ALEXANDRIA, Va. — The family business is the major player in the U.S. economy. According to the Family Business Review, 80% to 90% of all businesses in North America are family-owned.
That number includes many laundry operations.
The challenge is to keep the laundry business in the family.
Justin B. Craig, Ph.D., clinical professor of Family Enterprise, co-director of the Center for Family Enterprises, Kellogg School of Management, Northwestern University, has dealt with many types of family business dynamics and transition issues.
“If anybody ever suggests to you that family businesses aren’t good at succession, I encourage you to go back to them and say there is a reason for that, and the reason is we don’t do it very often,” he says. “The public companies, they rotate their CEOs every three to five years. Here, you’re going at a much longer tenure and you stay around and you absorb the misery from these financial cycles and these other shocks to the industry.”
During the Textile Rental Services Association (TRSA) webinar titled Family Business Dynamics: Innovation in the Family Suite, Craig discussed transition planning for family-run laundries and how to train up the next generation.
“There are a diverse range of issues you’ll be facing, depending on where you are in the life stage of the business and also the life stage of the family,” Craig says. “And, also, you’ll be at different levels of sophistication as far as your preparation for transition goes or your governance structures.”
FAMILY IN TRAINING
A successful transition doesn’t just happen, it takes planning, according to Craig. It also takes training, and to prepare family members to be part of the business and potentially take over the business, first they have to learn about the laundry business.
“Typically, in a family-owned business, you will be working in that business in summer jobs, weekend jobs, listening to business talk/speak from an early age,” says Craig.
After those types of learning experiences, some family members will go to college, business school or get some other type of technical training. At this point, according to Craig, the best practice is that those individuals don’t dive straight back into the family business.
“You go out and make some mistakes on other people’s money,” he says. “You actually go out and get some discipline from some other industry or in another position so that you get a broader perspective, a global perspective if possible—so you can bring something back to your particular business if you decide.”
If a family member decides to be part of the family laundry business, then it’s time for the next phase of training, Craig says. That’s in-depth education about the family business.
“I argue that this is most important,” he says. “The role is to learn your family business and to get credibility as who you are as a next-generation leader, not only within the industry and the company itself but also within the family.”
Craig says that up until this point, family members haven’t really been exposed to the difficult problems or challenges of running the laundry. They have been “shepherded” by parents as leaders of the business, so they come back in and complete their apprenticeship.
“Here, you need to look at the industry in closer detail,” he says. “You need to look at how technology is influencing the company, where you fit, but also to continue differently.”
Craig says that the priority here is to “perpetuate the values” of the family business. The pathway to achieve that, he says, is to keep the philosophy, not the details, of the family-owned business.
“There is a market value for family values,” Craig says. “This is what distinguishes you in a crowded marketplace. Publicly traded companies do not have the same perspective or the same legacy, same long-term orientation and the commitment to continuity.”
A key part of this training, learning the family business, he says, is to have profit responsibility, some sort of bottom-line responsibility.
“As you move into a greater leadership role, that’s what will be required—to actually deliver profits,” Craig says. “It’s a steeper and more challenging learning curve than just budget concerns.”
After a family member learns the family business, and if he or she has the desire and aptitude to guide the business, then it’s time for them to jointly lead with the incumbent leaders, according to Craig.
“You need them to introduce you to their networks, to introduce you to the institutional knowledge that they have and the institutional memory that they have had for being leaders of the business for years,” he says. “You need them to lead with you for a period of time, understanding that you will take over complete leadership of the business and potentially of the family at some point in time.”
TRANSITIONS
Takeover. The word sounds hostile, but one family member taking over leadership of the laundry is a must if the business is going to remain family-owned. The current leadership, says Craig, needs to have the foresight that it will have to turn over the reins of the company.
“They need to have the foresight to understand that it is inevitable that they will be transitioning away from an operational leading role in the business and then preparing themselves for another role,” he says. “It could be an ambassadorial role where they will still be able to contribute, but not necessarily in a day-to-day role. Maybe more of a mentorship role. Here, this is where it becomes more difficult.”
Transitioning is difficult, Craig says, but the pathway to achieve a change in leadership in a family-owned laundry is to develop a timeline.
“Again, it’s inevitable that I’m not going to be around forever. It’s inevitable that this needs to be transitioned smoothly and that my stakeholders, my suppliers and my customers, my financiers, my long-term employees, all of these people are part of this conversation,” Craig says. “I need to signal to them well in advance that my transition to another role, it starts now and this is how I foresee it rolling out.”
He says this signals to the next generation that there’s a road for them to lead the business, that the incumbent leader is not “entrenched” and that they are making sure continuity is a topic of conversation on the table and is well-planned.
That plan, Craig says, has to take into account what the leadership structure of the laundry is currently and what it will be transitioning into. If a laundry is first-generation, then most likely one person is the controlling owner. Next comes a sibling partnership. A third-generation ownership is usually a “cousin consortium.”
“You are changing the system as well as the people,” he says. “The challenge, and this is why you’ll hear so often that family businesses do not last more than three generations, is that we are changing systems and people in each of these transitions. If you get to this cousin consortium stage and are successful, it becomes simpler, because if you’ve put in proper governance in the family and the business, all you need to do is only change the people.”
The key in each of these transitions, says Craig, is that the family members need to understand the stage that they’re moving to, the structure that the company is moving to.
“If you’re a controlling owner now, spend as much time as you can understanding what a sibling partnership looks like,” he says. “If you’re a sibling partnership now, understand what a cousin consortium would look like or will look like.”
That, says Craig, is when the members of a family-owned laundry start to think that they need to be innovative in family structures. This has nothing to do with the business, he says, but in the family structures.
“We need to prepare siblings to be leaders,” he says. “We need to prepare and understand how cousins will work together to best facilitate continuity.
“I heard this from a group we had in a while ago: ‘Too many times we risk-proof the business, but we don’t risk-proof the family.’ The family organization has to be set to facilitate education, philanthropy, career planning, etc., in order to achieve a smooth transition, grow the business and keep it in the family.”
Miss Part 1 on family business dynamics? Click here to read it.
Have a question or comment? E-mail our editor Matt Poe at [email protected].