How family owned businesses benefit the capital markets

History/description of the family business

The history of very successful family owned businesses began around the 1870’S and 1890’s during the industrial revolution. This period ushered in an unprecedented amount of technological innovations such as the railroad, the steam engine, and eventually, the automobile. Each of these items help to foster a greater ability to transport goods and services without the need for excessive manner labor. The concept of total factor productivity was introduced during this period. Here TFP was synonymous with efficiency gains that correlated to higher productivity gain as a result of capital investment (Barnes, 1976). Capital investment was critical to the well-being of the country at this time. The ability to not only to use capital investment to enhance productivity, but also the use the financial systems to invest in these goods was critical at the time. Also, during the period capital intensive industries began to gain prominence. Examples include, chemicals, electric products, transportation systems, petroleum re?ning, metals, cigarette making, and more. The industrial revolution created an extreme demand for not only family owned businesses but businesses in general. However, because the industry at the time was in its infancy, it was able to grow from a very small base. This exponential grow allowed smaller family-owned operations to make inroads within the markets of their choosing. They started businesses with the intention of supplementing their salaried income. Instead, they were able to grow their income into many multiples of their expectation, due to the economics of capitalism. The industrial revolution provided large amounts of capital for entrepreneurs to expand their operations and created value for society overall. Even more meaningful was the untapped potential of the country (Colli, 2003). Road, bridges, railroads, and other infrastructure assets were not constructed. Airports and other firms of transportation had not been devised. This also triggered the birth of some ?rst movers who were able to establish enduring success in their ?elds and to gain long-standing leadership in national and international markets (Dyer, 1986).

Family ?rms were in the absolute majority during the ?rst industrial revolution, as well as in the pre-industrial period, going from the urban artisan’s workshop to the famous Medici Bank, to the sophisticated commercial and trading company of Andrea Barbarigo, ‘Merchant of Venice’, and the sibling partnerships common in the same period among the merchants of the Adriatic Sea Republic. The family owned business, even today, holds a significant place in the overall American economy. Many of these businesses are smaller and rely heavily on specialized knowledge that can not be easily displaced by the internet. These businesses rely heavily on individual skills as oppose to automated services and in many instances are owned by minorities. Dynastic principles typically dominate these firms, particularly in western civilization. Here property and control resonate with the family. Here the organization is typically small or medium sized with a flat organizational structure. The business typically relies on internal succession planning and is heavily influenced by self-funding. These organizations also typically abstain from traditional sources of financing which consist of much more “public” oriented features such as IPOS and so forth. Inevitably the history of family firms revolves around the ability to be a first mover in a specialized filed of operations (Gomez-Mejia, 2001). The Italians accomplished this through higher quality goods which ultimately built an international brand for French goods. Food, fashion, clothing and wine from Italy, for example are universally considered higher value that other products. Switzerland did the same thing with watches and banking. Germans did the same thing with cars and automotive products. Here in many instances, a small family owned business was the first mover and established a critical brand that resonates with consumers even to today (Ghoshal, 2005).

ef?cient family ?rms are found not only in the craft-based, traditional, and labor-intensive industries, but also in scale-intensive industries and especially in specialized, customer-oriented industries (Ewing, 1965).

