The Secret FD on keeping it in the family

ON several occasions I have invested time, effort and resource into pursuing the acquisitions of SME family businesses but, for various reasons, only one such deal reached a successful conclusion. However, despite my unfavourable view of certain family businesses, this sector does make an interesting study from the FD’s perspective.

I define family businesses as those where 20% of the voting shares are in the possession of multi-generational family members who are also involved in management and/or governance.

In my case, the attractive family business acquisitions failed partly because of poor information and analysis from the inadequate business systems which hindered the due diligence, so we were accused of being too demanding. In one case the board insisted upon continuity of the incompetent family management team despite the absence of succession plans, and refused to accept our strategy. Setting incompetence aside, one business refused to negotiate terms despite giving us minimal information. Another lost their bottle and changed their minds on the very day we were to complete the deal, although they could not provide us with a reason why. The one successful deal turned out very well indeed.

The family business sector is hugely significant. I was fascinated to note the waiting list for the Tercenterian Club, whose membership is restricted to businesses that have been going for more than 300 years under continuous ownership of members of the founders’ family. Many consultancy practices provide specialist services, advising family businesses to resolve problems that are unique to them.

In a family business, how is it possible, as a family member, to perform the FD role properly and still remain onside with the family? Equally, the role of a non-family member FD in an SME family business could be one of professional frustrations. I have seen some of them being ignored, bullied, relegated to operational tasks, not empowered to act independently, and restricted in professional freedom. These FDs are sometimes restricted to reporting the absolute minimum; disclosures are frowned upon; and the main strategic objective seems to be paying the dividend.

Who knows how they work with banks, ratings agencies, customer and suppliers? Do SME family businesses have audit committees and do they exercise the type of governance most of us accept as normal? How does the FD deal with a board that is populated in part by enthusiastic amateurs with minimal qualifications or skills for the role, other than their inherited shares? Does TV’s Ewing Oil of Dallas depict reality?

If so, how do we explain the success stories of the 20% of the Fortune 500 which are family companies, and the 40% of large European listed companies which are controlled by families who, collectively, employ 50% of the workforce? These include: Wal-Mart, News Corp, Mars, Marriott, and many of the global manufacturers of cars.

One convincing point, identified by the great Adam Smith, is that business owners exercise more ‘anxious vigilance’ than hired managers. Maybe the freedom that family businesses, in their pre-listed phase, enjoy to plan for the long term is another key factor. However, I do not believe that shareholder pressure is necessarily bad, because it pushes back against organisational laziness and places constant demands on the executives to be innovative and competitive. Shareholders also interface regularly with the FD and make the role influential and sharply focused on the aforesaid ‘anxious vigilance’.

There is a realistic opportunity to unlock growth and wealth from the SME family business sector. It requires SMEs to employ a greater number of talented and incentivised FDs, and give them the mandate and freedom to separate family priorities from business and financial strategy. ?

Having made myself unpopular by postponing the July family holiday until now, the Secret FD is writing this column from the Maldives.