Why You Need an Owner Strategy

Summary: As owners, you have the right to define what value you want to company to create. For most owners, there are three questions to ask to help guide the tradeoffs and choices you are willing to make: 1. Growth: Do you want to place any restrictions on the growth of the business? 2. Liquidity: How much money do you want to take out of the company? 3. Control: How much does having total control over decisions matter to you? An Owner Strategy can help your family business define the rules of the game, how you keep score, what winning looks like, and what moves are not allowed.

“What do you mean we can’t pay dividends this year?” Leigh was incredulous. The board of the surfing brand company she and her sisters Sarah and Sharon had founded had just reviewed projected end-of-year performance. This meeting usually celebrated another incremental step forward, with moderate growth, no debt, and significant dividends, which Leigh, Sarah, and Sharon used to support their comfortable lifestyle and charitable donations. This year, however, revenue growth was way up, but profits were down, and Leigh learned that the covenants on the debt taken out by the company to achieve that growth did not allow for any dividends. For the first time, Leigh felt out of control of the company she had cofounded.

How could the founders of a successful company find themselves surprised by its inability to pay them annual dividends? Leigh and her sisters had done many things right in building their business, including eventually appointing an independent board and an outside CEO to help the company reach the next level. But in turning over day-to-day management to the CEO, they also forgot something critical. They assumed that the new CEO would guide the company well, but they failed to clearly articulate the tangible outcomes that they wanted to achieve—and avoid—as owners. That opened the door to the CEO to pursue a business strategy that ran counter to what mattered most to them.

While public companies’ success is usually measured by growth in shareholder value, the same is not necessarily true for family businesses. And that’s one of the best things about family ownership. You don’t have to define success the way that other companies might. You can follow your own path in determining what matters most to you and your family.

This right to define success typically translates into three possible outcomes for the business. You can aim for growth, looking to maximize the financial value of the business. You can seek liquidity, distributing cash flow to the owners to use outside the business. And you can want to maintain control, keeping decision-making authority within the ownership group. You have the freedom to do what you want with your company. No outsider can force you to value revenue growth more highly than, say, offering family members employment in the business. Or choosing to treat employees like family. Or forgoing growth opportunities that don’t sit right with your beliefs. The right to determine what you value is an incredible opportunity and responsibility for owners.

But ensuring that your business produces tangible outcomes that are aligned with your values won’t happen on its own, as Leigh and her sisters discovered. Few family owners describe their sole objective as maximizing shareholder value in the way most business books assume. And for many family business owners, it is not even one of their primary objectives. Yet, the owners are often unclear about what they do want—or want different things. Unless you find alignment, you will miss opportunities for growth, fail to retain talented employees, lose control as management fills the void with their own priorities, or sell the business out of frustration.

To avoid those outcomes, your family business needs an Owner Strategy that defines the rules of the game, how you keep score, what winning looks like, and what moves are not allowed. This includes:

Your Owner Strategy is one of the purest expressions of who you are as individuals, as a family, and as a family business system. It’s your course to chart.

The First Step: The right to define value: growth, liquidity, and control

Why should you take the time to define clear objectives in your family business? If you fail to do so, you risk losing your raison d’être for being in business together, especially as the business grows and makes the transition to new generations. That path often leads toward the end of family ownership.

So how do you determine what your family values the most? Start by asking three questions that only owners of a business can answer.

Do you want to place any restrictions on the growth of the business?

This first question might seem counterintuitive. Most public companies single-mindedly focus on growing their financial value because that’s what shareholders demand. As a society, we’re used to measuring success that way. But as Bo Burlingham points out in Small Giants, a book that focuses on companies that choose to be great rather than big: “What’s in the interest of the shareholders depends on who the shareholders are.”

As an owner, you might wish to constrain growth by taking off the table any actions that would otherwise make you more money or broaden your global influence but that don’t align with your values. Several companies we have worked with have deliberately avoided growth in favor of creating a strong culture and, take Frederick for example, who desired a sane work–life balance for the owners and management. “We could triple our sales in a year,” one owner told us. “But that would dramatically change all our lives. There’s a lot of stress that comes with growth.”

How much liquidity do you want to take out of the company?

Owners of a business have the right to the residual, the profits left over after all the bills have been paid. It is up to you to decide whether to reinvest those profits or pay them out in dividends. Family businesses exercise this right in different ways, including payouts of 100 percent of the annual profits to the owners and no dividends for decades with all profits reinvested in the company. The right to make that decision rests with the owners, either directly when they are closely involved in decision-making or indirectly through the policies they set for the board of directors.

Are you willing to give up control over decisions?

Owners set the capital structure of the company, that is, the extent to which the company uses outside debt and equity. As owners, you can decide whether to have the company operate only with the resources it can generate internally or to access other people’s money. Many family businesses resist accepting equity capital from outside investors because they want to maintain full control over their decisions. With such control, the owners can make decisions that benefit their family and that an outside investor would rarely allow. For example, the family business might pay its employees well over market compensation. Owners also tend to worry that debt will reduce their control over their own destiny, since borrowing usually comes with rules and restrictions. “It’s one thing to negotiate with my brother and sister, who know how to push my buttons and annoy me,” said the CEO and co-owner of an Australian retail chain, “but I’ll take that any day over having to report back to the ‘suits’ at a bank, with their insane paperwork and bureaucracy.” As a result, this CEO’s company avoided taking on any debt—something many other family businesses do as well.

Through this influence over growth, liquidity, and control, owners shape the company’s strategy. You can define the objectives of the company in purely financial terms (similar to a public company) or prioritize nonfinancial objectives like improving the environment or paying employees above-market compensation. Likewise, you can allow managers to use any (legal and ethical) means that maximize those objectives, or you can take actions off the table because they conflict with your core values. How you exercise this right puts you in the position to create a company that pursues what you most value.

Watch Ownership Strategy– The foundation of every family business with Josh Baron presented by the Finnish Family Firms Association to see how a real family business implemented their owner strategy.

*Adapted from the Harvard Business Review Family Business Handbook by Josh Baron and Rob Lachenauer. Pages 77-81.