Planning for and Negotiating Crisis Events in Family Business

Being prepared for the unexpected in business can be very difficult- often you don’t know what it is that you are preparing for. This is where having the right type of architecture and governance systems and a process ensures that a family business has the ability to be pro-active. As discussed in last months column about “trigger events” the ability to be pro-active in business can be the difference between a quick recovery and losing your business entirely.

I recently had the pleasure of talking to Craig Luxton, the Managing Director of Deluxe Freight Systems. Craig is the 2^nd generation of this Qld based family owned and operated business with over 25 years of experience in freight forwarding and logistics management. Two recent “trigger events” combined, leaving turnover down from $20mil to $10mil per annum. Indeed, at times the outlook was far worse than a 50% reduction in turnover but the ability to be nimble, which is a common trait of many family businesses and a competitive advantage, stemmed some of the fall-out, resulting in an ongoing recovery phase.

Craig is very pragmatic when he discusses what happened, and according to Craig better systems and processes would have identified the writing on the wall and allowed them to react in a more considered and planned manner.

The first issue was leadership transition for the business. With very little notice or planning his parents stepped back from the business leaving Craig in charge. This was an event rather than the structured process we advise our clients to adopt. Any business inevitably struggles when the old leader steps back at short notice leaving no time to plan an effective and efficient handover.

Too often we find that the subject of succession is avoided and delayed in family businesses due to a combination of factors. The incumbent leader often focuses on perceived more pressing day-to-day concerns leading to avoidant behavior, perhaps because they are fearful of stepping out of the business. Having willing and able successors in place with an agreed timetable requires formalized long term planning.

While still finding his feet at the helm of the business Craig was faced with the Global Financial Crisis. Deluxe found, like many others in the transport industry, freight volume dropped, they suddenly faced underutilised fleet coupled with a high fixed cost base, all of which placed undue financial pressure on the business. A contingency plan was made by Deluxe for a 20% downturn in business, however unfortunately the eventual downturn was 35%. Luckily being nimble and being able to drive through some swift changes allowed the business to survive. Craig would have benefited from a better understanding of his business cost base as is reflected in his view that “we should have cut deeper and faster”.

This really shows how important capital management is for family owned businesses in particular the type of management information that is produced on which important business decisions are based. Best practice evidence shows that the successful family businesses establish systems and processes that generate management reporting based around both lead and lag indicators. It is important to know your historic financial performance but more importantly a business needs to understand the leading indicators, which are the drivers of future business performance. I always recommend to clients that they establish their management reporting around a mix of lead and lag indicators so that they do not just base their decision making around historical financial performance.

I often see family businesses who take the view that they have got this far OK so they must be on the right track, however often, as in the case of Deluxe, it is the combination of trigger events that leaves both the business and the family in an unfamiliar situation where they lack the structure to guide them through. Indeed an unwelcome side effect can be deterioration in family harmony. Implementing effective architecture via an advisory board and a family council drives good governance, communication and accountability. These things are the bedrock upon which the successful family businesses succeed.

The Deluxe Freight System story is an example of the unpredictable nature of trigger events and the need for family businesses to implement planning via effective architecture and governance across both the family and the business. Craig is now a strong advocate of the need to formalize the architecture around the business and family, as in his view the longer you persist with the informal the longer you run the risk of becoming caught up in “misdirected emotionally driven tangents”.