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It is logical to understand that in most families, Emotions serve as the pillars of almost all relationships In a Business or Enterprise, however, it is Economics which defines relationships!
Emotions & Economics are evidently, opposites of each other. Apart from the first letter, these two words hardly have anything else in common. ‘Emotions’ are feelings of the heart …while ‘Economics’only understands that which is rational and supported by valid theories.
Interestingly, family businesses, are a unique combination of both, Emotions and Economics!
This is why they are rather a delicate form of Enterprise. Undoubtedly, they hold huge potential, but they also tend to become more & more fragile …with time.
Family Businesses and India
Surprisingly enough, family businesses make up between 80% to 85% of the world’s GDP and fund 85%
of all start-ups across the globe! Not so surprisingly, however, the rate at which family businesses die out is alarmingly fast. 70% of family businesses fail to transition into the 2ndgeneration, from the 30% that survive, only 12% sustain up-to-the 3rdgeneration and from that 12%, a mere 4% are able to usher in the 4thgeneration.
This means that a majority of family businesses are unable to survive beyond 60 to 70 years. The challenge here, in fact, is not informing legacy businesses, but rather …in sustaining them. Emotions are definitely required when an enterprise starts. Raw passion, energy, and a die-hard attitude are vital to making a start-up successful. Similarly, in family businesses too, when the founder starts the adventure, and it is a progressive one, the venture takes the normal route that any successful start-up would and grows at a phenomenal rate in the initial years. By the time the second-generation steps in, however, the growth rates start reducing …. and this is not necessarily because ‘opportunities’ in that sector have all been exploited …the business and that market sector still has a lot of potential but for some reason the second-generation (more often than not) is to exploit these opportunities in the manner the first generation was able to. In fact, many times, the second-generation owners know exactly what is to be done, but they are unable to do it.
The Differences
The business, therefore, starts plateauing …and by the time the 3rdgeneration has stepped in, the graph of the enterprise has already commenced its downwards trajectory and sustainability of the family business becomes a serious question mark!
The above, however, does not hold true for professionally managed companies. If the erstwhile Chairman / Directors retire, the next batch is more often than not able to deliver results which are as good as or sometimes even better than the earlier set of leaders ... and this trend continues. The result is that the life
of companies with professionally managed boards far outstrips that of family-run enterprises. This is a fact. Actually, the problem here lies in the fact that family business members often fail to understand the difference between “owning a company …and managing a company”.
In most family enterprises, the owners themselves are the managers & are (personally) involved in day to day nitty gritty of the business. Contrary to popular belief, this type of micro-management by an owner is actually harmful to a family business, especially if the business is in a mature stage of its lifecycle.It is true that when a business is in its early stages of life, it does requires an “owners” mentality to grow…and this mentality is easily provided by the founder or the 1stgeneration. However, once the start-up has reached a level of maturity, cash flows are stable & business is growing …the same start-up then requires a “manager’s” mentality to sustain itself!This is why an ‘Entrepreneur’ is very different from a ‘Manager’. It’s really not about skills here but more about the character and mindset of the individual. The way an Entrepreneur approaches a problem is very different from the way a Manager would and this is a vital point which is often missed by most family business houses.
The Legacy
In family businesses, the business always takes centre stage. Business is discussed at the breakfast table, at lunch, over dinner, in the bedroom, and even in the bathroom! The definition of work-life balance for a family business member is different from that of a professional manager.
Family members usually grow up listening to business stories, business problems, balance sheets, new ideas & new ventures from an early age. Their world and definition of earning a livelihood are quite different than those who don’t come from family business houses …at-least this is true for most family business members if not all. In fact, statistics show that, given a choice, up to 70% of family members desire to join the family business because of their mind being pre-conditioned to doing so from an early age. It's just the way things are and there’s nothing wrong about it.
The problems actually begin by the time the business has entered into the second generation and especially when it enters into the 3rdgeneration. By this time, the business is no longer a start-up and does not require an entrepreneurial mindset to run itself. Rather it requires a managerial one and this is precisely where most family businesses fumble …because family members turn out to be great entrepreneurs ... but they fail to be good managers!
The Important Factors
The risk appetite, mindset, access to resources, exposure & confidence levels make family members excellent candidates to undertake new ventures, but when it comes to managing processes, family members often lack the discipline, the patience, the skill-set and many a time even the required experience to create, manage and sustain business processes. This is where professional managers and consultants are required to come in and take over ... and indeed this is where the family members need to bow out and delegate. The family members can continue being the owners and even the face of the company (if required), but they need to stop wasting their time in day to day nitty gritty and start utilising their talents in setting up new (greenfield) projects which would eventually serve as excellent diversification platforms to the existing family business and generate immense value to both the family members (personally) and the family business.After all, creating an enterprise …and sustaining an enterprise are really two very different ball games …and require two very different mindsets! Hence, if a family business is to survive the torments of time, an ideal & time-tested policy would be allowing the management of the on-going businesses to be led by ‘Professional Managers’ …while (simultaneously) inspiring & motivating the members of the family to become Entrepreneurs!
Originally posted Here
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