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Article

A near-death experience

1 January 04

One client's tale of how a lack of understanding by professional advisers almost killed off a family business

by George Stevenson

Mathiesons is a fourth/fifth generation, family owned bakery and restaurant business based in Falkirk. Two years after I married the younger daughter of the majority shareholder, I was invited to give up my career as a marine geophysicist and join the family firm. Two years later I was managing director. That sort of thing happens in family businesses.

During the 90s, the public’s burgeoning love affair with supermarkets in general and the growth of in-store bakeries in particular put the traditional craft bakery under enormous pressure. To put it in perspective, in the period from 1980 to 1997 the craft sector’s share of the bread and cake market was slashed from 28% to 9%! Mathiesons were not coping well with the rapidly changing market place. In August 1999, I received a call from our finance manager to tell me that the latest results indicated that losses were starting to spiral out of control. I cut short my holiday and asked for an appointment with the manager of the bank we had been with since the company was founded in 1872. When I pointed out that if the trend continued we would soon be out of business, he just shrugged his shoulders and said “It was just a matter of time – that’s what happens to family businesses. The first generation starts the business, the second generation builds it up and then the third or fourth generations just p*** it against the wall.” So much for sympathy and understanding. Ongoing help and advice took the form of a monthly meeting with a specialist from head office. Apart from having to pay for this specialist’s time (just what we needed in a cash flow crisis), it quickly became clear that, far from being a specialist in problems affecting family businesses, he was the bank’s debt exposure expert simply protecting their position!

Previous experience of our small local law firm, when I had once asked them about perhaps updating the articles of the company, which had remained unchanged since the company was incorporated in 1958 and were treated by the family as tablets of stone, was that they didn’t do advice – they took instruction.

Our accountants were more sympathetic than our bank manager but equally gloomy about the company’s future. Their advice – sell any surplus assets, cut costs and look for a trade sale before you’ve nothing left to sell.

It didn’t take long to discover that you can’t sell if no one wants to buy. To try to salvage something, the Local Enterprise Company offered to pay for help and advice from a business consultant. His diagnosis – the management is hopeless. His solution –  demote/fire the family management and bring in professional managers. Within days of their arrival from large, successful plc retailers, the professional managers had succeeded in alienating suppliers, antagonising the family owners, demoralising an already shellshocked staff and accelerating the decline towards oblivion.

I had tried all my traditional sources of advice – either there was no advice on offer or the advice had simply made things worse than they were before. Maybe I was the problem. If so, was there any viable exit route other than suicide? When you are married into a business, probably not. There had to be another way and in my darkest hour I stumbled across it while leafing through a file I keep of articles on management issues – an article, written in 1995 to highlight the launch of the Centre for Family Enterprise, that gave some answers to the conundrum of why the survival rate of family businesses is so low beyond the first generation. I was, as it were, relieved to note that in the vast majority of cases the answer was not because it had been p***** against the wall! At this point, the penny dropped. The poor performance of the management was a symptom, not the root cause. The cancer that was crippling the company lay deep within the complex family dynamics that grow and develop as a family company matures through successive generations. Critically, none of us involved at the time – advisers, family, owners or management – possessed the knowledge to even identify it, let alone cure it.

The author of the article (a solicitor who had retrained as specialist adviser to family businesses) was in my office the following day and from that moment onward my life, and the fortunes of the business, were transformed. The family and the owners were now the client, not me. Lines of communication were opened up and operating structures between the family, the owners and the business were established. Everyone started to learn about governance, ownership, family constitutions and family councils. And, crucially, a non-family, non-executive chairman was appointed to the board.

Within three months, the professional managers were gone, the board was giving clear direction and the family management was delivering what it does best – passion and commitment. Within 12 months the company was back in profit and today is still going from strength to strength.

If I hadn’t kept that article, Mathiesons would now be history. If that had happened, it would have been unfair to lay the blame at anyone’s door, least of all our advisers’. The advice they gave was the best they could give because they had never had the opportunity to acquire the appropriate specialist knowledge to provide the advice that we needed. Our banker thought he knew everything he needed to know about family businesses because he had been providing banking services to them for over 30 years. That belief is sadly all too prevalent amongst professional advisers, but it can change and is changing.

We have now changed banks, lawyers and accountants. To be fair, our new advisers don’t know much about family business governance and ownership either, but they are willing to learn – and that is where it all starts.