It is generally understood that a career will come with a range of strategic and emotional considerations. Do you get on with your boss and your co-workers? Do you have job satisfaction? Do you feel supported in your career progression?
These questions gain an added level of complexity when it comes to family businesses.
Family businesses can be incredibly successful and are generally well trusted by both consumers and investors. However, the most successful family businesses achieve this trust by taking an informed and mindful approach to their business structures, culture and succession planning.
For those that do not place emphasis on people, culture and planning, cracks can appear.
What does the research say?
This paper comprises key extracts and selected findings from the inaugural Pitcher Partners Business Radar: Understanding the businesses that drive Australia’s economy report published in August 2020.
The report takes a particular interest in family businesses. It comprises independent research canvassing over 400 Australian private and family business owners and operators in Australia’s mid-market to further understand the mindset and unique challenges of businesses in this space.
These are typically companies operating in that less often referenced space between ‘small business’ and ‘big business’. They usually employ between 20–200 people and have annual revenue of between $2 million and $500 million. Often described as the engine room of Australia’s economy, the mid-market produces just under 25% of Australia’s revenue ($625 billion) and contributes one-fifth of the country’s net tax take.
While these metrics may help to define which businesses fit in this segment of the market, mid-market companies are defined by their attitude. Businesses in this sector typically have a growth mindset and can quickly adapt to change and capitalise on new opportunities.
Mid-market business owners typically have skin in the game. They are confident with what they have to offer and are leaders within their industry.
Interestingly, despite the pervasiveness of the term ‘middle-market’ the research revealed the term has no real affinity for business owners in this space.
Preferring the terms ‘private business’ or ‘family business’, the respondents from the middle-market cohort shared many of the same characteristics:
Confidence—they are confident, bullish and know what they are offering to the market and why.
Adaptability—regardless of the challenges and changes their businesses face, they are confident in navigating tough times by being adaptable and agile to capitalise on opportunities.
Growth-focus—they share a growth mindset, pushing their boundaries to grow and evolve their businesses.
Self-drive—they feel a sense of control over what they are doing, how they do it, and how that may change in the future.
The research also sought to understand the motivations of middle-market operators and why they started their businesses.
The top three reasons respondents started their businesses included:
- work-life balance (47%)
- to follow a passion (46%)
- to have control over my destiny (37%).
Did you know?
Despite succession being a common challenge, particularly among ageing business owners, over a third of respondents did not have a succession or exit plan in place.
The types of businesses examined included start-ups, family businesses, and private companies at various stages of maturity.
By comparing the responses that came from non-family members of family businesses with those from within the family, the report paints a picture of the key emotions and challenges at play. Business owners, managers and operators need to be aware of these factors when planning for the future of the business.
The business lifecycle
The report identified four stages of the business lifecycle, as summarised below.
The seed stage of business is broadly defined as those companies with a turnover of $2 million or less and in operation for less than two years. During this formative stage, businesses experience many challenges and opportunities. Among the challenges facing seed-stage businesses are factors associated with establishing their businesses and gaining traction in the market, noting marketing, cash flow, regulation and capital raising as the most challenging areas.
Conversely, opportunities involved entering new markets and experiencing growth, with digital marketing acknowledged as an important opportunity to expedite growth.
Growth-stage businesses are organisations that continue to evolve and expand either in revenue, profit, size, product lines/service offerings or markets. These companies have typically gained traction in their market and are now facing issues of diversification. Business owners and leaders at this stage see immediate opportunities for growth in their current markets and expansion into new markets, supported by investment in technology.
Loosely, these organisations are self-sustaining, have peaked in terms of size, revenue and markets, and risk entering a decline cycle. While this cohort had established stable revenue streams, the research revealed businesses at this stage continued to pursue opportunities for sustained growth in existing markets while also seeking operational efficiencies.
Expanding to new markets, particularly international ones, can be challenging, but it is still a significant opportunity for businesses at all stages. The research showed this cohort experienced challenges with entering new markets, and in some cases expending capital on rushed attempts to market—particularly when expanding into foreign markets.
Businesses that sought assistance to establish the right foundations early on experienced greater success. Leveraging external knowledge and expertise provides access to critical information, networks and resources. Additionally, respondents demonstrated a reluctance to admit being in a mature stage of business, instead preferring the definition of ‘growth’. This is consistent with the segment’s growth mindset and the perceived negativity of the term ‘maturity’ among the cohort.
Transition-stage businesses are those with an existing business model they are looking to diversify or pivot, or those going through a change of management or ownership. This includes both family-owned and non-family-owned private businesses.
The most immediate challenges faced by this segment relate to pivoting an existing business model, specifically in relation to identifying and funding new growth ventures. For those considering an exit strategy, challenges are different and relate to transitions of management or ownership of the business.
