The Competition Commission vetoed the sale of Burger King to a foreign buyer based on, for the first time, BEE and not competition. (Lexology)

Is this another short-sighted bureaucratic bugger up?

Yes.

On 1 June, 2021, when the commission blocked the deal, it cited concerns over black ownership dropping from 68% to 0%. This was despite the buyer committing to 4 other significant BEE-related goals worth hundreds of millions, possibly billions, and directly benefitting over 1,250 black workers and plans for future black ownership.

Although ownership is an important BEE factor, the commission is obviously misinterpreting BEE and competition legislation. In its view, ownership apparently trumps all other factors that might support BEE, including denying present black owners from realising the value of their investment.

This runs against the intentions of BEE and the commission’s mandate. The decision directly prejudices blacks from participating in the economy by (a) blocking black owners from growing their business and cashing out and, (b) blocking or slowing benefits to thousands of black workers and suppliers.

The decision also sets a precedent that disadvantages everyone in the economy, especially black entrepreneurs. To the cynical, it’s another notch in the woke list of “white privilege” factors: reducing black ownership is irrelevant to a white-owned business.

What the commission is actually saying to black entrepreneurs is, “If you’re black, you can sell to only other black entrepreneurs.”

That restricts buyers to only South African investors (because non-South Africans can’t be “black” in BEE terms) and only those who are blacker than you.

It seems the commission is missing the point of entrepreneurship being to grow your business in order to enjoy the profits, whether as dividends or exit capital. Especially that last bit about exiting. When you sell out and you’re limited to a tiny pool of buyers, it devalues the realisable value of your business. It’s a clear disincentive against black entrepreneurs to grow beyond a small business.

It’s ironic that, instead of assuring healthy competition, the commission is stifling it. It also reinforces the concentration of black wealth amongst only those few who can afford major buy-outs and a key failing of B-BBEE not actually being broad-based.

What to do?

Fortunately, as statistics indicate, most businesses are not big enough that their sale triggers an eyeballing by the Competition Commission. So don’t fret about it. Just keep building your business.

In fact, building a business big enough to merit the commission’s attention would be a badge of honour—would you prefer an insignificant business or one that gets the Competition Commission’s panties in a knot?

Image credit: Wallpaper Flare.

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Most entrepreneurs know that profitability matters, but there's more to your bottom line than meets the eye.

Your accounting profit reflects how well you're pricing your goods or services and controlling your costs. It's a measure of business sustainability as well as management competence.

However, accounting profit is strictly limited to business line items and excludes an owner's investment circumstances. Therefore, it's a reasonable indicator of business performance, but not a reliable measure of investment performance.

Your economic profit, on the other hand, includes your required rate of return (i.e. the return that you need to justify your investment risk). Many entrepreneurs under-estimate their required rate of return, and it's not unusual for an owner-run business to make an accounting profit but an economic loss.

For example, consider a business that makes a net profit of R1 million and pays a dividend of R500,000. Many owners would be delighted with these results.

But what if you had to invest 10 years and R10 million to get your business to this point? If you had allocated that same capital over the same timeframe somewhere else, you could have enjoyed a better return with less risk (e.g. you would have more than tripled your capital by simply investing in the S&P 500).

The distinction between accounting profit and economic profit is critical, because your business isn't just a place to work. It's also an asset that can (and should) create wealth for you.

Accounting profit tells you whether your business is making enough money for itself. Economic profit tells you whether it's making enough money for you.

“After everything I’ve put into this project, I can’t give up on it now.” Ever heard yourself say this? Or replace “project” with “business” or even “relationship” and I’m sure you’ll easily answer “yes”.

Being sentimental about things or relationships we’ve invested in – money, time, or effort – can be endearing. Imagine how cold and meaningless life would be if we didn’t value what we put into our projects, whether it’s our business, staff, clients or even personal relationships. Maybe the symbolic value of that old family heirloom outweighs its high maintenance costs?

But there’s a place where sentimentality or loss aversion gets us into trouble. Especially for business owners and other decision-makers.

If ever you’re facing a major decision, whatever you’ve invested to date is irrelevant.

In the business case for a big disinvestment – ending a major project or operation – only future costs must be factored in green-lighting the decision.

Sunk costs – expenses incurred and which cannot be recovered – have no place in your cost-benefit analysis. In deciding to end an investment, we must compare only the future costs of keeping it going against the benefits it’s expected to yield. What we’ve spent is water under the bridge – it’s never coming back.

The only time a cost that’s already spent could be a factor is if you’re certain you can recover it. But our assessment of certainty is usually clouded by our irrational emotions:

- In taking steps to recover a bad debt, at what point do you realise you’re throwing good money after bad?

- You’ve invested thousands in a marketing campaign for a product launch, but it’s not gaining traction – when do you cut your losses?

- When you’ve paid for a big-ticket conference, but you've fallen ill on the day, how sick must you be to convince yourself that your debilitated attendance is not worth it?

- Do you over-eat at the fixed-price buffet because you have to get your money’s worth?

