As we move past the financial crisis, the global economy has become thirsty for growth. While the BRIC countries escaped relatively unscathed and have been enjoying buoyant growth, the economic picture in Eastern Europe and the Middle East has become polarised: businesses are either flourishing or continuing to suffer. Western Europe and North America have felt the economic pain much more deeply and remain fragile. However, wherever they are, entrepreneurs around the world are all working hard to spark the economic revival and the next stage of business growth, hoping to instil optimism and a breath of fresh air into what remains a convalescent economy. Dr. Denise Kenyon-Rouvinez, The Wild Group Professor and co-Director of the IMD Global Family Business Center at IMD, explains the various strategies of financing and growth applied by family businesses and makes recommendations on how to think out of the box. While everyone is ready to turn the page and move forward, the question of growth is particularly tricky for family businesses and needs to be planned for carefully. Families need to consider two essential points:

1. Strategy: growing or not growing – is there a choice? And if growth is the choice – at what pace?

2. Financials: what resources are needed to finance growth, and how much control over the business does the family want to retain?

1. Strategy: growing or not growing, and the pace of growth


The question might sound futile but it is actually rather serious, as a decision either way can have major consequences for the business. Families and their boards would be well advised to spend ample time debating the issues, taking multiple options into consideration as well as determining the risks of each, the resources needed and the long-term impact on the owners.

To grow or not to grow

Not growing is always an option. Interestingly, when investigating long-lasting businesses, indications are that most family businesses around the world survive through the generations precisely because they don’t grow. Instead, they re-invest a large part of their profits to adapt, modernise and revamp their business in order to protect the company, their income and their client base over time. This is true for long-lasting family business in sheltered niche markets be they boutique hotels, jewellers, wine makers, restaurants or local craftsmen. And it also holds true for estates that are usually handed down to one family member to avoid the land being split or to protect the entirety of family owners’ assets.

Equally, not growing is the favoured option of quite a number of rather large family businesses that have reached a stage where securing their market position and preserving what they have becomes more important than growth. Families who are at this stage often focus on image and quality, as well as building family cohesion.

Growth, but at what cost?

Also, seeking growth in mature markets can be difficult and very costly. In such cases, families may consider not growing the main business but use the profits it generates to venture into new grounds – this is often achieved through a family office structure that receives the profits from the main business and re-invests them in a variety of others that should provide growth alternatives for the next generation.

In most other cases seizing market growth opportunities makes sense and becomes a question of long-term survival. Opportunities missed by a family will inevitably be taken by other players. In addition, for a large number of families, growing is a way to provide more dividends and more job opportunities for family members as well as to attract or retain talent within the family business.

Ultimately, however, families need to assess carefully each growth opportunity, and decide which they want to pursue considering the resources they have and the degree of control they want to retain over the business.

2. Finances: the tricky balance between opportunity and control

In general, when families consider financing growth they naturally think of two options: self-financing by re-investing profits or borrowing money. And as relying on others is not their forte, self-financing is usually the preferred option, which, if done consistently and systematically, can lead to a high level of growth. Such is the case of Miele, the German electrical appliance company, where the owners decided not to resort to increasing their debt burden, but grow at their own pace. Today the company is present in 96 countries around the world, employs more than 16,000 people and shows an annual turnover of €2.8bn.

Self-financing

While self-financing brings tremendous freedom over decision-making, it may impose a heavy burden on family shareholders as the more that is re-invested in the business, the less dividends are distributed; and the longer it lasts, the more it will impact upon their own individual ventures and standard of living. This is a sacrifice family members are ready to make only if they fully understand the reasons behind the decision, and if today’s strictures lead to an eventual increase in business value. It should be noted, however, that in such cases families would be wise to set up a distribution plan that will allow owners to benefit from the appreciation over time, for example, if a family decides on an extraordinary payout every five or 10 years, or on an ad hoc basis when the business is performing particularly well or part of the company is sold.

External investors and seeking finance


There are, however, many more options to consider for financing growth: a family could invite outside investors to enter their capital; potentially find an equity partner, a venture capital company or a private equity fund; identify a merger or joint-venture partner; and go public or sell part of their business. All have pros and cons, and for each option the family needs to evaluate carefully the degree of control they will lose over the business, and determine just how many internal problems each financing solution might generate.

There are also issues surrounding control versus liquidity: the more that is kept internally usually means that less new money is needed. The reverse – in terms of external financing – might certainly provide more funds but it can also lead to a loss of control over strategic decisions.

