The What, Why, Where, How, and Who of Growth in Family Enterprise

Jennifer Pendergast, Kellogg Center for Family Enterprises and Drew Everett, Bush Brothers & Company

March 2022

What kind of business growth do you seek, and why?

How should the enterprise grow, such as through organic expansion, acquisition, or some combination?

Who should be involved in growth-related decisions?

All these questions revolve around a key dimension of the family enterprise: growth. Growth is something that's easy to take for granted in early periods for the family firm, then typically becomes much more elusive in the longer term. That's because successful businesses tend to grow rapidly, then hit a maturity phase. Thus any family business focused on maintaining ownership across generations comes up against the challenge of growth, with the need to continually reinvigorate the business.

Moreover, in most cases the ownership group of the family continues to grow - unless the family consolidates ownership by buying members out - so the challenge is to invest to sustain the business's financial performance while meeting the family's needs. That is, a growing family requires a growing business.

Promoting strategic growth is, of course, much easier said than done. One of the largest reasons is embedded in a successful business family itself: when a family has run a well-performing, cash-generating business for some time, they often become more risk-averse, to avoid losing the wealth accrued. That can take the form of complacency or entrenchment about growth-related investment, as influenced by factors including family member age, risk preference, and life circumstances.

For example, as the leader of a family-owned automotive business told us, "Our older family members didn't see the value in refurbishing our headquarters. They would prefer to take money out of the business. Next-gen members understand we need to have good facilities to attract capable employees to grow." That sets up inevitable tension among family firm members around the need for and purpose of growth.

We wrote this article to help you tackle the challenge of addressing growth in your family enterprise. In the remainder we present key growth-related dimensions to think about, in rough sequence, including the "what, why, where, how, and who" of growth. This is not meant to be a "growth playbook" for family firms, but rather a way to think about growth and get the conversation going with key stakeholders, so you can have proactive, productive discussions about this critical but often-overlooked dimension of the enterprise.

Understand Risk

As noted above, risk plays a large role in any family's exploration of growth. That's because growth almost never comes without risk. Thus family business owners face the decision of where they want to play on the risk-return continuum.

One family leader we know described the challenge with a stock-market analogy: "We have to decide if we want to be a growth stock or a value stock. Right now we are a value stock." More specifically, if you see your firm as a growth stock, you reinvest the majority of your returns in the business, seeking new avenues for growth. In this case, owners benefit from the increased value of their investment, but are less likely to have access to distributions, given the reinvestment imperative. Alternatively, if the family sees the business as a value stock, the firm may achieve modest growth or none at all, while still representing a good investment that generates significant cash for family members.

The value-stock goal is not an ideal situation for some owners. The business leader of a family-held construction firm said, "I'd hate for us to become a 'lifestyle business,' operating to fund our owners' lifestyles rather than pursue a vision of an exciting, thriving enterprise." Moreover, even if the lifestyle-business route is compelling for owners, it will likely be difficult to attract high-caliber outside management or investors to this vision.

That's why it's important to discuss the risk owners are comfortable with as they think about growth. Critical to that conversation is understanding the definition and purpose of growth in your enterprise, as we discuss next.

Define Growth - and Its Purpose

Growth is not a unitary concept.

There's revenue growth, market share growth, growth in enterprise value, growth in number of accounts served, growth in cashflow, and many others.

So it's important for family enterprise members to define the type of growth to aim for. Type of growth, in turn, will be tied inextricably to the fundamental question of the purpose of growth. So it's about both what type of growth and why that type. Some people have the mindset of "If we aren't growing, we are dying." That pithy statement may sound appealing, but it's important to recognize that the wrong type of growth can kill a business as well; for instance, the firm will suffer if you grow quickly beyond its operational, financial, or managerial capacity.

In short, get people thinking about what type of growth to seek and why. For example, is the purpose of growth to fuel the financial expectations of a growing family, as alluded to earlier? That purpose can become untenable over time, depending on the family's growth rate, which is outside the control of business leadership. It can also be demotivating to non-family management if the business's sole purpose is to increase owners' wealth.

Another rationale for growth may be to attract and retain top management talent. Growth, in this context, provides an opportunity for executives and others to work on interesting projects and to create a high-potential, opportunity-rich career path. Growth can also be attractive to family members who seek to be part of a vibrant, long-term legacy. Growth may also be a strategy to mitigate the risk of having all of the family's financial eggs in one basket.

It's worth spending significant time on the what and why of growth, to make decisions from a place of shared understanding, clarity, and enthusiasm.