The most common dilemma I’ve seen business owners grapple with is when an existing project or operation is challenged by a replacement. It’s even harder to kill a project if it’s already produced some assets, like useable software or production machinery. But despite whatever has been produced, assuming projects A and B will yield identical benefits, the time and money already spent on project A are irrelevant.

To choose between finishing project A and starting project B, only project A’s remaining costs are relevant. If project B’s total costs are less than project A’s completion costs, the decision is simple: switch to project B.

When you’re deciding to switch from one investment to another – a project, a business, a key relationship – the only costs relevant in your business case are the future costs.

Valuing your business can be a lot of fun when negotiating an equity investment to springboard growth or structuring a lucrative exit strategy that will assure your financial freedom. However, there are many scenarios (e.g. forced buyouts due to owner deadlocks) where getting your business valued may be decidedly less glamorous but no less necessary.

Many conventional valuation practices are based on large companies, so applying them to a small enterprise is challenging. SMEs are risky, volatile and unpredictable. Their valuation can vary by an order of magnitude depending on your methodology: valuations based on historical performance tend to be overly-conservative, while those based on future potential risk excessive optimism.

So what's the solution?

#1 Clarify the context

The purpose of a valuation ought to inform its calculation. Equity investors are motivated by a share of the upside, so it's reasonable to prioritise future returns. By contrast, if a disgruntled partner wants to sever ties as quickly as possible, it makes more sense to focus on current financial position and recent trends.

#2 Normalise the data

SMEs tend to be highly dependent on owners who don't come from strong management backgrounds, which is reflected in their financials. Irregular income and discretionary expenditure are common, particularly when personal and business affairs get conflated. Adjustments must be made to account for these otherwise any valuation will be biased towards the owners' personal idiosyncrasies.

#3 Establish a range

Relying on a single number is foolhardy because every valuation methodology has its own pros and cons. Performing multiple valuations will confirm over-arching trends and provide a range for framing negotiations. For example, if liquidation, net asset and normalised EBITDA valuations all yield a range of R1.2m - R2.4m, then it's hard to defend a value of R200k or R20m.

Almost every entrepreneur’s dream is to cash out and live financially free — to sustain their lifestyle without having to sell time for money.

In reality, when the time comes to retire, most entrepreneurs are bitterly disappointed. (That’s assuming their business lasts that long.) They realise too late that their company is not a company or it’s not worth an investor’s second look.

What do I mean by “not a company”? It’s not the legal definition that matters — you might have a company, partnership, or a franchise, but it might operate like a practice.

The dipstick test is to measure the company’s dependence on its owner. If you're easily replaceable, then you have a company. Can you take an uninterrupted 4-week holiday and come back to a business that’s in the same state you left it?

But if the work you do is a key driver of value to customers — e.g. your work is highly skilled, creative or personal in customer relationships — then you have a practice, not a company.

This applies to most professional services firms, like lawyers, architects, and plumbers. I’ve even seen some franchise contracts obliging franchisees to work regular hours. The only buyer who might be interested in your practice is another professional willing to trade places with you.

This is not what investors look for. Investors want to buy out the owners and replace them with a manager. They don’t want to be stuck in your role.

The owner-dependence test is a useful guide, but it’s often too subjective. For a more objective measure, especially for owner-managed small businesses, we prefer a more reliable method of assessing the owner’s discretionary earnings (ODE). This involves comparing the owner’s salary against fair market rates and adjusting for perks (like overseas “business” trips), dividends and a few other items. (For larger companies, we’d use other valuation methods.)

If your ODE is similar to a regular employee’s pay, then you own a job, not a company. Or if you earn less than fair market rates, you’re donating free labour to a charity — expect investors to cross the street to avoid this.

To appeal to any true investor, your ODE must not only show how a new owner can replace you with a professional manager, but also come out with enough, regular dividends payments that justify the risk attached to owning your specific business.

This is where most entrepreneurs fail to see how they’re not paying themselves enough. Accounting profits might all be positive, but in relation to the risk attached to your business, you might be making an economic loss.

For most small businesses, the dividends an investor earns should pay back their investment within 2 to 5 years. The higher the risk, the shorter the payback period.

In addition to ODE being too low, you might be subsidising your business in other ways. For example, if you’ve paid off your bakkie and use it for work, your company enjoys this free benefit. Profits might look reasonable, even healthy. But will you donate your bakkie to the new owner? I doubt it.

A new owner would have to replace it. So after normalising cash flow to present a budget where capital or depreciation (or any other free benefit) is paid, the company might actually be in  a loss scenario. Good luck finding a buyer willing to take over a business that can’t sustain itself off the bat.

And there’s a myriad other reasons, usually unique to each industry and business conditions. Landing a major client might shine up the financials, but a concentrated customer base poses a big risk. Old assets or technology past their best-before dates need more capital to replace them than simply buying you out. Competitors threatening a price war — are your pockets deep enough?

