In traditional companies, management passes from one individual to the next based on professional qualifications. In family-run businesses, however, leadership positions often pass to close relatives irrespective of qualifications for the job.
In many ways, family businesses are better than traditional companies. The employees have been there through thick and thin, and there is a strong sense of pride throughout the organization. Still, over time, even the strongest organizations can falter if the leadership isn’t up to par. Mismanagement is the source of most business failures, and by the time the company realizes it needs outside help, it’s often too late.
Take, for example, a company that my private equity firm acquired in 2009. We made the mistake of leaving the management team — established by the second generation of family leadership — in place until 2010. When we decided to overhaul the company, there were several key steps.
Address staff issues. In mid-2010, faced with mounting operating deficits, I stepped in and assumed the CEO position. I eliminated redundant and ineffective staff members and streamlined reporting responsibilities, eliminating entire layers of management. Not only did this result in immediate cost savings, but it also enhanced staff performance and created accountability. Do not be afraid to let people go if they are not helping the business succeed.
The company is your first priority.
Get new perspectives. If management needs to be replaced, be wary about hiring existing staff members to fill those vacancies. Poor or insecure leaders tend to surround themselves with advisers whose critical thinking skills are weak. When incumbent management indicates that the status quo must remain, more often than not, this is indicative of management lacking in expertise and vision. A third-party expert might be needed.
Don’t overhire. Hiring several people at once is a classic leadership mistake. It’s easy to assume that one new hire will generate a certain amount of growth, which will, in turn, create a need for additional employees. Avoid this pitfall. Hiring before you have actual need or before free cash flow supports hiring a bigger staff is the first step on the path to failure. My rule of thumb is to wait until the existing staff has a heavy enough workload to necessitate three new employees, and then hire one.
Keep the peace. While trying to revamp any family-owned company, you will inevitably face challenges from people who have been there for years and who expect things to be done a certain way. Change is unavoidable, but you can gain your employees’ trust by retaining the best qualities of the business as you restructure. Don’t fix what isn’t broken. Your staff will recognize that you have the company’s best interests in mind and will trust your judgment as you implement changes.
Know your customers. Understand the choice your customers are making between you and your competitors. For example, at the company acquired by my private equity firm, I knew our products were outstanding, but our marketing strategy was ineffective and customers weren’t fully aware of our product range. Overhauling the marketing strategy has helped us expand our market share. This is a continuously evolving process. To perform better, you must exceed customer expectations on every visit. It is critical to understand your customers and the market so well that you anticipate customer needs before they know what they want. In restructuring the business, the rule of thumb should be, “Keep the best, overhaul the rest.”
Guest columnist Bruce Rosenthal is the president and CEO of Submarina California Subs. For more information about Submarina or franchising opportunities, please visit www.submarina.com.