Posts Tagged ‘debt’

6 Things We Can All Learn From Family-Owned Businesses

Tuesday, April 23rd, 2013

The 6 things I’m going to talk about come from a study of 149 large, publicly-traded, family-controlled businesses.

However, stay with me because we’ve seen the same characteristics in the successful family-owned businesses we’ve dealt with – and none of them are publicly traded.

Another thing – the study looked at 1997 – 2009, covering some good and some very tough times. Guess what? The family-controlled businesses, on average, turned in better long-term financial performance than non-family businesses – in multiple countries.

So what are the 6 things we can learn?

1. Family-controlled businesses are frugal in good times and bad. How? They don’t, for example, have luxurious offices. That’s because they view the company’s money as the family’s money – and so keep a tight rein on all expenses.

2. They limit their debt. The family-controlled companies in the study had, on average, debt levels equal to 37% of their capital (compared to 47% for non-family firms). Why, because if something goes wrong, family businesses don’t want to risk giving their investors too much power.

3. They have lower staff turnover. Only 9% of the workforce (versus 11% at non-family firms) turned over annually. And family firms don’t rely on financial incentives. They focus on building a culture of commitment and purpose, avoid layoffs during downturns, promote from within, and spend far more on training than non-family firms.

4. Capital expenditures are tightly controlled. One owner-CEO said “We have a simple rule, we do not spend more than we earn.” Family businesses not only look at each project’s ROI, they compare projects – to meet their self-imposed budget. It costs them some opportunities but means they’re less exposed in bad times.

5. They diversify. 46% of family businesses in the study were highly diversified, while only 20% of publicly traded ones were. The reason – diversification has become a key way to protect family wealth as recessions have become deeper and more frequent.

6. But they do fewer, smaller, acquisitions. There are exceptions, for example if there’s structural change/disruption in their industry. But generally, family companies prefer organic growth and partnerships or joint ventures to acquisitions.

The simplicity of the 6 things makes them easy for any business owner to implement.

There were 7 things mentioned in the study but the seventh, that family-controlled companies generate more of their sales abroad, applies less to the companies we work with. So I can’t talk to it from personal experience.

By the way, the study’s conclusion is that CEOs of family-controlled firms invest with a longer time horizon in mind and manage their downside more than their upside, unlike most CEOs, who try to make their mark through outperformance.

All because their obligation to family makes them concentrate on what they can do now to benefit the next generation.

You can read the full study, which was conducted by The Boston Consulting Group, here.

 

 

If you enjoyed this post you’ll also enjoy 5 Tips To Improve Margins and the Bottom Line……

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6 Challenges Fast Growing Companies Face

Tuesday, August 28th, 2012

I’ve mentioned Inc. magazine www.inc.com several times before. It’s a great resource.

There’s a well-researched article in the current issue about 6 challenges fast growing companies face. They’re all about execution – and if the owner doesn’t deal with them well any one of them can be fatal.

1. Your business outgrows its staff. One or more hard working, loyal employees who had the skills required to make a great contribution when they joined the company can no longer deliver. Owners are torn, knowing that the business wouldn’t be where it is without Joe or Mary – but that they just can’t cope and are hurting the company now. The solution needn’t be just to let them go but the owner needs to deal with the situation quickly and honestly.

2. You wait too long to hire.  A classic dilemma. Hire people before you need them and you add to overhead and risk having to lay them off if the orders you thought were coming don’t. The alternative is to risk service and credibility if the business does materialize. One solution – hire all-rounders who you can train and slot into more than one position.

3. Your business lacks the right systems. Two potential causes here. Either you don’t implement processes and systems quickly enough or the system you chose doesn’t work as advertised. I know which one frustrates me most – the latter. There’s nothing worse than dealing with implementation problems and delays – so have a solid contingency plan in case it happens.

4. You run out of money. We’ve said it before, and I’ll say it again, the most important document for a business owner is a cash flow forecast. Keep it up to date, study it often and it will provide the information you need to stay out of trouble. Because growing companies have to invest before invoices are cut, never mind paid, they become less, not more, liquid.

5. You can’t keep up with demand. This is the most dangerous point for fast growing companies according to the article. The owner takes on debt to finance additional capacity – or people – and the demand doesn’t appear. According to the author the best solution is to manage growth so that it happens in small rather than large increments. But that’s not always easy to do.