It’s too late to discover your “company” is unsellable when you’re ready to sell. It takes years to turn around and build up an unsellable company that’s attractive enough to investors. And offloading in a hurry typically gets you barely the book value for the assets before winding down and de-registering.

As a business owner, your strategic planning process should never be limited to simply planning your business strategy. It should always start with your shareholder exit goals: what’s your price and when do you want it? Then work backwards so your business funds your financial freedom.

Is your business performing well? There are two ways to answer this.

First, is what you’re getting out of your business worth what it’s taking from you? Using my Triple-F model, we could measure this as the finances invested and extracted, freedom your business takes or gives you outside your business, and fulfilment in your work and the difference you make in the world.

If you could invest everything you’ve put into your business somewhere else, could you get a better return? Are you satisfied with your Triple-F score?

The other angle is to consider how other businesses are performing and how your business compares. This isn’t about keeping up with the Joneses, but assessing what’s possible and realistic. If your specific market has a proven ceiling of selling only 1,000 widgets a year, then a goal to sell 1,001 widgets next month might be an impossible target.

I can’t help you make the first assessment – we’d need a direct conversation for that – but a few trends in the local small business environment might help you answer the second question. If every business is struggling equally, it may not be realistic to expect much more from your business, right?

Actually, not quite true. While most businesses are struggling as a result of lockdown restrictions, some are thriving. Where might your business fall on the scale of “struggling” to “thriving”?

We first need to sift through a lot of noise. There’s plenty of hype about how bad lockdown is for business, but who is calibrating “bad”? Everyone seems to know someone who knows someone who had to close down. How do we measure “economic crisis” and other hyperbolised headlines?

A BusinessTech headline, “Lockdown forced nearly half of small businesses in South Africa to close,” seems to be quantifiable. The story cites research by Finfind: “an inability to operate during the lockdown forced the closure of 42.7% of small businesses.”

Digging into it, though, there’s no reference to a baseline or timeline that informs the statistic, only that 1,489 businesses responded to the survey. This renders the “42.7%” unreliable. (In statistical terms, it’s nowhere near “half” – I guess precision doesn’t sell newspapers.)

By contrast, Stats SA reported in March 2021 that company liquidations for the calendar year 2020 were 2,042, which is marginally down on 2019’s 2,035. This is surprising because all the negative news would suggest liquidations ought to have rocketed.

Nonetheless, the Finfind data could be valid because Stats SA counts only the closures of formal businesses, i.e. those registered with CIPC. A 2017 Trade & Industrial Policy Strategies report (ironically referencing Stats SA), counted 670,000 formal small businesses in SA and 1.5 million informal businesses. Informal businesses are typically micro in size (less than 10 employees), which are typically the most vulnerable, so maybe this is where “half” of business closures is happening?

Alternatively, you might be fortunate to be in the “right” industry. Economist Mike Schussler tweeted a chart on 21 Mar 2021 that showed 4 industry sectors with healthy growth: furniture and appliances, hardware, used vehicles, and pharmacy. Industries losing heavily are those related to fuel, retail, and new cars. (Interestingly, travel, tourism and accommodation don’t feature in the chart.)

If you’re in a “lucky” industry, you might be thriving or, at least, holding steady. But these are the macro stats; there’s more relevant data that can help measure what “bad” means for your business.

How you trade is critical predictor of survivability.  As I wrote previously (Prioritise Customer To Survive), regardless of size, industry or growth stage, if you need physical proximity to your customers and they can pay only in cash or by EFT, you’re likely going to be challenged by the COVID-19 crisis.

If you can sell and deliver online, you have a better chance of surviving. In a 2020 Facebook survey of 86,000 small businesses in USA (Later), 51% of respondents depended on being in the same place as their customers.

In South Africa, with a lower adoption rate of online trading and less reliable infrastructure – load shedding, internet access and data costs – we should expect a higher proportion of face-to-face SMEs and, hence, a much higher ratio of distressed businesses.

My heart goes out to entrepreneurs who invested their life savings in B&Bs, coffee shops and restaurants – if you haven’t closed down, I’d love to hear how you kept things going.

In a field study by UBU  (ITWeb, 15 Mar 2021), in which 60 small business owners were interviewed from a once-bustling Bellville small business precinct, 85% had suffered a negative impact due to lockdown restrictions. Respondents included retailers, restaurants, coffee shops and spas. Specifically, “over 70% of businesses suffered a revenue loss of more than 25%…while almost 30% of respondents said their total revenue had dipped more than 50%.”

So how are businesses coping?

Most SMEs are focussing on cutting costs through payroll reductions, with retrenchments and short time the most common, unfortunately for workers. Other tactics include moving to smaller premises or other rent reduction methods. After wages and rent, other costs and cash flow solutions could be possible with your suppliers, like a moratorium on price increases, or softer credit terms.

But cost control is merely a stopgap. There is no “normal” to return to after COVID – the real adaptation is not to merely survive, but to prepare for the new normal and re-grow your business. According to the UBU study, “[Businesses] may not find retaining their customers to be a challenge, they certainly are finding it difficult to attract new ones...”

