ISSUE 8 APRIL 2009

When thinking about the current economic crisis, it is worth remembering that some family businesses have already survived the oil shock of the 1970s, the depressions of the 1930s and 1870s, the panic of the 1840s, the lean 1820s and even the grim 1780s. What values and approaches have helped long-lasting family businesses to survive through past booms and busts?

One value is being cautious on debt and leverage. During boom times family businesses are sometimes criticized for being 'too conservative' and not leveraging themselves up to the maximum. But the aim of many family businesses is to pass on the business to future generations - as opposed to making as much money as possible while times are good. So there is understandable reluctance to take on debt unless it is for prudent and productive investments that will more than pay back the amount borrowed.

A case study on managing debt is provided by William Clark & Sons Ltd, which the Clark family started in 1736 and which they still own today. In the 1810s the business was centred on linen which was enjoying a major boom. The defeat of Napoleon in 1815 brought peace to Europe and credit conditions greatly eased. Many manufacturers took the opportunity to borrow money and expand their factories. It seemed that a new world order had been created where risks were low and the explosion in population virtually guaranteed ever-increasing demand for linen.

Alex Clark (the fourth generation leader) did borrow money, but only as much as was needed for limited additions to the factory in Upperlands, Northern Ireland. He was careful not to make the business overly dependent on borrowed money. He understood that there was a threat to survival if loans were suddenly called in or if it became impossible to roll them over.

In the 1820s credit conditions suddenly tightened and there was a crash in 1826 - despite attempts at monetary easing by the Bank of England. Demand for linen fell dramatically while the supply from newly-expanded factories continued to be huge; the inevitable result was a devastating decline in price. Many linen manufacturers were swept away but William Clark and Sons Ltd survived due to Alex Clark's earlier caution about borrowing.

Since 1603 the Mogi family have
told themselves: 'Don't carelessly fall into debt.'

In his book 'Centuries of Success' William O'Hara comments on the story by writing: 'Those who forget history are condemned to repeat it...'The history of the Clarks tells us that when expanding your business, do so carefully and wisely even when the vital signs of the economy are healthy ones.'

Caution about debt is woven into the values of not just the Clarks but many other business families. 'Don't carelessly fall into debt' are words from the family creed of the Mogi family of Japan, which has owned and operated Kikkoman foods since 1630. This view has helped them survive as a business for nearly 400 years.

Similar caution over debt was repeated at a recent roundtable event organized by the Family Business Network in February 2009. There was a general wariness over debt and leverage, some even going as far as to say, 'No debt.'

At the same time, the roundtable also highlighted that there may be potential opportunities in the economic crisis to pick up productive assets at bargain prices - even if this might involve cautious leverage. After all, another lesson of history is that great fortunes can be made by those who are able to buy from distressed sellers.

This is shown by one of history's richest men, Marcus Crassus. He lived in ancient Rome two thousand years ago when there was no fire brigade. Crassus set up his own fire brigade of 500 men who would rush to any fire. However, they would not lift a finger to put out the fire until Crassus arrived to negotiate a fee with the owners. These owners were the ultimate in 'distressed'; they knew that they were at risk of losing everything and so they were willing to offer very good terms to Crassus.

Similarly, economic crisis can be a time when there is distress selling of sound businesses by people who must find a cash market for at least a portion of their assets. For those who have cash, and who are not already over-extended, there can be some very interesting opportunities.

So the current economic crisis is likely to be a testing time when the strong will survive and then become even stronger. Long-lasting family businesses can draw on their values which have already sustained them through previous crises and which can continue to sustain through this crisis too.

In this issue

The benefit of 'patient capital'
'In the good times it was easy to say that our priority was to build a long-term profitable business,'

Next Generation money training
Parents find it easier to
train their children in
money management if
they understand their
children's natural 'money
styles'.

Intelligent nepotism
Some entrepreneurs claim they do not want to be 'family businesses'.

Case study on using bonuses to motivate employees
Today's banking crisis has caused the media to ask questions about the wisdom of some types of bonus systems.

---

« back to the homepage

« FBN International