The natural way of a family business is a decline over time. So, successful family businesses must take actions to counteract the decline.
Written for Farm Futures Dec 2023.
You have heard the adage. “The first generation builds it, the second generation maintains it, and the third generation loses it.” This is not just an American problem; it is an international phenomenon.
The decline of family farms is due to tendencies that repeat themselves. The natural way of a family business is a decline over time. So, successful family businesses must take unnatural or unorthodox actions to counteract the decline. They feel unorthodox because these actions often take on a balanced business-first approach versus a family-only approach. These actions often do not feel good. At least not right away. It takes hard work and sometimes tough decisions, decisions that aren’t always popular with everyone.
It all boils down to the values and practices of the family and their influence on the business. These family practices, habits, and values drive the business.
Maintain a sustainable ratio of Family Growth vs Business Growth
Over generations, family growth is geometric. Families often grow faster than acres, heads of livestock, or anything else. There are more lifestyles to maintain and more people who want to work on the farm. If all family members stay in the business, it places a large strain on the business. Especially if there isn’t enough work to go around to keep everyone busy and efficient. Too often, we observe family members working on the farm and pulling a large salary that they would never pay a hired hand doing the same work. (This sounds harsh, I know)
Too many large salaries, and there is often not enough money left to reinvest back into the farm. Pruning the tree in each generation is probably the best and cheapest option, but it’s not easy. What father or mother wants to tell their offspring to leave the farm and look elsewhere for work? If you want your farm to be sustainable for generations, then your farm's profit growth rate ( after reinvestment) must be equal to or exceed the family growth rate. Simply maintaining a standard of living for a multi-generation farm requires growth, risk-taking, diversification, etc. Sitting in maintenance mode is sometimes the riskiest option, and prudent risk-taking and growth are the safest.
Control financial expectations of the business
Families become increasingly financially dependent on the business, and successful families understand this. They also understand that no family business can survive the unsustainable financial demands of families, regardless of the family size.
In order to not kill the golden goose, families control their financial expectations of the business. They build wealth outside of the business that can sustain the financial needs of the family. They live within their means based on fair wages and outside investments. This is increasingly important as different families in the business have different financial needs and wants. One family may have eight kids, and the next family, only one. One family may want a large, expensive home and the other a modest one.
Usually, the best course of action is for every family to be responsible for their own vehicles, houses, building retirement nest eggs, etc.
On a side note, transition planning is infinitely easier if the Sr. Generation can sustain their lifestyle without pulling equity from the farm. Every year, there are farms that cease because there isn’t enough cash flow and equity to sustain the lifestyle of the Sr. Generation and operate at the same time.
The laws of nature and family can seem a little harsh, but the suggestions above keep the business AND the family strong. A profitable and sustainable family business has great rewards. There are real benefits to these self-imposed sacrifices because there are financial rewards, family pride, and loyalty when family businesses succeed over multiple generations. After all, there is no law of nature that a family farm has to stop in the third generation.