Moving to the internet age, many of the advantages afforded to the family owned businesses where demised. Craft based enterprises were replaced with automation which provide similar quality products with much more speed and accuracy. Labor intensive businesses where also replaced with technology that lowered the need for the labor. For example, self-driving trucks will eventually eliminate the need for many professional truck drivers and their corresponding family-owned operations. Family owned fast food restaurants will need to compete with the technology and self-services options of competitors using various technologies to enhance their product offerings. Family-owned craftsman will be adversely impacted by technologies such as artificial intelligence which could make their operations obsolete. All of these factors diminish many of the advantages discussed above for family owned business. For example, as discussed above, family owned businesses have the advantage of a long-term commitment to a particular goal or ideal, they possess a large degree of trust between family members, and they possess a particular skill that is difficult to replicate by other competitors. During the internal and information ages, many of these advantages are mitigated. For one, due the speed of information flow, companies are now much nimbler in their ability to course correct. Data is now becoming the next great frontier. As a result, larger, public companies have much more of a competitive advantage than family-owned businesses. For one, they are better able to fund capital investments, they have more access to the capital markets, and they are often able to attract higher degrees of talent. This ultimately allows them to be successful as they can leverage data to provide goods and services quickly and more efficiently. The family owned carpenter for example may be able to make custom pieces by hand. Their competitor however uses technology to make products much more quickly and efficiently as they often have the capital through the public markets, to invest in property plant and equipment to achieve their goals. This ultimately erodes the position of the family owned business within the technology age.

Thankfully, particularly in America, there is always room for the family owned business to flourish, albeit at a diminished level. Currently, family owned businesses comprise roughly 21% of all small businesses in America. This are often termed “mom and pop” stores and are characterized by small operations. Although technology has inhibited many of the smaller family owned businesses from flourishes, others have innovated and adapted according. They businesses typically rely on a specialized niche or technology that can not be disrupted by the internet. Hershey’s is a family owned business that can not be disrupted by technology. The candy bar is very unique in that many are often brand oriented products are successful. In addition, there is little change in the preferences of other as it relates to candy bar consumption. As a result, as a family owned business, Hershey’s has benefitted from consistent and stable growth in its operations. This has allowed the business to flourish over long decade and periods of time despite the decline in family owned businesses. As the internet continues to permeate throughout society larger, publicly traded tech firms will continue to dominate. Currently, 25% of the market cap for the S&P 500 is dominated by just four firms. Each of team, Amazon, Apple, Google, and Facebook, each have dominated and market leading positions. They have a strong growth trajectory and they each show no signs of slowing down. As a result, their growth inhibits the growth of other smaller family owned businesses. It is nearly impossible for a family owned business to compete with Amazon. As a result, they must use the Amazon platform to compete. They must use the platform to sale their goods or risk losing access to one of the largest networks in the world. The same apply for many other small businesses operating in the space. Although the future is unknown, family-owned businesses will always play a significant role in America and in the world (Danco, 1975)

Company description and history - products/services, financial performance, etc.

The family business that I am personally familiar with is Crenshaw Supply Company‚ an Atlanta?based scaffold and shoring company. Here the company has been in operations since 1984. It has been founded and still operated by David Jackson. He has successfully taken the company from just 10 employees in 1984 to over 200 now. As a private company financial performance is not readily available. However, the company has noted that it has nearly $50,000,000 in revenue growing well in excess of the industry overall. The company has heavily benefited from the increase in construction activity throughout the southeast region. As these markets is where the company is primary focused, its operations have likewise grown with this increased activity. The company’s primary focus in with commercial and residential construction. Here, through increase activity in the construction industry, the company has flourished. It has expanded its operational capabilities while also expanding its product lines beyond scaffolding and shoring. The company is currenting developing roofing, window, and door products to help supplement its other product offerings.

Currently, the industry is experiencing supply chain disruptions due to the delta variant and its impact on manufacturing firms. As a result, housing demand has not kept up with supply. This has created a unique position for the company as demand for its products has increased dramatically due to supply chain disruptions from foreign competitors. Due to COVID-19, the company, as a domestic producer now has an advantage over its foreign competitors who are now experiencing supply chain disruptions. In addition, the company can access the market much more efficiently thus lowering prices and providing higher value. This impacts the family business in a number of ways. First, it is able to generate higher prices due to the international supply chain disruptions. As the industry has limited suppliers who can provide the scale needed to meet demand ,the company can raise prices without a corresponding decline in demand. In addition, the company now has higher reinvestment opportunities to expand its product offerings to better drive more market share gains. If the company can serve its clients effectively, it can take market share and continue to grow faster than the industry overall. This will lead to higher revenues and higher profits for the business.

