The end of a family business legacy

TIME is a variable for any kind of business. The test of the viability or feasibility of an enterprise depends on generational creativity. Business survival or leaving a legacy from generation to generation requires hard work and commitment. It means that successors believe in and live the vision of the founder.

Creating a family business legacy is a challenge for owners. The past and the present stature of a family business will determine its future existence or demise. Much, of
course, depends on business and talent management and stable or liquid cash flow.

External factors also count such as man-made global financial crisis as well as uncontrolled or unforeseen natural disasters.

James Olan Hutcheson’s article “The End of a 1,400-year-old Business” (2007) says it all: “The world’s oldest continuously operating family business ended its impressive run last year. Japanese temple builder Kongo Gumi, in operation under the founders’ descendants since 578, succumbed to excess debt and an unfavorable business climate in 2006.”

What were the factors that contributed to the success of Gumi and his descendants’ temple-building enterprise from 578 to 2006?

Construction of Buddhist temples is based on the stability or continuing presence of the Buddhist religion. Buddhism is a stable belief system that has millions of followers or adherents for thousands of years. The other key factors include a blend of flexibility and conservatism.

Rather than choosing the oldest son as successor, Kongo Gumi turned over the reins of the business to a woman, the grandmother of Masakazu Kongo. Masakazu Kongo was the last president of Gumi’s business empire. Gumi’s criteria for succession was based on “health, responsibility and talent for the job.” He did not succumb to the concept of gender divide in terms of business leadership.

In the article, which appeared in the Small Business, April 16, 2007 issue, Hutcheson says: “Another factor that contributed to Kongo Gumi’s extended ‘business’ existence was the practice of sons-in-law taking the family name when they joined the family firm. This common Japanese practice allowed the company to continue under the same name, even when there were no sons in a given generation.”

In essence, the Gumi case shows that the elements of conservatism and flexibility can be mixed to stay in the same business for generations. Variation from the principle of primogeniture is a must to stay afloat.

So, why the demise given the above success factors? What lessons can family business owners learn from Gumi?

Hutcheson explains, “Despite its incredible history, it was a set of ordinary circumstances that brought Kongo Gumi down at last. Two factors were primarily responsible. First, during the 1980s bubble economy in Japan, the company borrowed heavily to invest in real estate. After the bubble burst in the 1992-93 recession, the assets secured by Kongo Gumi’s debt shrank in value. Second, social changes in Japan brought about declining contributions to temples. As a result, demand for Kongo Gumi’s temple-building services dropped sharply beginning in 1998.

“By 2004, revenues were down 35 percent. Masakazu Kongo laid off employees and tightened budgets. But in 2006, the end arrived. The company’s borrowings had ballooned to $343 million and it was no longer possible to service the debt. In January, the company’s assets were acquired by Takamatsu, a large Japanese construction company, and it was absorbed into a subsidiary.”

‘Proper training and skills are vital to generational success…It also does not follow that belonging to a family business entitles the children to continue running the family business.’

Hutcheson summed up the lessons of Kongo Gumi’s long tenure and ultimate failure: “Pick a stable industry and create flexible succession policies. To avoid a similar demise, evolve as business conditions require, but don’t get carried away with temporary enthusiasms and sacrifice financial stability for what looks like an opportunity. These lessons are somewhat contradictory and paradoxical, to be sure.

But if sustained success came easy, then all family businesses would have a 1,428-year run.”

A combination of lessening demand for construction of Buddhist temples and bad investments spelled the demise of the Gumi’s generational business empire.

Multiple generational business existence can also fall into traps. A recent Harvard Business Review article identified some traps that can hamper generational success, such as: the mind-set that there is always a place for a family member in the business; that the business can’t grow fast enough to support everyone; and that family members can stay in silos according to bloodline.

Proper training and skills are vital to generational success. It means that the senior family business owner can have wrong expectations as far as business succession planning is concerned. It also does not follow that belonging to a family business entitles the children to continue running the family business.

There is an Italian saying, “Dalle stalle alle stelle alle stalle,” which means, “From the stables to the stars and back to the stables.” It is an indication that the challenge facing family businesses is universal across our world.

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