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Control and financing growth

There are three main factors that families should concentrate on. First, is this central issue of control. For many family businesses control over their financial affairs is paramount: total ownership means complete freedom of choice in the decision-making process. Any attempt to dilute that structure will lead to an ancillary loss of control – something that many family business members may be unwilling to countenance.

Second, is liquidity and how that directly relates to the family itself, rather than the actual business. For many family members the dividends, bonuses or payouts might be their only source of income. In this instance, liquidity also can come to mean family needs – as opposed to internal capital – and is essential for ensuring family balance: a happy shareholder is one who receives a regular dividend.

Third, it is important to look at capital needs. Every business – family-owned or otherwise – needs funds in order to survive and grow. And as capital is a scarce resource, the business capital need in periods of growth with inevitably compete with family needs for liquidity.

These issues are all interconnected, and there are inherent tensions between the needs of liquidity and capital. Finding external sources of capital to finance growth will mean diluting control, which is a situation that could impact quite emphatically on many families for several reasons.

First, because they don’t like to share control; but, second – and mainly – because one of the key success factors of family businesses is their long-term vision and that vision will be challenged depending who finances the growth.

The vision dimension

Determining the family business‘s vision is paramount. What sort of time frame is being applied? Does the family have short-, medium- or long-terms needs? And does the strategy have to alter accordingly?

Most family shareholders are there for the long term: what has been passed on to them will be passed in turn to the next generation – hopefully intact and boosted by years of steady growth. Equity partners, however, will only be looking for a medium-term boost to their investment, while other external partners – who have perhaps steered the business to an IPO – will only be in it for the short term. Each tranche of interests has to be fully reflected in the business‘s overall vision and strategy.

Therefore, when seeking external sources of capital, it is vital that families try to understand how much their own long-term vision may conflict with other investors, and anticipate the tensions it will create.

Ultimately, growing the business may mean taking it to a different level with tougher competitors and involve players family members may not know. Some, at that stage, may prefer to sell the business altogether to an investor who has the financial strength and the knowledge to take the company to the next level and attain its potential.

More than ever: the focus is on governance


The board and senior management of the business need to spend time analysing the risks and benefits of each growth opportunity, estimate the resources needed (whether it is in terms of finances, staff, equipment, facilities, etc.) and evaluate the impact each opportunity may have on the family‘s overall control. The family owners will then select the opportunities they feel most comfortable with.

However, it should be noted that these issues – raising capital, diluting control and monitoring cash-flow and discussing finances – are all elements that might take a family way beyond its comfort zone.

Reducing anxiety

First, it is important to make sure everyone in the business – and the family – is aware of the reasons behind raising capital in order to fund growth. Educating the family is paramount – without them on board and behind the decisions then any move towards boosting growth will quickly founder. They need to understand the different strategic options, feel comfortable with the growth strategy chosen, and fully understand how the finances work – particularly those concerning the debt-to-equity split.

Second, if there is not one already in place, the business needs an effective and clued-in chief financial officer. They will not only help to steer the family‘s finances to safer shores, but also oversee the third element, which is the analysis of the cash-flow as well as being able to monitor and report back how much progress has been made. Regular updates for family members will ensure that the first point – educating the family – is also covered.

Thinking out of the box

This part is crucial – and will determine the success – or otherwise – of the family business. Key to the overall strategy is ensuring that all staff and family members are stakeholders in the company‘s future as their motivation and commitment will be essential to successful growth.

As an alternative source of capital, employees and non-family directors could be invited to invest in the growth of the business. They share the same vision and values as the family and could bring a very stable capital base. It would also provide strong incentives for the promotion of non-family-member staff, stimulate loyalty and commitment. Ultimately this may also solve the succession issue – if there are no obvious candidates within the family.

Another alternative is to free up capital by transforming the company into a less capital-intensive business. Offices and equipment can be leased – rather than owned outright. This will not only free up cash needed to finance growth, but it will also do so without having to cede control to external investors.

Or even more daring: is it time to rethink your business in order to grow without capital? For example, the Marriott hotel chain moved from owning all its hotels to entering a “franchise-like” partnership for certain hotels that are owned by others who use and pay for their brand and expertise. A strategy that allows fast growth without adding capital needs.

Growth is a choice

Ultimately, most family-owned businesses will want to increase their options – and this might mean the final decision could be not to grow (to sustain the business at its current size). In the pursuit of growth though, families must realise there are pitfalls as well as benefits.

Growth can come at a price – but it is for the family to decide whether it is worth paying – and a well thought and mastered growth plan will help them fully enjoy the journey of growth if such is the direction they opted to go.

Tharawat Magazine, Issue 11, 2011