We find ourselves using the word “risk” all too commonly in our pandemic reality, but in any context, risk—the possibility of something bad happening—has two characteristics: quantitative and qualitative.
Quantitative risk is measured by the probability that the bad thing may or may not happen. The measure of qualitative risk, on the other hand, assumes that the bad thing will indeed happen and attempts to rate the severity of its occurrence. A consideration of these two risks, consciously or unconsciously, drives decisions that affect people, property, teams, and organizations.
Here are some examples of decisions large and small we all make to manage risk characteristics:
- Sometimes, although it is unlikely that the bad thing will occur – if it does it will be devastating. Therefore…many of us keep a fire extinguisher near the fireplace.
- Sometimes, there is a high probability of a bad thing happening, but the risk is tolerable. As a result….occasionally the Owl has been known to live park in the city while running into the coffee shop.
- And sometimes both quantitative and qualitative risks are high, i.e. the bad thing will likely happen and when it does, it may be catastrophic. Thus…Every Navy SEAL boat team includes a warrior medic.
Risk Considerations in Family Business: The Setting.
In family businesses, where entrepreneur founders typically have a significant tolerance for risk, both quantitative and qualitative risks are contemplated intuitively with every decision.
Most founders are genetically wired to be entrepreneurs. They are often smart, courageous, ambitious, have a penchant for action, and a healthy disrespect for formality, structure and/or governance–none of which has a place in the early formative stages of their budding enterprises. They often grow the business as an Army of One, a manner that strengthens like a muscle until it becomes second nature. This is often the only way founders know how to operate.
When a business is small, the quantitative risk might be considered low. Failure, should it occur, might bruise the family’s ego more than its economics. But with each passing year of the founder’s life and in the arc of the business’ growth, when it continues to be dependent on the presence and health of its founder, the quantitative risk of loss increases exponentially.
And when the business is also the principal support for the next generation of the family, the qualitative risk to the family also becomes dramatically higher. This is especially true when founders are in denial and fail to accept that they will not always be available to direct the affairs of the business in the same controlling Army of One manner.
Many suffering such denial, and/or those who consciously avoid confronting this existential reality, fail to plant the seeds for business continuity, believing there is no practical choice for a successor in the family – as that Army of One “magic” is rarely transferred to the next generation’s gene pool.
Like the SEAL team example, both quantitative risk and qualitative risk in such a dynamic are extremely high. That is, the founder’s time is certain to end, and the absence of the founder will certainly represent a grave trauma to the family business left behind.
What, then, can founders do during their lifetime to provide a mechanism for the development and utilization of the types of systems of governance and organization that will be required upon their departure from the business?
The Solution: Include a medic on the team before trauma strikes.
Multidisciplinary family business advisors who serve as catalysts to family enterprises can help the family develop and properly utilize the systems of governance referred to. Such firms serve to educate and model for the family different ways of making decisions, executing strategy, and holding management accountable.
For those business families without the will or desire to adopt such systems while the founder remains active and in control, retaining such a catalytic advisory firm, not necessarily to effect change during the founder’s continued tenure, but simply to become familiar with the business, its key employees, and family members engaged in the business, will serve to mitigate this risk; so that, when the founder’s time is up, the advisor will be in the best position to help the family in its time of need.
This might mean helping the family to implement governance best practices and continue operating the business as a family-owned enterprise. Or it might mean doing the same, but with the goal of maximizing the exit value in the event the family wishes to sell.
By onboarding a medic during the founder’s lifetime, families can take comfort in the knowledge that they’ve managed some of the highest quantitative and qualitative risks to the family’s business. When the bad thing comes, a period of great strife, confusion and conflict for many business families, it does not need to be catastrophic.
Until next time … wishing you fair winds and following seas.