Strategic planning is the key to growth and sustainability

By Richard A. Harvey Jr.

Planning helps owners to understand core corporate competencies and to allocate scarce resources.

In today’s increasingly competitive and global corporate marketplace, strategic planning has become a valuable tool for companies as they strive to balance the varied interests of key stakeholders —shareholders, employees, customers and community members. In family-owned businesses, managing these potentially competing interests becomes even more complex owing to emotional attachments and individual financial interests. For middle-market family firms, understanding and implementing sound growth strategies is critical to achieving competitive advantage and attaining corporate sustainability while also generating shareholder wealth, both in the near term and at a future liquidity event.

Corporate growth may be achieved in a number of ways—by developing new products, entering new markets, initiating global expansion, or pursuing merger and acquisition opportunities. As family business owners assess growth initiatives, strategic planning can help them understand core corporate competencies and allocate scarce resources. A -comprehensive strategic plan can also increase the alternatives for ultimate value realization in ownership transitions.

Despite its importance, a significant number of family-owned businesses either lack a formal plan or have failed to sufficiently communicate it throughout the family ownership group or management team. Family relationships often play a significant role in deciding which corporate strategies are considered and ultimately implemented.

The strategic planning process in family-owned companies is often influenced by several unique dynamics. These include:

• Varied shareholder objectives.

• Family legacy issues.

• Limited access to capital.

• Management succession challenges.

Balancing corporate and family interests

While large public companies tend to maintain a singular focus on maximizing value, family business shareholders might have multiple goals. Eventually, though, family business leaders must distinguish between decisions that are in the best interest of the family and those that are in the best interest of the company. Failure to separate family issues from business issues can result in conflict that threatens family harmony and the ability of the company to plan for change and future success. Strategic planning makes it possible to articulate a unified vision that equates family values with corporate culture, creates a shared commitment to pursuing a focused business mission, and balances the elements of a family ownership plan with a sound business strategy. In addition, the planning process will define expectations and responsibilities, which in turn will clarify what family members want and need from the business and each other.

Managing legacy issues

It’s no surprise that family businesses are managed with a focus on maintaining family legacies and tradition as well as retaining family ownership and control. Failure to maintain family ownership is often attributed to challenges around intergenerational transfers, estate planning, succession planning and shareholder liquidity requirements.

Interestingly, the very qualities attributed to family business success —loyalty, dedication and passion —may become liabilities when family members favor maintaining the status quo over implementing necessary change. That’s because clinging to established ways of doing business makes it difficult to maintain an edge in an ever-changing, ultra-competitive environment. A well-executed strategic plan can compensate for these tendencies not only by taking into account both family traditions and governance considerations but also by serving as a framework for evaluating and implementing strategic growth initiatives.

Assessing the role of outside capital

Because they are privately held by a small group of shareholders, most family businesses have limited access to new capital. The evaluation of growth opportunities and shareholder liquidity options should reflect this reality. Internal cash flow generation is often the lifeblood of the closely held company, supporting both profitable reinvestment and shareholder cash return needs. Many family businesses do not have relationships with large outside financial partners or capital providers and use little leverage in their capital structure. More than half have debt levels of less than 25% of their equity base, and fewer than 40% permit equity ownership outside the family group.

However, as a business grows and matures, competing demands for capital resources often emerge. It is not uncommon for the founding generation to want its financial reward at the same time that the company requires capital to fund expansion and future development. Because over 70% of family business owners have more than 75% of their net worth tied up in their company, the strategic planning process must take into account the funding of shareholders’ short-term and long-term liquidity preferences and needs.

A sound strategic plan is essential for evaluating different types of outside capital from both cost and suitability perspectives and is required when making presentations to outside investors. Because the future of a family business often rests with a capital strategy that allows the business to recapitalize family members with an equity infusion from outside investors, the company’s strategic plan should also address cultural issues that may arise when non-family investors become involved.

Ensuring successful succession

In public companies, leadership transitions are institutionalized, but in family businesses, management succession may be a significantly less formal process. Grooming a successor can be difficult in any situation, but family business dynamics can make it even more challenging. A later-generation ownership group is often large and disparate and may include family members who are not employed by the company. In many cases, these firms lack formal business continuity plans.

Succession planning is more than simply selecting the next leader; it is developing the talent, focus and resources for the business to continue to be successful under new management. Unfortunately, for many families succession planning is a means for achieving other goals rather than a goal in itself.

A succession plan should outline how succession will occur and what criteria will be used to determine when the successor is ready to take on new responsibilities. The succession plan should provide for a meaningful period of transition. Clear communication of the plan to both family employees and non-employee family members is critical. To reduce frustration and confusion, heirs should understand what their roles and responsibilities will include, both throughout and after the succession process. Equally important, the plan should recognize that succession should be based on managerial ability rather than birthright. Professional non-family management should be considered if appropriate.

Sustaining the family business

Strategic plans can provide a blueprint for dealing with a range of external and internal challenges. Developing a sound strategy to address evolving market conditions and opportunities, an increasingly global environment, and changing government policies is essential to sustaining the family business. Likewise, formally addressing the unique dynamics of a family business in the planning process provides the framework for managing these challenges as issues and growth opportunities arise. This helps ensure corporate sustainability.

Accordingly, a strategic plan must help create a cohesive vision of how to adapt to a changing business environment while dealing with challenges around cash flow utilization, capital funds availability and succession planning. These factors help determine the strategic success of the company and influence the family’s ability to ultimately achieve timely value realization. If done in a thoughtful manner that involves all key stakeholders, a strategic plan will be of tremendous benefit to family owners and managers—driving company growth and creating near-term shareholder value. Ultimately, it will also position the company and family to manage inevitable ownership transitions or realize shareholder value by ensuring an optimal range of recapitalization or liquidity strategies.

Richard A. Harvey Jr. is the president of Stonebridge Associates (, a Boston-based investment banking firm providing merger, acquisition, divestiture, private capital raising, and strategic financial advisory services to private and family-owned businesses.

Article categories: 
Print / Download
Spring 2009

Other Related Articles