BUSINESS WATCH

The promise of family-owned firms

Peter C. Newman April 7 1986
BUSINESS WATCH

The promise of family-owned firms

Peter C. Newman April 7 1986

The promise of family-owned firms

BUSINESS WATCH

Peter C. Newman

Last week the 290 members of the Canadian Association of Family Enterprise got together privately to compare the secrets of succession without having to take in outsiders. The featured speakers were shoemakers Tom and Sonja Bata, while Llewellyn Smith, the jam maker from Winona, Ont., was named Family Enterpriser of the Year.

A shadowy phalanx of entrepreneurs who run some of Canada’s 10,000 family-owned firms, most make inordinate profits by concentrating on value and quality instead of price and quantity. The companies in this convincingly dynamic sector of the economy—which rank somewhere between John Bulloch’s shock troops and the unwieldy business conflabs like the Canadian Manufacturers’ Association—enjoy some important advantages. Their owners are free of securities regulations and can do anything they want, this side of the Criminal Code. They can react much faster than their publicly owned competitors and can take greater risks for long-run results.

They can (and do) keep all of their sales and profit statistics secret and, because in most cases there are no shareholders outside their immediate families, there is little threat of their proprietors waking up one morning to find themselves taken over by some unwelcome numbered company. On the other side of the ledger are the pitfalls. When private companies need capital, they generally borrow and pay interest, whereas public companies can float treasury stock. Another problem is succession. Family firms tend to be accused of nepotism, but the trouble is often that there are too few qualified sons or daughters to take over.

Gordon Sharwood, a Montreal-born, Oxfordand Harvard-trained merchant banker who rose to become chief general manager of Canadian Imperial Bank of Commerce and later chairman of Guaranty Trust Co. of Canada, formed the Canadian Association of Family Enterprise two years ago. “Nobody does what I do,” he told me recently, “that is, look after the midsize private Canadian company which wants to remain as a proprietorship, and yet needs to finance itself. We act as brokers for them, much as Wood Gundy does for public companies. We do mostly private placements, a lot of leveraged buyouts and look after their

association as twell. Instead of going to the Toronto Club, I now end up lunching at all those awful restaurants with ‘Tiffany’ lamps at suburban shopping centres. But that’s where the vibrancy is these days. In terms of future growth, large corporations are declining and megaprojects are dead. The real play now is with midsize entrepreneurs in midsize towns.”

Sharwood’s most recent triumph was to lead the lobby that persuaded

Michael Wilson to remove the 12 Vèper-cent distribution tax in last month’s budget. Wilson also made some changes in his minimum tax and capital dividend provisions favorable to these private businesses. “Wilson did what we wanted,” says Sharwood. “It will go a long way to help familyowned companies stay independent.” Access to funds for new capital investment is usually a first-generation problem; after that, the biggest headache is finding suitable successors

without giving up family control. Statistics show that only 10 to 15 per cent of these private firms survive into the third generation, and many of the association’s meetings are spent on how to avoid sibling or intergenerational conflicts. The trick to avoiding King Lear’s fate, apparently, is to pass on companies in stages—first by giving up management, then ownership and finally control in a slow and carefully choreographed series of handovers.

At the moment, the fledgling association is growing at the rate of about a dozen new companies a month. Among them, the members sell goods and services worth $10 billion a year and employ 100,000 people. “The really big private concerns, like Eaton’s and the Richardsons of Winnipeg, are not members,” says Sharwood. “They scare the hell out of some of our guys who say, ‘What have I got in common with Fred Eaton?’ ” Sales of the family compacts are growing at the rate of about 11 per cent annually, and during the past decade they have expanded their payrolls more than seven per cent annually—nearly twice the national average.

“Everything from computers to television sets has shrunk in size,” says Sharwood. “Now, business itself is going through the same process. Large companies are scaling down their operations. The best among them are showing more entrepreneurial forms of management to encourage innovation. Meanwhile, the most rapid growth is among smaller companies. What we’re witnessing is an economywide trend favoring more adaptable companies, a trend which reflects not only economic uncertainty and changing technology but also a transition in values among business people.”

The men and women who run family-owned enterprises aim at exploiting a market niche with new products or new ways of doing business that fetch a premium price. Surveys have shown that many midsize concerns are run by owners who are obsessed by a vision of their enterprise that includes many values transcending personal wealth. It’s no Dallas script, however, but a struggling corporate culture. “Many people, including some senior civil servants,” Sharwood says, “see the family company as run by rich people who live in a big white house on the hill. Sure they live on the hill—but the business is eating up most of their cash and they never stop working.”