I’ve met with many entrepreneurs who gave up their rented shop space and now trade from their home or garage. For some this is a transition step to going online; only a few intend re-opening a physical shop. This introduces an entirely new marketing challenge in generating online versus foot traffic, followed by new ways to convert visitors into sales and then fulfil the sales.

While our core business model might stay the same, the way we do business might be overhauled completely.

Some businesses have introduced a delivery service, something many owners had never contemplated before COVID. Have you noticed the swarms of delivery bikers zooting around the streets? And it’s not limited to the food industry, either: I know of some bicycle shops that now offer home service options. Who knows, we might see the return of GP home visits!

Lastly, if you’re looking for inspiration for innovation, SME South Africa published a thought-provoking list of “10 Innovative COVID-19 Business Solutions We Loved”.

If you believe you can keep your business going, then go all in to make it work. Times of chaos and transition are often ripe with opportunities – is this your time to transform your business so it serves you better in the new normal?

(Image credit: SME South Africa, https://www.pexels.com/@thatguycraig000)

The saying goes, “The only constant in life is change.” Except change is not constant.

As you’ve grown your business, have you noticed how the uncertainties and assumptions around each decision have increased, both in their number and their degree of uncertainty?

For example, if you offer a discount of 10%, how many more units must you sell to at least make the same profit. If you replace ageing, inefficient machines with new assets that contribute more to gross profit, what volumes are needed to compensate for the finance costs? Or in seeking to improve turnover, should you concentrate your capital on generating more leads, improving conversion ratios, managing margins, or reducing customer churn – for each additional rand spent, which area would yield the best return?

To cope with these complex decisions, a critical skill every entrepreneur needs is to be able to conduct at least a basic sensitivity analysis. In fact, if you’re a seasoned business owner, you’ve surely done some what-if analyses for your bigger, higher-impact decisions.

The basic model is to identify the key variables or inputs affecting your decision, identify the relevant outputs, then  build an algorithm that converts the inputs to outputs. With your model created, you simply assume your input values and calculate the expected output.

The value of the what-if analysis is in both validating your model and, ultimately, understanding how the variables influence the outcomes.

For example, if you operate an airline, 2 of the biggest costs affecting profits are fleet repayments or rental payments and the cost of fuel. Newer jets are significantly more fuel-efficient than older planes. But replacing a tired fleet would incur higher rental costs. So what would you do?

After modelling the key inputs, like volumes (passenger load factor (capacity utilisation), flights per day etc.), ticket prices, fixed and variable operating costs, a sensitivity analysis would help us see which input factors should be managed closely and which can be accepted and merely monitored.

The starting point we typically take to solve this conundrum is to first set a baseline for our assumptions of the most likely input values, then apply a basic what-if analysis of adjusting each input up or down by 10% and measuring the effect on the output value(s).

The input variable that causes the biggest change in output tells us which variable our business is most sensitive to.

There is much more available in doing sensitivity analyses, like multi-variable analyses and integrating the model with industry indicators or employee and customer behaviour changes. E.g. how might not investing in a new fleet of jets increase customer attrition when competitors’ shiny new models entice your customers away from you?

The greater the impact of your entrepreneurial decisions and the more ambiguities and assumptions involved, the more valuable a sensitivity analysis will be in managing change in your business.

For any entrepreneur building a business that feeds their wealth, a basic sensitivity analysis should be a frequently-used tool in the toolbox.

You might have never heard of Looksery, a Ukranian company founded in 2013, but you’ve probably been entertained by their product. Snapchat saw the value in their app and, after barely 2 years, bought out Looksery in 2015 for about $150,000,000. (TechCrunch, 2015)

It’s the type of success most entrepreneurs dream of – building a business that can sell for millions within a few years.

So what did this start-up do to create so much value so fast?

Looksery had developed video filters that overlay your selfie video with animated enhancements in real time. Their software can make your selfie look skinnier or plumper, add wrinkles or a flower wreath, or just for fun, animate your image with a puppy face or turn you into a monstrous ghoul.

Personally, I think the app is bollocks and, for the most part, its utility to the end user is nothing more than frivolous fun. If I were looking for business ideas, I would have shot down this one before I even opened my mouth to suggest it.

But that’s precisely the problem most of us entrepreneurs have, whether imagining new business ideas or getting creative about rejuvenating our existing business.

Interestingly, behind the scenes, the Looksery selfie animation app relies on seriously smart computing. It overlaps with the same types of algorithms used in self-driving cars to avoid running over pedestrians, face recognition systems, and deep fake videos.

Still, an impressive computing concept dressed up as a goofy selfie modifier would strike me as a dumb idea. Without hindsight, I would have thought it would have no viability as a business. Evidently, I’m not the target market.

And Looksery’s app isn’t the exception. There’s a surprising array of imaginative, ingenious and downright weird niches that actually make money, like beer wrapped in taxidermied roadkill and nappies for chickens. This should, in fact, encourage us to be far more adventurous in our ideation process.