Interestingly, the search for new sources of growth was considered both a challenge and an opportunity, while technology and digital marketing were considered enablers to harness efficiencies and access new markets.
Confidence throughout the business lifecycle
The research showed confidence in business strength and future growth over the business lifecycle is highest and most stable from the seed stage to the growth stage. However, this trends downward at the mature and transition stages as growth begins to slow or regress.
Further, the key drivers of business growth aspirations were to:
- expand into new opportunities for growth (44%)
- increase profitability (42%).
Steady growth can be a precursor to complacency. Create a team of advisers to gain access to the right advice and review your plans periodically to keep growing and improving.
Innovation and technology
Businesses need to constantly look ahead, making sure they can see around corners and anticipate their next move. Interestingly, the report found that companies are highly attuned to the micro trends that affected their businesses but are less likely to pay heed to macro events.
Events such as the COVID-19 pandemic and the bushfires earlier in the year strongly align with the findings of the report. They hammer home how important it is to have a plan in place so that a business is prepared to respond to the unpredictable.
One surprising result from the report was that mid-market business owners do not consider themselves as ‘innovative’. This is despite the fact that many of them have created and developed solutions either directly for their customers, or internally to create greater value and realise efficiencies.
However, what the report showed is that mid-market businesses are practising “innovation-in-action”. Rather than sitting back to think about being innovative, many of these businesses are simply forging ahead and creating solutions—many of which could easily be white labelled and commercialised.
Innovation has been increasingly associated with tech disruptors or businesses that create an entirely new market. However, innovation is multi-dimensional and is not simply defined as total industry disruption or founding of a new industry. It is about problem-solving and continually seeking more efficient and effective ways of doing business.
Mature-stage business expressed a desire to “find internal efficiencies to cut costs” in the near term, and “gain access to new markets” over the next 12 months. However, many companies are not using business intelligence, such as data and analytics, to its full capability to further improve and grow.
To do this, businesses must be able to access the right information. With the fast-paced nature of commerce, informed, data-driven decision making can be the difference between success and complacency.
Businesses might not commercialise solutions for reasons such as:
- failure to identify the commerciality of a solution
- lack of resources, expertise and know-how to commercialise a solution
- disinterest in commercialising and scaling a solution.
Human resources and relations
The report showed that business owners generally understood and appreciated the direct correlation between finding the right people and the success of the business. Attracting and retaining talent was seen as one of the most challenging parts of being in business.
Another key challenge was proactively up-skilling and cross-skilling employees to keep a business competitive in the future, especially as emerging technologies drive change in supply chains and processes.
Even though human resource management was one of the key issues that kept business owners up at night, only 28% of respondents had sought HR advice in the last five years. Even less (26%) indicated that they would consider seeking advice on the subject in the future.
Unfortunately, interviews conducted for the report showed a discrepancy in the satisfaction experienced by family and non-family employees in their experience working for a family business. This pointed to a specific need for strategic human resource planning.
In interviews with non-family employees, there were repeated references to the challenges caused by working alongside family members, including perceptions of nepotism and the suitability of people for roles. In emotional terms, family members reported feeling more secure and optimistic than non-family members, who felt significantly more frustrated.
Making sure the right culture exists is critical to ensuring a business can retain its top talent. While it may be an uncomfortable discussion, it is better for businesses to be aware of any issues and address them quickly to eradicate excessive tension between family and non-family employees.
In the absence of formal human resource management advice, it is critical to consider the following factors when it comes to people and culture.
- The right culture is critical to the success of a business. Invest in the right people and processes to create a culture that matches your organisation’s values.
- Attracting and retaining the best talent does not happen by accident. Formulate a talent strategy that supports your broader business goals, including a mix of hard and soft skills.
It’s all relative
There were some unexpected results from the report. Both family and non-family members believed family dynamics impacted the business culture, especially the day-to-day decision making of the management team. However, non-family members of the business did not perceive the reverse. That is, the business might also impact family dynamics.
In contrast, family members felt strongly that the business did impact their family dynamics. This dissonance in understanding is likely a result of the family prioritising their privacy by not being candid with their employees about the strain that running a business can have on a family.
It can be incredibly beneficial for the business to cultivate a culture where open and honest conversations can occur. Suppose both groups remain aware of the complex interrelationships between family and business dynamics. In that case, the negative feelings of non-family employees may be assuaged before they have a material impact on the business.
Although 36% of respondents reported that business challenges had a positive impact on family dynamics, around one-fifth (26%) of respondents reported stress and family disagreements. Some interviews even revealed a partial regret for mixing the two worlds. One respondent referenced the strain that operating a business had on his marriage, especially in the early stages.
Succession planning is not just about who will take over the business when you depart. It is also about ensuring the legacy you have earmarked to leave is able to be executed in the right way and at the right time.
