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Perpetuating a Family Business

Picture of Tobacco leaves drying in the shed.

Tobacco leaves drying in the shed. Cuba. Vinales

This week I want to talk about perpetuating a family business. I mentioned in last week’s blog post my recent trip to Virginia. And the trip, a vacation, was great.

The highlights of our trip were the visits to all the historical sites like George Washington’s home at Mt Vernon, Jamestown, Thomas Jefferson’s estate at Monticello, and  James Madison’s estate at Montpellier.

But one other historical site has really stuck in my mind, too, the Shirley Plantation.

Maybe you already know this, but Shirley Plantation qualifies as the oldest family business in the United States. The Shirley family has operated the business for, no kidding, centuries.

While the plantation and family history are interesting all on their own, more than anything else the business’s longevity seems the most interesting part of the story. A family business that lasts for centuries–how is that even possible?

After thinking about all this in the month since I’ve been home, I have some notions to share on this topic… notions which stem not only from my general observations of fellow small business owners but also from  my ownership of a couple of small family businesses and then also from watching my wife’s co-ownership of a family farm her great grandparents homesteaded more than a century ago.

These are just my thoughts, so you should feel free to add your own in the comments. Successfully perpetuating a family business seems very tricky… We can probably all use as much help as we can get.

Very Strong Profits

So here’s a first comment. I will hypothesize that truly successful successions require a pretty profitable business that’s got good (or maybe great) future prospects.

You and I do not, for example, want to work on perpetuating a family business for emotional reasons or the sake of nostalgia.

More specifically, it seems clear to me that to continue operating past the founder’s tenure, the family probably wants a good return on the capital they’ve invested, probably wants a generous salary for the heir who manages the second-generation operation, and probably wants additional financial cushioning.

I’m just throwing out these example numbers for illustration, but if some family business requires a $1,000,000 in capital and a six-figures-in-salary top manager, the family might reasonably want a $100,000 annual return on the $1,000,000 in capital, another $100,000 for salary to the talented heir assuming the management job, and then another $100,000 in cushioning to provide some wiggle room.

Perpetuating a family business that only returns a standard profit on the capital invested and then a market rate salary for the managing heir? What business reason is there to go to this effort?

If all the family gets is a market rate return on their investment and a decent job for a highly talented heir, liquidating the business and letting the talented heir work on another better opportunity seems the obviously better option.

Talented Heir But Also Spares

Another notion shows up over the centuries of Shirley Plantation’s operation.

You need not just talented heirs with both an ability and a willingness to run the business in the next generation. You also need other family members who can function as backup players.

This makes sense, right? With only a single son or daughter available in the next generation, you can’t be sure you’ll really have the person you need to take over the business.

Centuries ago, predictably, a shorter life expectancy meant that a son or daughter a family thought that they could count might not be around to step up and assume a leadership role.

But that’s going to be a risk factor with businesses today, too, even if we have largely conquered infant mortality and infectious diseases.

An heir may decide or need to stop working. A family may need or want to relocate.

A weird thought: Families with larger numbers of offspring (not one or two kids but rather three or four or more) are probably going to be more successful at recruiting talented heirs simply because they have a larger pool of candidates.

Another weird and similar thought: Maybe a family business needs to look not just at the next generation of sons and daughters (or sons-in-law and daughters-in-law) but also to the subsequent generation of grandchildren and their spouses…

True Flexibility to Change Business Model

One final observation—and one that really shows up when you look at a family owned business that lasts for centuries. The family and the management team must be okay changing the business model.

Like probably every other Virginia farm in the 1600s and 1700s, Shirley Plantation operated for a while as tobacco plantation dependent on (tragically) enslaved labor. But over time, that model adapted, business practices improved, and agricultural practices evolved.

By the way, today, the Shirley Plantation land is still farmed, but the family business includes other product and service lines, too. (There’s a tourism business, for example, whereby people like your author get to see inside the plantation’s outbuildings and get to tour the mansion–which is still occupied by a family member.)

Flexibility from the family so the business model and the business practices can be updated? Maybe this counts as the most important piece of the puzzle…

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