Make Strategic Decisions About Growth

Once you have more clarity on the rationale for growth, you have to think about how to make that growth happen while managing risk. That means asking questions like: Do acquisitions in adjacent markets represent an attractive growth opportunity? Or is it more preferable to expand into completely new domains? Both have associated risks. Organic growth in core operations may seem low-risk because it is investing in "what you know," but may present risks if you already have strong market share and growing in your existing space will bring diminishing returns. Making an acquisition in a completely new area, meanwhile, could seem high-risk, but if there is an opportunity to buy a strong management team and enter a growing market, the potential rewards may significantly offset the challenges.

At a broader level, where you grow and how you grow are dimensions that drive risk. Where could be your core business, adjacent businesses, or something completely new. How involves choices such as organic, acquisition, minority investments, or partnerships. Again, each of these elements has associated risk.

In looking at where and how, families also need to determine what responsibility they take on as a collective family enterprise versus as individual family members. Is it the responsibility of the enterprise to diversify the family's investment profile to manage concentration risk (i.e., too many eggs in one basket) or is that the responsibility of individual members? For example, if individuals are responsible for managing risk by diversifying their own investment portfolios, the business is free to take on more risk. However, if the family is highly concentrated in their core asset (as many are), this reduces the ability of business leaders to take on risk. For this reason, many later-stage family businesses prefer to distribute cash to enable family members to diversify their portfolio on their own, allowing the business to take more growth-related risk.

Engage Key Stakeholders

Given the complexity of these issues, it's important to engage all stakeholders in the family enterprise system - owners, management, and board - in decision-making around growth. Indeed, the question of "who" is a factor in play across all activities we discuss here: who should be involved, and how best to involve them.

Owners, of course, need to establish expectations around risk (willingness to lose or tie up capital), liquidity (through dividends or stock buybacks), level of diversification (within the core business and/or beyond), and structure of growth (willingness to take on partners, interest in minority or passive investments). But owners can't establish expectations in a vacuum. They must live within the reality of what their business does and the capacity of management. So, grounding growth decisions in the business and strategic context is important.

While there are no right answers to establishing the growth and risk profile of a family enterprise, the key is to educate the family on the business fundamentals so they understand the growth potential and risk profile of the existing business. Gaining this baseline understanding enables thoughtful discussion about the growth vision. The goal is to engage in healthy, ongoing dialogue on what the family wants or expects, and how that aligns with what is feasible in the current business environment. This is a critical activity for families in today's business landscape, where the only constant is change.

Of course, the board is another key stakeholder as related to growth. Once the family has established baseline goals, parameters, and/or guardrails for the growth strategy, it is the board's role to hold management accountable for developing plans to address these priorities. For example, in the case of one mature family business considering expansion beyond its core retail operations, this process started with a board retreat focused on the discussion of the where and how of growth. This board level discussion then set the framework for management to work on delivering options. The family's guidance came primarily from family representation on the board, conveyed through the family board chair.

Start - or Continue - the Growth Conversation

The example above is just one way a growth conversation can happen. In truth, the discussion of growth can be initiated in many different ways.

For instance, the instigators of such a discussion may be a group of owners who are disappointed in enterprise performance or seek additional opportunities to expand the enterprise. Or, the board may push management through the strategic planning process to think harder about how to achieve growth. Or management may present growth opportunities they see to the board, to spur the discussion.

Moreover, the conversation could be instigated by a strategic necessity (address failing performance, combat a competitor) or driven by an emergent opportunity (unique acquisition). Ideally the growth discussion will proactive rather than reactive, so that parameters and plans are in place before they are needed. An example of failed reactive planning involved a Canadian business family that saw an acquisition opportunity but struggled to gain alignment on the level of debt they were willing to take on. When they finally agreed to move forward, a competitor had already acquired the target.

The takeaway, then, is to aim to start and continue the growth conversation with key stakeholders, to get ahead of performance problems and be ready to capitalize on new opportunities.

Be Thoughtful and Patient

This last item is more of a broad guideline than a practical step.

The key to the growth discussion, regardless of where and how it is initiated, is to gain consensus on the purpose for growth, define the growth avenues that are most advantageous, determine what role stakeholders will play in making decisions, and ensure that all are educated on the risk-reward profile of opportunities considered. Given the complexity of most family systems, such discussions will not happen overnight, and will almost definitely shift and evolve over time.

For example, in the case of the retail company mentioned earlier that initiated growth discussions with a board retreat, the board chair anticipates that the process could take "two or more years" to complete. That said, stakeholders are excited about the conversation, and eager to continue it. As the chair notes, "People really appreciated the opportunity to have a focused discussion on growth, dedicating time and space to the topic outside of normal business planning." In short, there is no right answer to how to initiate the growth discussion.

The important overall takeaway here is that families who desire to achieve multi-generational enterprise ownership should be thinking about what role growth will play in continuity and how this growth will be achieved. That means taking the time to hold thoughtful, ongoing conversations with a wide range of stakeholders about the what, why, where, how, and who of enterprise growth.