Rather than thinking of succession as having an exit plan, businesses should think about being ‘opportunity ready’. Even if you are not looking to pass down or sell your business in the near term, you should be prepared for things to change, both within the family or across the broader market.
The complex nature of family structures is a major consideration when undertaking succession planning. Challenges can arise if business owners assume the next generation is interested in taking over the business without serious consultation. The prevalence of divorce and blended families, and interrelations between family dynamics and financial structures—such as investment holding trusts and superannuation— are also at play when businesses look to plan their succession.
It is incredibly important to proactively prepare for the different scenarios that may arise as leadership and responsibility within the business shifts to new people. In the case where several family members are vying for the same leadership position in the company, business owners can feel incredibly stressed. Early succession planning can mitigate this tension.
Sleepless nights were common among business owners, but to a lesser extent in mature-stage businesses that were well-established in their markets and operationally. Qualitative feedback revealed operators of mature-stage businesses reportedly faced lower levels of stress. This feedback was bolstered by the feeling that companies of their scale ran almost autonomously with fewer challenges in contrast to those at the seed, growth or transition stage where constant critical attention may be required.
Reasons for sleepless nights differed from individual to individual, including:
- financial security and cash flow issues (26%)
- market and economic uncertainty (10%)
- government and tax regulation changes (8%)
- human resource or staffing issues (7%).
Stress associated with human resource management largely related to staff retention, partly as owners often needed to step in and take on the role of the outgoing staff member while also actively recruiting.
Where professional services were concerned, loss of staff also carries with it the risk of losing clients, as staff often hold the client relationship—adding further stress regarding financial security and cash flow.
Other respondents referenced the challenge of meeting the changing demands of the modern workforce, creating a requirement for increased awareness regarding mental health and workplace flexibility.
While Australian businesses survived the global financial crisis relatively unscathed, we are currently experiencing a low growth, low interest rate environment, rendering business more susceptible to both local and global impacts.
Organisations with adaptable business models and those with supply chain contingency have a higher probability of success during times of disruption, but also during normal business conditions. This has been particularly apparent with recent challenges such as the drought, summer bushfires and the COVID-19 pandemic where the ability to pivot business models, fill gaps in the market or alter production capability enabled businesses to not only survive but thrive. Those businesses that looked beyond the horizon, and sought expert assistance and advice, have emerged stronger.
The impact of macro and micro trends
While business owners acknowledged other macro trends such as the decline of the Australian dollar and escalating economic tensions between the US and China, this did not affect their confidence unless directly impacting their business (for instance, an import- or export-dependent business).
The research revealed micro or industrial trends had greater impact and relevance for mid-market businesses, thus affecting general business confidence. In line with this, 40% of mid-market operators believed consumer preferences were among the most impactful factors on their business, expounding the middle market’s focus on industry-specific trends. It is, however, important for business owners to remember what influences consumer preferences in the first place, which is typically the broader macro environment.
Middle-market confidence levels
Qualitative interviews revealed middle-market businesses displayed a siloed mentality, seeing their viability separately to the Australian economy and almost in isolation, to macroeconomic factors. Confidence in one’s business strength and future growth was stronger than that in the economy, be it at a national or global level, and this pattern was consistent across Australian regions.
As mentioned, this research occurred before the summer bushfires and COVID-19 pandemic, events that have had varying degrees of impact on local businesses. It remains to be seen if these factors have impacted the confidence levels of middle-market business operators.
A key mistake that mid-market business owners tend to make is not taking the time to discuss their business with like-minded leaders or advisers.
Moreover, the report found business owners often experienced professional loneliness. They believed their business required a full focus, leaving little time to make connections with leaders facing similar challenges.
Support networks of likeminded people are critical. They provide a forum through which to share information, ideas, challenges and opportunities. Understandably, joining a ‘mastermind group’ or attending events can feel like another thing to add to an already busy schedule, but making time to connect with other business owners can be energising, inspiring and offer fresh perspectives.
The research found the most commonly referenced emotions experienced by business owners and operators were frustration and uncertainty, much of which stemmed from navigating the red tape of government regulation and managing personnel within the organisation.
Look ahead and be opportunity ready
To put a spin on Leo Tolstoy’s famous phrase, “All happy family businesses are alike; each unhappy family business is unhappy in its way.”
Recognising and addressing the dynamics between family and non-family members in business is crucial to maintaining success. Family dynamics will play a part in influencing the culture and future of the company. So, if business owners do not clearly and candidly outline their culture, mission and values, employees will be left to ‘fill in the gaps’, often to a negative effect.
Maintaining harmony across family and non-family employees, while building a strategy to protect the legacy of the company for the next 10, 20, and 50 years is critical. Businesses should always be opportunity-ready and planning to lay the groundwork for generations of success.