity & Control. The message here is to use cash flow to pay owner distributions, and maintain low debt.  Growing the business is not the primary goal of the owners.  However, if growth is too slow, the business’ momentum will be undermined, employees might leave, and the company may lose its competitive position. 

We worked with a family business in which four G2 siblings owned the majority of the business.  One of the siblings essentially wanted liquidity only, acting as if it were a “God-given right” (they actually used that language).  The effort required by management to appease this shareholder during board meetings and other times throughout the year was deflating. It created great distrust and dysfunction between ownership and management.  Health issues, missed opportunities, and poor family harmony were just some of the results of this ownership dynamic. 

Eventually, the dissident shareholder sold their shares back to the company, and the company enjoyed a renewed energy, confidence, and success going forward.

Get your ownership aligned around their goals for the business.  If you don’t, you will hurt the goose that lays the golden eggs, and soon you won’t have anything to argue about because your business will be history.

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Tom Garrity is managing partner at Compass Point Consulting, based in Bethlehem, PA, a business consulting firm specializing in family-owned companies, primarily in the manufacturing, construction & professional service industries. Compass Point provides hands-on consulting & coaching to help businesses close performance gaps; give owners practical, actionable tools that drive growth; deliver training to develop leaders and position the business for successful ownership transition - all on their terms.

 

Learn more at: http://www.compasspt.com

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