As a family owned business, company leadership can change the direction of the business quickly to capitalize on the changing market dynamics. It can also use the current economic environment as an opportunity to take market share from competitors who are struggling with supply chain disruptions and higher input costs. If done successfully, the revenue generated can then be deployed back into the business to better increase the company’s market position. As a family owned business this strategic direction can be better achieved as the family controls a majority of the shares of the company. This ability to quickly shift strategic focus can help family owned businesses quickly navigate changing market dynamics (Bornheim, 1997).

Genogram and family history

The family history of the company is very simple. Josh Jackson was an African American entrepreneur who graduated from the University of Florida with a business degree. While in college he met his wife Maria. Maria is from Puerto Rico and also graduated with a business degree. There child Allen Jackson would eventually attend the University of Florida and obtain a sports management degree. He then would go to FIU to obtain his MBA degree. While in Miami attending graduate school, Allen met Maria Dawkins. They both moved to Atlanta, Georgia to start the scaffolding and construction materials business. While running the business Maria had her son David who is now running the business as the CEO. At a young age, David was groomed by Allen to understand the innerworkings of the business. Here, Allen was very proficient with finance and wanted to go into investment banking. After graduate school Allen worked for New Constructs which was a boutique equity research firm. The firm would later promote Allen to director of research where he stayed for roughly 4 years. However, as Allen was becoming older he needed a successor to the business. Allen accepted the CEO position with his dad becoming chairman of the board. With his investment contacts, Allen quickly grew the business and expanded throughout the Southeast. He also invested in other much small construction and homebuilding firms to gain a further toehold within the industry. As such, the firm has now grown to what it is today in large part due to Allen’s leadership.

Ownership structure

The ownership structure of a family owned business is heavily centralized. Most of the ownership is concentrated at the top with a few family members owning a majority of the shares outstanding. In addition, voting rights are heavily centralized with family members. To maintain voting rights, many family-owned businesses uses two classes of common stock. The classes are equivalent but one class has more voting rights than the other. This allows management to effectively control the business presumably for the benefit of other shareholders. This ownership class can be beneficial if the ownership is honest and has integrity. Here, ownership can run the business without the influence of outsiders and activists who do not fully understand the operations of the business. Likewise, it is important of ownership to maintain control as they can transfer this control to family members in the event of death (Becker, 1978).

It is not uncommon for family owned businesses to provide stock ownership

Assessment of current situation, including strengths and issues/challenges (e.g., using 5 rights)

Strengths

· Concentrated ownership structure

· Long term commitment from management

· Stable and secure ownership

· Focused on long-term performance as oppose to short term performance

· Less influence from Wall-street which allows for more shared prosperity

· Values and virtues are more easily maintained.

Issues

· Issues related to innovation and the ability to rely on other members other than the family

· The inability for other family members to be a forward looking and innovative as the founding family member

· Capital deployment and how it will be used to enhance shareholder value

· Issues related to competition and their ability to leverage the capital markets in a better manner than the family-owned business

Weaknesses

· Lack of capital access particularly for smaller and medium sized firms

· Less ability to innovate as management can suffer from inertia

· Succession planning can be an issue if family members do not want to participate in the business

· Structural disadvantages as compared to publicly traded peers

· Heavy dependance on the leader who may not be particularly well suited for their leadership position

· Family members may be unwilling to change their behavior as they have large amounts of control over the enterprise

Opportunities

· Mergers and acquisitions

· Use of public funds to increase the ability for capital deployment (IPO)

· International expansion in areas the align with the company’s mission and value proposition

Recommendations for addressing current or potential issues (\"pre-mortem\") –

As it relates to methods to mitigate the issues, first the family owned business must be honest with their internal capabilities. Here, the company must make annual assessments of their competitive position and how to better mitigate risks to the business. They must actively hire individuals who possess the desired skills and abilities needed to keep the company relevant in the future. If these individuals can not be found, the company must develop them internally. This ensures that the company can continue to compete at a very high level (Dyer, 2003).