Just remember to validate your ideas. When you can actually sell your product, regardless of how idiotic it seems to you, you might have the kernel of a potentially lucrative business.

What might look like a dumb idea doesn’t mean it won’t appeal to hundreds, maybe millions, of customers. When you build a business around efficiently delivering any product with demonstrated demand, this can make your business attractive to investors for growth, or anyone looking to acquire your technology.

If you want to build a business with value, the only dumb idea is to start a business without validating that customers will actually buy your product.

Many entrepreneurs we’ve worked with dream of handing over their business as a legacy to their children. In reality, most small business owners fail to achieve this.

There’s a plethora of generic prerequisites to have in place when transferring ownership in any business, like being a replaceable owner and having a stable business that’s not in a crisis. Simply, you need to build a business that’s desirable, one that anyone would want to take over, not just your children.

But family-owned businesses need additional, special care.

Most importantly, you need a succession plan that’s communicated carefully. I’ve seen that the best succession plans are those that empower the incoming leaders with significant input in the planning. They also allowed the plan to evolve.

The worst you can do is write your succession plan as if it’s a secret, then surprise everyone with it in your will after your death. The University of Connecticut reports that about 77% of family-owned businesses fail due to the founder or owner’s unexpected death. (Family Business Program, 2009)

In our work with family-owned companies, their successful hand-over to the incoming generation hinged on only a few but critical areas. So…

Here are the 3 things you must get right when passing on your family business to the next generation:

1. How will you pass on ownership?

2. How will you let go?

3. How will you groom the new leaders?

The most obvious method to pass on ownership is to gift it to your children by literally transferring your shares into their names. But this could have huge tax implications. A popular method we’ve seen is to transfer the owner’s shares into a trust set up for the children as beneficiaries. We’ve also seen clients retain ownership but transfer executive control by appointing their children as directors. (Ownership would then pass at their death.)

The second area garnered the most common complaints, being from our next-generation clients wanting their parents to get out their way. Understandably, it’s hard to let go of your precious business, especially if you feel the new owners aren’t ready.

Surprisingly, the opposite complaint was also popular: some owners exited too abruptly – mid-life crisis? The new owners longed for deeper mentoring and advice.

Both complaints can be pre-empted by solid planning and building up the third area.

In a 2012 survey by PWC SA, 25% of respondents were “unsure whether the next generation will have the skills and enthusiasm to do this successfully,” while 23% “intend to pass on their shares, while bringing in professional managers, citing the next generation’s lack of skills as the main reason for this decision.”

The most common concern I’ve noticed with my clients is that the incoming generation invariably needs skills and knowledge at a far higher level of competence than the outgoing owner-managers. This is most noticeable in the transition from the founder to the second-generation owner than transitions to generation 3 and beyond.

Starting a business is easy and relies more on technical skills and can be, counterintuitively, more forgiving of mistakes than in an established company. Taking over and running an established business, though, demands specialised management skills.

You need to plan with your new leaders where their enthusiasm lies, then co-design their specific roles. That’s the easy part! The real work lies in creating explicit learning opportunities before handing over full authority.

Throughout the hand-over process, from concept and planning to execution and completion, be cognisant of how the family dynamics affect every conversation.

It might not be rocket science, but transitioning the ownership in any family business can be a complex challenge. Get these 3 things right to pass on your legacy successfully.

(Image credit: Inc.)

Everyone is entitled to privacy. The same goes for juristic entities, like a business.

Unlike the general public, shareholders are entitled to know an awful lot of sensitive stuff about their business: financial records, major deals, trade secrets…

And that’s where things get fuzzy in family businesses. Just like your grandparent’s home is always open to you and your cousins, most family businesses let anyone in the family through the front door. Sometimes literally, sometimes metaphorically.

Although leaving all your doors open exposes the business to meddling by family members who have no direct stake in the business, being too secretive can starve the business of vital support and cohesion. Keeping the next generation locked out makes it harder to bring them in when it’s their turn at the helm.

But don’t be haphazard about your communications. Poor comms is one of the biggest reasons family businesses disintegrate or fail to pass to the next generation.

Effective comms builds that most valued intangible asset in any family business: trusted relationships. Family businesses can build social capital among the family that a regular business can never achieve.

Being in a family business doesn’t remove your duty to clarify your communication policies. My rule of thumb is that it’s OK to be informal when the business is small and the family members in the business are all from the same household. As soon as family in the business spans more than one home, it’s time to formalise how communication happens.

Look at the different types of information, job functions, your channels – meetings, email, grapevine etc. – and technology, then decide:

- What will you say?

- Who is allowed to know?

- What won’t you say?

- Why?

A family business is like a Venn diagram with 2 overlapping circles: one for the business and the other for family. People in the family circle who aren’t in the overlap should be excluded from the “need to know” audience.

But they’re also not your regular Joe Public. They deserve their own PR campaign.

If you want to build a business that provides for your family, keep the family on your side.