6. The problem is the owner. If you’ve built a company – i.e. been successful – why would you have to change? That’s a reasonable question. But I notice, after 15 years of working with business owners, that the ones who grow their companies successfully are the most open and willing to change themselves. If the business can outgrow an employee, why can’t it outgrow the owner?

You can read the full article 6 Classic Ways to Crash Your Company here.

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6 Tips for Protecting Your Long Term Success

Sunday, June 13th, 2010

Some of things I’ve written about in the past were confirmed recently by a man with an outstanding track record for building successful companies! I’ve followed the writings of Norm Brodsky http://blog.inc.com/ask-norm/norm-brodsky/ for a number of years. He’s built 7 companies and is blunt, to the point and often outspoken. In his March column in Inc. magazine www.inc.com Norm says……

Don’t let fear lead you into making decisions that will damage your business in the long-term. When you’re looking at implementing cost-saving or even survival strategies, remember that this economic downturn, like all downturns, will come to an end. Norm uses the example of a retailer of luxuries whose monthly revenues have dropped by 50%, but his logic applies to any business. So what does he say?

Point #1 – Don’t reduce your exposure to your customers. A lady he’s advising (Lisa) wanted to reduce the time that all of her stores were open by 2 hours a day. Norm’s point – she’s cutting her selling time by 25% to save an amount that doesn’t compare to the margin dollars she could make in that time. Our thought – across the board cuts to marketing expenses in B2B markets, without first weighing their impact, could just as easily produce negative, long term results.

Point #2 – Think about your people. Lisa had built her staff carefully over a number of years by hiring and training good people who reflected her values. Norm’s point – by cutting their hours she was cutting their pay – and risking losing them – instead of reassuring them their jobs were secure. Our thought – think about the knowledge of your business and the investment you’ve made in training that walk out of the door when you lose good employees.

Point #3 – Be creative when cutting expenses. Being in retail, rent was a big component of her monthly expenses. Because Lisa had 4 stores and had signed personally for her leases, her landlords were unlikely to renegotiate with her. Norm’s point – be creative in the face of apparent barriers. He suggested she ask for a short term reduction in rent which would then be added to the end of the lease. Our thought – brainstorm creative solutions and write down every idea that comes up, no matter how crazy it seems. This process will unfreeze your mind and help you find things that can be made to work.

Point #4 – Avoid the temptation to cut prices. Lisa suggested holding a sale. Norm’s point – instead do everything possible to hold the line on prices and add extra value instead, for example hold a customer appreciation event. Our thought – adding value takes so much more energy than cutting prices but once you cut prices how do you justify putting them up again? Bundle an extra add-on or service with existing products and services for a limited period of time.

Point #5 – Find untapped markets or other opportunities. While Lisa had 4 stores, they were all on the West coast. She had a dislike for both paying commissions and giving up control of her sales efforts. Norm’s point – she had great gross margins with which to pay commissions on what would be brand new revenues and she had to let go to grow her business. Our thought – Type A personalities (i.e. most entrepreneurs) hate giving up control and many (particularly the males, my wife assures me) have great difficulties moving outside of their comfort zone. But if you keep doing the same things then don’t be surprised if you get the same (or worse) results. The economy and our markets have changed dramatically – we have to do the same.

Point #6 – Using/increasing debt. With very strong margins Lisa had managed to stay debt free but now she was thinking of applying for a loan. Norm’s point – you can’t borrow your way out of debt so get a Line of Credit instead and use it only as an absolute last resort. Our thought – by maintaining your prices and margins and using creative ways of reducing costs you can keep on generating profit. By focusing on collections (perhaps by offering incentives for quick payment), keeping tight control over inventories and working with your suppliers you can keep the cash flowing.

Norm closes his article by echoing a couple of themes I’ve seen in a number of places recently. The first one is that, no matter how things look today, the downturn will come to an end. Our thought – it’s sometimes hard to remember when you’re shovelling the snow off your driveway in the middle of a January snowstorm that, in 4 or 5 months the golf courses will be open. But summer always comes. The second theme is that some companies will come out of the recession stronger than others. If you want yours to be one of them then you have to take advantage of your most important resources – imagination and creativity.

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