Sustaining the Family Business with Minimal Financial Rewards: How do family farms continue?

 

(Authors: Jane L. Glover and Trish Reay)

Research Applied précis prepared by Barbara Dartt, Family Business Consulting Group

Despite tending to generate less than average returns on investment, almost a third of family farm businesses in the UK have operated in the same area for more than 100 years. To investigate this paradox, the authors studied 20 family-run dairy farms in the Midlands region of England.

Data collection included semi-structured one-on-one interviews with farm owners and family members. Questions were focused on factors the family members believed affected their past and future decision-making. In total, 48 interviews were conducted, generating 41 hours of narrative. Interviews were transcribed and individual case studies generated. Cases included family business history and the family’s reasoning for continuing the business despite below-average economic rewards.

The socioeconomic welfare (SEW) literature refers to the nonfinancial aspects of a firm that meet a family’s affective needs through the business. This model was developed specifically for family firms. Elements include family control, family harmony, independence, identity and perpetuation of family values. For the businesses studied in this paper, where financial returns were not high, the SEW provides a meaningful framework for making sense of families’ decision-making choices.

Implications for Practitioners

• Many practitioners regularly assist families in articulating what non-financial principles guide them as they draft vision, mission and values statements. It might be beneficial to dip into the SEW literature in preparation for this family guidance – do families most value family control? Family harmony? Independence? How tightly is their identity tied to their role in the business?
• As business-owning families educate successors about guiding the business in the future, it might help to articulate what trade-offs are acceptable. For example, does the business heritage include “Sacrificers” or “Compromisers”? If so, what kind of firm initiatives might be prioritized and advanced at the expense of some financial return? How much return can be given up and still sustain the business?
• If entrepreneurial successors return to the business, what work must be done to reconcile their potentially higher emphasis on financial return than has been expected historically?

Summary of the Research

After examining the group of case studies, the authors identified four primary strategies used by the farm owners to cope with minimal economic returns:

• Diversifying the business
• Maximizing debt
• Sacrificing family needs
• Compromising

Within each of the strategies, family and business consequences were found:

• Diversification (2 farms) into non-farming business ventures was adopted to increase revenues and profits and the strategy did result in higher family income. These two operations did seem more focused on financial performance than the others interviewed.
• Maximizing debt (5 farms) was adopted to expand the business and ensure a scale that was sufficient to support the next generation. The debt levels did cause stress and conflict for family members.
• Sacrificers (6 farms) gave up family time to work in the business or to take an off-farm job. These operations tended to be under financial stress. The strategy resulted a “battling the odds” mentality and anxiety.
• Compromisers (7 farms) accepted less than maximum income in return for the farming way of life or a lifestyle that they wanted for their families and children. They were not willing to sacrifice family relationships for higher income.

Not surprisingly, in the face of lower economic rewards, families took different paths to maximize their SEW. An interesting follow-up to this research might be to incorporate management ability into an analysis of family business strategies. It is possible that the declining financial position of the businesses wasn’t simply due to market conditions but also was related to below average management ability among the owners of these 20 businesses.

About the contributor:

Barbara Dartt is an FFI Fellow and a consultant for the Family Business Consulting Group. She can be reached at dartt@thefbcg.com.