(Image credit: Moula)

For almost all shareholders of public companies, success is easy to define: maximise shareholder returns. But for small to medium family-owned companies, that’s seldom true.

Most small business owners we know, especially family-owned businesses, are not obsessed with quarterly targets, price-earnings ratios or pandering to stock exchange vicissitudes. Having the freedom to set your own goals for success is one of the greatest advantages of being a small business owner.

Except, it’s also a disadvantage. Too often, we see small business owners accept mediocrity by not setting explicit, well-defined goals. More specifically, they have too many goals and lack of focus.

If you’re a co-owner in a family business, then you’re virtually guaranteed to suffer the too-many-goals challenge. Even if you have a concentrated ownership structure where one person owns the majority of the company.

It’s easy for a family-run business to fall into the trap of trying to satisfy the whole family’s needs. When there’s no impersonal shareholder pushing for financial returns, competing priorities arise, like guaranteed employment for family members, extra fringe benefits, or taking family holidays under the ruse of business travel.

There’s nothing wrong with non-financial goals; the problem is having too many, or at least not ranking them from the highest priority goal that trumps all others down to the most mutable goal. Without clear long-term objectives, the family business can drift from their reason for existing and owners are more easily tempted to cash out when the meaning is lost, especially as each generation passes through the doors.

What’s needed is a way of prioritising your goals and setting just one over-arching strategy to match your family values.

As with any small business, the goal categories are growth, liquidity and control. (Harvard Business Review) The problem is, you can only pick 2 in the short- to medium term. This leaves you with a choice between 3 pairs of goal types:

- Growth-control goals keep the power in the family while growing the business, but they struggle to pay good returns to the owners.

- Growth-liquidity companies aim to grow by using outsider’s money to pay good returns to owners. This usually involves giving up some control to take on equity investors.

- Liquidity-control companies strive to give the owners a healthy cash flow while they retain authority, but this company will struggle to scale.

There’s plenty of wiggle room to set a small selection of long-term objectives unique to just your family and business. It’s important to know how these goals drive business planning, investment decisions and daily operations. What you do and what you avoid should all be aligned with your top priorities. And your top priorities should be aligned with your family values.

When your business goals fit your family, then you’ll have a business that serves your family, whether you define success as growth, free cash flows or a job for life.

(Image credit: Daily Muse Inc.)

Don’t you hate it when colleagues meddle in your job area? Or they make big decisions solo when they should have included you in the process? Or when even minor decisions get bogged down by committees dithering over trivialities?

These are just three of the typical complaints we’ve encountered when working with business owners in family-run companies. And although these ailments aren’t unique to family businesses, they’re far more common and far more damaging in family companies than “regular” companies.

We’ve seen first-hand how family business with family members who are under-involved or over-involved often struggle to realise their full potential in generating wealth and financial freedom for their owning families.

As I wrote recently on the ownership structure of family businesses, they can thrive or suffer from the heavy influence of family relationships on how the business is run. In the ideal family business, family relationships are healthy, everyone likes each other, and decisions and conflict are handled in a consistent way in both family and business environments.

It might seem pedestrian or even touchy-feely, but liking each other plays an outsize role in pre-disposing a culture at work of collaboration, trust, and the benefit of the doubt when mistakes are made. If you’re spending chunks of your leisure time and 40 hours a week at work with the same crowd, not getting along could be traumatic.

The solution to meddlesome families in family businesses is to clarify your governance structures. Specifically, it’s about role clarity and managing boundaries.

(If “governance” sounds like a rude word and has you picture auditors and bureaucracy, it’s time to re-frame it: see my June 2020 primer on how governance affects your wealth. Governance guides how you achieve your vision.  It’s your business system as a wealth-creating asset.)

Managing boundaries between roles is vital in any business, but again, it’s a uniquely tougher challenge in family businesses because of how pre-existing family systems invariably dominate all other contexts, especially at work.

In the same way that your well-meaning aunt plays match-maker in your love life, so might she be just as inclined to insert herself into critical decisions at work. That she’s merely a minority shareholder and not actually employed in the business might be entirely irrelevant in her view.

So how do you ensure family members stay in their lane?

The easier-said-than-done answer is to clarify each family member’s job description or role profile. Starting with best practice for any owner-manager, define the boundaries between your roles as owner versus manager.

The owner role should be a relatively easy starting point: it’s defined in the companies act, plus the rights and obligations for owners of your specific business are set out in the shareholders agreement.

Don’t feel bad if this sounds foreign to you. Many entrepreneurs we’ve met don’t have a shareholders agreement and the companies act is known by name only, not its content!

Next, clarify each family member’s job at work, whether it’s as executive or non-exec director, manager, or even regular non-management employee. Key to this step is ensuring there are no gaps or overlaps between authority limits in the chain of command.

E.g. if the finance director has an upper limit of making investment decisions up to R 1 million, then the MD or board of directors to whom the FD reports should have a lower limit of no lessthan R 1 million. And so on down the reporting hierarchy.

