Will your family business survive for generations?

Will your family business survive for generations?

The family farm can beat the odds and survive with well-thought-out planning and sound execution.

by Kirk Sattazahn
The author is a director of marketing at Select Sires in the Mid-Atlantic area. He is a graduate of the Young Dairy Leaders Institute.

generation collage

You may have never heard of the family business, Kongo Gumi, but it is in the Guinness Book of World Records. It earned that distinction by being the world’s oldest continuously operated family business. The Japanese company took root in 578 A.D. and withered away in 2006 when it was taken over by another company. Kongo Gumi was a temple builder, and a combination of lessening demand for Buddhist temples along with some bad investments meant that the record-breaking run was over after 40 generations of operation by a Kongo family member.

Look for the brightest
Even though the streak is over, it is a remarkable lesson of how a business can stay prosperous under family leadership for multiple generations. The last family president of the business offered advice in a 2007 Businessweek article that can ring true to a family farm today. He cited the company’s flexibility in selecting leaders as a key to the company’s longevity. Rather than always handing leadership in the company to the oldest son, the company chose the family member who best “exhibited the health, responsibility and talent” for the job.

That is advice that Cliff Hanehan echoed at a past Pennsylvania Dairy Summit. Hanehan Family Dairy LLC is a New York dairy farm that has added a 700-cow satellite dairy in order to bring in the next generation. Cliff mentioned that family members have the ability to acquire equity in the family business but that the individual’s performance, not age or family standing, determines leadership roles and amount of ownership.

In addition to ensuring merit-based leadership, a recent Harvard Business Review article identified traps that can hamper generational success. These traps include:

  • The mind-set that there is always a place for a family member in the business
  • That the business can’t grow fast enough to support everyone
  • Family members stay in silos according to bloodline

Family farms can easily fall into these traps, and we will look at the solutions a little deeper.

Trap 1: There’s always a place for you here
Family farms often struggle with this trap the most. It affects parents and children alike. The senior family member already in the business wants a child to become involved and indirectly has an expectation for the child to do so. That expectation of a successful family business almost turns into an entitlement and causes the younger generation to not pursue training and experiences that could help them become a valuable member of the business.

Instead of allowing that expectation of opportunity to take root, existing dairy business managers should insist that a younger generation that wants to join the business pursue certain outside opportunities that allow the younger generation to bring key skills back to the farm.

These might include earning a university degree, several years of relevant work experience away from the family farm, and then even requiring the interested family member to apply for open positions with nonfamily benefits. Human nature may give the family member an inside advantage but it does foster an environment that even family members hoping to join the business must develop skills that will help the enterprise.

Trap 2: The business can’t grow fast enough to support everyone
The Harvard Business Review article points out that families often grow faster than businesses do. This makes it all the more important that proper planning is implemented for business growth that can manage the potential demand from family member draws. If Trap 1 is properly managed, it can go a long way in helping to avoid Trap 2.

Proper training and skills in managing an effective family farm can produce family member employees who can take over other operations away from the home farm. The Hanehan satellite dairy cited above is a few hours away from the home farm and is run by the younger generation with input and advice from the senior generation.

Existing family businesses with a new generation hoping to join can invest capital in another operation while still maintaining some autonomy between the two facilities. The farms can still utilize the power to combine resources and efforts where it is advantageous such as in group purchasing, while allowing each operation to have its own balance sheet and accounting.

Trap 3: Family members remain in silos according to bloodline
It is probably ironic that one of the traps of a family farm business involves silos and the tendency to only focus on one specific aspect of the business. While it is an advantage to have individuals with talents in specific areas of the farm such as managing crops or cattle, it is also a danger to not have cross-functional expertise in seeing the big picture.

Eventually one member of the operation will be the executive in charge of the entity. The tendency of a son or daughter taking an interest in what dad or mom are in charge of does not allow the next generation to have a wide enough breadth of interest to make investment and resource decisions outside of their main interest.

Where possible, family members should be prohibited from supervising one another. This allows a younger generation to learn from someone with whom they are not familiar. The learning style and experiences are new, and it allows for candid discussion on the task and the talents and skills needed to complete the task. Just the fact that a new generation is learning from a different person affords the learner some experience in what are effective training tools. They will someday need to do their own teaching and can use that experience to effectively train the next generation.

Make it three generations
Research shows that a family business beats the odds if they last for more than three generations. There is even an Italian saying, “Dalle stalle alle stelle alle stalle,” which means, “From the stables to the stars and back to the stables.” It is an indication that the challenge facing family businesses is universal across our world.

For a family farm to survive, it is important to get family members outside experiences and mentors. The family member stepping right into a business only knows one way of doing things and has a skill set that is very focused. A family member joining a family farm after several years away from the operation can bring a new set of skills to the business along with a fresh set of ideas on the best way to implement those skills.

Perhaps your family farm will change direction after 40 generations and obviously the economics of the dairy industry have an impact on that possibility. The goal should still remain to have a business that can be successful and support family members who wish to join. Avoiding the traps that can affect family businesses of any type will allow future generations to learn skills and acquire talents that they will be able to utilize anywhere.

This article appears on page 195 of the March 25, 2014 issue of Hoard's Dairyman.

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