In addition, the company must be able to identify areas in which the company can best invest its resources in. The ability to deploy capital efficiently is critical to sustainable operations. Here the finance and accounting operations are critical. The company must deploy its capital to areas that generate the highest return for shareholders. This allows the company to ward off competition, while also remaining profitable.

Lessons learned for your career and life

Family businesses are a critical aspect of the American dream. As stated in the introduction, family businesses are often created out a communal need to do better for others while also reaping profits commensurate with the risk undertaken. Family businesses are unique in the sense that many can withstand much of the short-term nature that has historically characterized much larger, publicly traded enterprises. By focuses on long-term valuation without the pressure of making quarterly sales figures, family businesses can focus heavily on their values and mission. These values are often emboldened by a genuine sense for helping others and the communities they serve. This often results in lower profitability, but a much higher element of shared prosperity with critical stakeholders (Gersick, 1997). These stakeholders include communities, governments, employees, and so forth. This is one of the first critical lessons that I have learned for my personal life. It is much better to focus on longer term value creation predicated on customer service and value. Element such as honesty, integrity, and trust are critical not only to family owned brands but within business in general. This is often lost in large part due to greed and the willingness of others to do wrong in the pursuit of profit. On numerous occasions within the last decade alone, society has seen the result of greed and how it adversely impacts the company, its stakeholders, and society at large. Just a few years ago, Wells Fargo roiled the markets as information related to fraudulent accounts surfaced. This fraudulent activity was induced by an incentive program predicated on lofty sales goals. In addition, many entry levels associated were heavily pressured to make these lofty sales goals or face severe adverse consequences such as termination or lower pay. In addition, management was heavily incentivized based on sales as oppose to customer outcomes. In this example, customer outcomes were not the focus, but instead sales goals that were predicated on ever-increasing sales figures. This lack of focus on the customer due to greed ultimately unraveled in a massive scandal that significantly eroded the trust in the bank. In addition, the behaviors of employees resulting in billions of dollars of fines, financial impacts for those involved, and numerous other business repercussions. The lesson, as it relates to family owned businesses is to operate with an extreme sense of integrity and honesty (Bird, 2002).

In addition, family owned businesses must ensure continuity of operations in the event that the founder or their family is unable or unwilling to assume operations. This is another critical element as it relates to family owned businesses, which is continual training and succession planning. With many businesses the founding member engages in a business idea that eventually becomes very successful. This successful typically comes from satisfying a need that isn’t currently being met by market participants. As these needs is met, consumers are willing to pay premium prices for the good or service being produced. This allows the family-owned business to grow by investing back into the business through the hiring of additional employees, the purchase of additional assets, or acquiring other businesses. These activities allow the family owned business to continue to grow as it satisfies more of the needs of the customer. However, with many family-owned businesses, there may come a point for the brilliance and foresight of the founder is no longer needed or warranted. Here, the business owner may need a particular skill set to better navigate coming market changes. Many family-owned businesses often look to family members as a means of stewarding the future operations of the business while also maintaining ownership interest (Christensen, 1953). However, family member may not have an interest or ability in doing so. As a result, it is important to continue train employees in the event that a change is leadership is required. The lesson I learned here, is to continually surround yourself with smart, honest, and energetic talent. Otherwise, the business can crumble as succession planning was limited. We have often seen this with many family-owned businesses who sell to private equity firms, only to have the business severely decline years later. In addition, some owners do not posses many of the same values described above. As a result, they may take on excessive amounts of leverage to make the financial performance of the firm look better. They will then use the misleading financial performance as a means to quickly sell the business for quick profit. Mounted with debt, the new buyer is often forced to lower labor expense and downsize those adversely impacting a formally well-run family-owned operation. To avoid this occurrence, the lesson is always thinking about succession planning (Bennis,, 2005).