The bigger the business, the more important it is to clarify the boundaries between each layer in the circle of control. After defining the owner role at the centre of the circle, radiate out into the CEO and board of directors layer, then to the management layer and staff layer on the outside.

Underpinning the full relationship map inside the business is the family system. Clarifying role boundaries makes it possible for even non-owning family members to still have touchpoints and visibility within the business, but their path to influence the business is through the clearly-defined layers in the overall governance structure.

The family-business clients we’ve seen succeed in solving family interference at work are those who already have a strong family foundation for resolving conflict. They also prioritise separating their roles in the business from their roles in their family. E.g. a family patriarch might step aside as CEO and report to his son, yet without undermining his family role as patriarch in the family system. (More on succession planning in family business in a future article!)

But that’s not to say prioritising family over business isn’t also a win. Making big changes too quickly at work could well ruffle some feathers at home. So no matter how much growth potential the business might have, allowing it to bumble along to rather preserve family unity is entirely your prerogative as the owners.

Either way, it’s your choice. Just know that fixing relationships at work and growing your family legacy is more achievable than you might think.

(Image credit: The Times of Israel)

With the various family-owned businesses we’ve consulted and mentored with, we’ve seen how the ownership structure can be pivotal in the long-term success or failure of the business.

But the weird thing is that there’s no single “right” structure. While any two family-owned companies might share the same ownership protocol, their fortunes could easily be headed in opposite directions.

A family business is a business owned by 2 or more family members, either concurrently or consecutively across generations. In South Africa, family businesses are increasing in both number and economic impact. Despite there being far fewer family businesses as a proportion of all companies than in other countries, they contribute 50% toward economic growth. In the USA, they contribute 50% of GDP and account for 80% of all businesses. (“An exploration into family business and SMEs in South Africa”, 2014)

With most family companies being small businesses, they often fit the stereotype of all SMEs. According to Family Firm Institute of Boston, “30% of family-owned businesses survive to the second generation…while only 12% survive to the third generation.”

Fun fact: did you know that Jose Cuervo, the world-renowned tequila maker that sold its first bottle of tequila in 1906, is now managed by its sixth-generation leader? (Wikipedia)

Except, what makes family businesses unique is the heavy influence of personal relationships as well as the overlap between family relationships and shareholder control. This is where ownership structure could be reinforced by the family dynamics or where family dynamics could work against the chosen ownership regime.

Hence, ownership structure is not just a “simple” legal formality like it might be with most other businesses. I’ve noticed with many of our clients how shareholding amplifies or restricts family members’ involvement, which can often show up as a latent cause of conflict both in the business and in family relationships.

We’ve noticed critical lessons from our work with dozens of family-owned companies. Here’s a summary of them, organised into a four-part framework (framework sourced from Harvard Business Review, January-February 2021):

Sole owner is where a single person is responsible for all decisions. Works well where decisive leadership is needed to execute an agile strategy in dynamic conditions. For this to work, though, either the business must reliably create enough cash for the family, or the family must have a low financial dependence on the business.

I’ve noticed that this structure works best when the family head is also the owner i.e. when domestic and business relationships are congruent.

“Partnership” family businesses limit shareholding to only family members who are active in the business. The advantage is that ownership can be based on merit and there’s little dead weight in the business. Shareholders can earn their place competitively, not just through inheritance or a trust fund.

However, conflict is likely if the rules governing admission to ownership are unclear, or when performance management can’t be objectively measured or implemented.

Distributed ownership allows any family member into the owners “club”, often through inheritance. The upside is that acquiring ownership can be done fairly if shares devolve to descendants in equal ratios.

The pitfall, though, is the challenge that’s typical of silent partners: shareholders who are “too” silent seldom fulfil their shareholder duties, or they’re seen as freeloaders. This not only hinders the quality and speed of executive decision making, it can cause resentment and the breakdown of family relationships.

Concentrated ownership is effectively a mash-up of the distributed ownership and partnership structures, where any family member can be a shareholder, but with decision-making in the hands of only a sub-set of shareholders.

This approach makes for a more agile leadership team when decisive execution is not slowed by absent shareholders.

Almost without exception, though, the challenge I’ve noticed among my clients with this structure is that shareholders without power can easily lose interest. They then become obstacles through apathy, passive resistance or even active sabotage, damaging family relations in the process. Very hard to recover from this scenario. To avoid this outcome, it takes mature leadership and strong family relations to sustain an inclusive approach.

Some of our most rewarding work has been with family-owned companies, when our “whole person” philosophy is automatically put into practice. After all, we don’t just grow businesses, we help owners grow their wealth and make a difference through their business.

If you want to build your business as a legacy to your family, which of these four structures would fit your family dynamics and business strategy best?

“Everything is bigger in Texas. That’s why I call my underwear ‘Texas’.”

Undoubtedly boastful. Also undoubtedly a maxim that’s not everyone’s cup of tea. Nor should you allow this thinking in your business. Bigger is not always better.

As Greig wrote on Tuesday, scaling up shouldn’t be driven by simply wanting more. Every business, whether big, micro, or anything in between, reaches a point where bigger becomes crippling. For most small businesses, hitting this economies-of-scale point happens early.

