Globally, family-owned businesses are the oldest and most predominant form of a business, forming an integral part of the organised and unorganised sector of economies. Over the years, with the greater longevity of family businesses in India, there has been a dynamic and strategic shift in Indian families from being ‘family businesses’ to ‘business families’. This shift has come with its own set of challenges. Just as with people, businesses experience a concrete life cycle too. The average age of the legacy firms in India is about 35 years. While some of them are still helmed by the founder, some are at the cusp of a transition to the next generation and some are being managed by the 2nd, 3rd or even the 4th generation. In the next 15 years, 40% of India’s large family businesses will undergo a handover from the founder to the 2nd generation of owners, and 35% of them to the 3rd or 4th generation. Only about 1.2% of firms are more than a hundred years old. These 1.2% firms prove that longevity is not a myth.
Legacy businesses make up to 60-70% of the world’s GDP, according to a study by the Confederation of Indian Industry (CII). However, the rate at which these legacy businesses die out is alarmingly fast. As new generations join the family business, it is an enormous challenge to keep the family & business together. The generation at the helm in legacy Indian businesses is 25% in first generation, 38% in second generation, 29% in third generation and 4% in the fourth generation, as per a study on family businesses conducted by KPMG and the Indian School of Business (ISB).
Legacy companies can exist for many decades or even centuries, depending on various factors including industry dynamics, adaptability, market changes, and management strategies. Some legacy companies like V-Guard Industries, Ajanta Pharma, Pidilite Industries and Kajaria Ceramics continue to thrive for generations, while others like Ruchi Soya Industries and Winsome Diamonds & Jewellery face challenges that lead to their closure or acquisition. The timeframes can range from 50 to over 100 years or more.
Sustained business growth requires businesses to expand market share and customer base, increase profits and cut costs. This indicates improvement and helps secure financing from banks, support opportunities for opening new business locations, and helps reinvest those profits back into the business in the form of research and development. As a business matures and stabilises, so does its revenue and profits, sometimes holding the company’s growth stagnant if changes aren’t made.
Working with a family-run legacy business can offer several advantages that stem from their long history, access to established networks and relationships, and market reputation. Here are some of the advantages:
- Stability and Reliability: Legacy businesses track record of delivering on time can provide assurance that they are committed to keeping their business afloat and maintain long-term relationships with their business partners.
- Competitive Advantage: Legacy businesses focus on long-term success rather than short-term gains. This perspective can lead to more sustainable business practices, strategic planning, and investments that benefit both the company and its business partners over time.
- Deep Industry Knowledge: Businesses that have been operating for generations tend to have a wealth of industry-specific knowledge and expertise. This knowledge can be a valuable resource.
- Flexibility and Adaptability: While legacy businesses have a strong tradition, many also have a culture of adaptability. They have survived and thrived through various market changes and economic cycles, indicating their ability to pivot and adjust when necessary.
However, there are many potential pitfalls to consider while working with such businesses too:
- Resistance to Change: Family businesses often have deeply ingrained traditions in ways of doing things. This can make them resistant to adopting new technologies, processes, or strategies, hindering your business’s ability to innovate and adapt to changing market conditions.
- Succession Planning Issues: Family businesses often struggle with succession planning, which can lead to instability when key family members retire or pass away. This could disrupt your supply chain or distribution channels unexpectedly.
- Financial Instability: Smaller family businesses might face financial challenges that larger and more established companies won’t. This could impact their ability to deliver on time and maintain quality standards.
- Dependency Risk: Relying heavily on a single family-run legacy business for distribution, supplies, or services can create a significant dependency risk. If such businesses face operational challenges due to conflicts, your own operations could be severely affected.
- Limited Scalability: Family-run businesses might not have the resources or ambition to scale up their operations rapidly. This could limit your growth potential if your business outgrows their capacity.
When to jump the sinking ship?
There’s often a very thin line between a company that is failing and one that is simply experiencing a temporary cash crunch or a seasonal decline in sales. From a company perspective, you should be aware of these signs to contemplate when to jump the sinking ship to save your business. There are some specific warning signs of a failing company that can alert us before it’s too late:
- Diversification from core business: Businesses often diversify their products and services to grow but moving away from the core business will often increase costs, open doors to new competition, and cause businesses to lose their competitive advantage.
- High Trade Receivables: Late payments are one of the primary reasons businesses are unable to pay their own creditors on time. If the businesses offer long payment terms or do not have an established collection procedure in place, they will experience a cash shortfall.
- Stagnant/Declining Revenue: A consistent decline in revenue can indicate that the company’s products or services are losing relevance in the market and its chance of survival is unlikely.
- High Inventory: Holding too much inventory or investing too much capital in stock could leave business without cash required to pay its creditors. Inventory loses value over time as degradation occurs and demand diminishes leading to an eventual loss of revenue.
Increase in Debt & Expenses: Difficulty in managing debt obligations can lead to financial instabilities. Every business has payments that must be made whether it’s to suppliers or financing providers. Although it is not unusual to struggle to make the occasional payments, if the company is regularly defaulting on them, that could be a sign of a cash-flow problem.
6. Drop in Service Quality: If the company’s reputation is tarnished due to quality issues, it can lead to loss of customers which can harm the company brand name and sales and lead to decreased customer loyalty.
- Cash Flow Problems: The most common reasons for company’s cash resources being drained are excessive overhead costs, heavy debt loads & high-interest payments, and outstanding accounts receivables. All businesses suffer periodic dips where cash is tight. However, if cash flow is continually a problem, the business is likely in trouble.
Ultimately, a legacy company’s survival depends on its ability to adapt, innovate, and remain relevant in the face of changing market dynamics. Companies that proactively address challenges, invest in innovation, and embrace strategic changes, have a better chance of extending their life cycles.