The only time bigger might be better is when competing on price. For your small business, this should not be your competitive point of difference. It’s simply not in the small enterprise’s armoury to dictate terms with suppliers or be a household name with an outlet on every corner. Rather, your strengths must focus on quality, convenience, a tailored product, or personal relationships.

A thought-provoking case study of this is In-N-Out Burgers, which smashes the stereotype of fast food brands having none of these strengths.

Unless you live in the south-west parts of USA, you probably haven’t heard of In-N-Out. A family business that started in 1948, it grew to only 334 locations by 2018. (History, In-N-Out Burgers.) With McDonald’s’ 38,000+ global outlets, KFC’s 24,000, and Burger King’s 18,000+, In-N-Out clearly is not competing on ubiquity against the global “leaders” in fast food. (Statista, Wikipedia, Statista)

So what is it exactly that has In-N-Out’s patrons reportedly drive 4 hours or even take flights to wait in queues to get their fix? In short, In-N-Out trades on exceptional quality,

This shows up in a number of ways:

- Consistency in everything, from the menu to the product itself, service, shop layout, decor, and drive-through.

- Very fast (and friendly) service.

- Ultra-simple menu, being only 3 types of burger, 1 size of fries, and 12 types of drinks (PolyMatter), with very few changes over time or across outlets.

- Fresh ingredients prepared daily and delivered for consumption within 24 hours.

- Exacting standards had them close all outlets in Texas for 2 days in 2018 until an issue with defective buns could be resolved.

- Extensive training for staff, e.g. the cook is not just any burger flipper, but gets 3-6 months’ training and is the second-most senior person in the shop.

- Very low staff turnover, with an average churn of 14 years.

- Excellent employee care, remuneration and benefits, e.g. store supervisors earn an average of $160,000.

Despite this extensive focus on quality – their burgers actually look like “proper” burgers and not “factory food” – In-N-Out’s prices are also competitive. The distinction, though, is that price is not the point of difference but a by-product of high system maturity (policies, processes and quality management) and well-trained staff.

For In-N-Out, growing bigger would stress their strengths. The only way to sustain this would be to reduce quality, which would break the magic of the business.

As absurdly boastful as naming everything dear to you "Texas", bigger is not better. Better is better.

Which of the many lessons can you apply from In-N-Out to your businesses?

Short-termism doesn’t pay off in the long term, and that’s not just an adage. In 2017, Harvard Business Review published convincing data from a 2001-2014 longitudinal study (of course!) of 615 listed companies in USA.

If you ever needed proof that long term is better, you’d surely be interested in the data to defend your stance. For example, what’s interesting is that in 4 critical dimensions of measuring value – revenue, after-tax earnings, business value, and economic profit – the long-termers substantially outperformed the baseline short-termers on aggregate by between 36% and 81%.

In part, proving the case against short-termism is a revolt against the relentless drive for public companies to hit their profit-before-everything earnings targets each quarter year. But for privately-owned small businesses that aren’t compelled to report as frequently, the principle is equally relevant, though obviously for different reasons.

Here are 4 key tips for the small business owner in staying focussed on the long term.

1. It's OK to miss earnings and dividends targets by a little.
2. Invest heavily in assets and IP.
3. Short-term crises seldom need long-term goals to change.
4. Be opportunistic, but don't be a hustler.

First, don’t throw out the baby with the bathwater. Regular reporting to business owners and executive-level management, whether monthly, quarterly or annually, is still vital. It’s just that, to assure governance, you need to shift your reporting priorities to what matters more.

Which leads us to our first tip in how to long-term. To classify each company into either the long-term or short-term group, a metric the researchers used was how often quarterly revenue targets were narrowly missed.

The reasoning is that diverting resources could have easily had them hit their targets. Not diverting resources and, instead, allowing a narrow miss demonstrates the prioritisation of other, usually long-term criteria, over short-term targets.

Building long-term value, by definition, takes a long time.  That’s why another key factor the researchers relied on was measuring capital expenditure and investment in research & development. Generally, the more you invest in assets and people, whether R & D, patents and processes and other IP, the more you build the “machine” that creates customer and shareholder value.

But what about crises, like the effects of the 2020 lockdowns? Bear in mind that the study’s review period includes the 2008 global financial crisis. Maybe surprisingly, the research proves again that a long-term approach is better. The long-termers fared only marginally worse around 2008, and by 2014 they collectively outperformed the short-termers by 36% or better.

Responding to an urgent crisis shouldn’t necessarily force a deviation from our long-term goals (even though it might cost a little in the short term).

This is a critical concept for many entrepreneurs. A common trait of most entrepreneurs is opportunism, but the risk of over-flexing the opportunism muscle leads to hustling. It’s precisely the opposite of investing in long-term assets and IP.

As we wrap up this weird year of 2020, how could you apply these 4 tips to ensure your short-term COVID-19 tactics fit with your long-term goals?