My guest on this episode is Jamie Shah. Jamie worked in investment banking and Google before returning to her family’s business, Chem-Impex International, which manufactures materials for life sciences companies, as VP of Operations.
Today, she is the managing director at the company and a professor at Chicago Booth, where she teaches a course on family business. Our discussion focuses on lessons to be learned from family businesses, which are more trusted and stable and generate higher returns. We talk about what success looks like in failing businesses, the balance of paradoxes, and how to apply principles that make family businesses successful to all companies.
Live Oak Bank — Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle-market companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.
Hood & Strong, LLP — Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected].
Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.
Oakbourne Advisors– Oakbourne is an independent retirement plan consulting firm that helps small companies design and implement great retirement plans for their teams. Whether you already have a 401(k) in place or are looking to start one for your team, please reach out to learn more about how Oakbourne can set your people up for success in retirement at oakbourne.com/think.
(2:46) – Jamie’s background and career with Family Businesses
(9:46) – How do you feel like your family’s business is run compared to others?
(11:12) – What was the most interesting Family Business you learned about at Northwestern?
(13:24) – Why do you think there are such high levels of stability, trust, and returns in Family Businesses?
(15:54) – The boring aspect of Family Businesses
(18:53) – What are some observations you have about the different paths within entrepreneurship?
(22:01) – What are some examples of different business goals within Family Businesses you’ve studied?
(25:00) – What are some paradoxes you’ve identified in Family Businesses?
(28:38) – How does your Family Business deal with being uncomfortable in these paradoxes?
(30:16) – Do you think conflict is good because it forces clarity?
(31:20) – Which benefits of a Family Business would be most replicable to other styles of businesses? Which would be most difficult?
(34:29) – Why are Family Businesses cautious to take on debt?
(38:35) – How often is the CEO of a Family Business a member of the family?
(40:44) – How do Family Businesses navigate liquidity, control and capital?
(42:24) – What strongly held belief have you changed your mind on?
(43:39) – What’s the best business you’ve ever seen?
Alex Bridgeman: I think a fun place to start would be kind of reviewing your background and starting from the different family businesses that you’ve been either running or a part of, chatting with. And then I’d love to hear also about the Chicago Booth class that you’ve been teaching about family businesses. There’s so much to dive into, I’d love to hear about all of it.
Jamie Shah: Okay, so maybe I can start with how I even got to family business. Because a lot of people assume that if you’re in a family business, it’s part of your legacy and it’s something that you plan on doing for your whole life. And to be honest, it wasn’t actually something that I thought about doing until I graduated business school. So, I started in investment banking at Goldman Sachs and was there for the two year analyst program. And honestly, had the time of my life with all my other analyst friends, and I’ve still kept in touch with them. And I loved the analyst experience. But I knew I wanted to be in the client side. I thought it was interesting to figure out what happened after you raised that round of funding or after you went public. Like you got all the money now, and now what? And in banking, that’s when you leave. You like go to the next client and do whatever it is. So I decided to join Google to work on the Maps team. And it was a really great experience because I got to now see, like, oh, this is what happens when you have cash and you get to invest in it. And Google is of course, just such a fun place to be. But it was such a big organization. So even if it’s very innovative, it just took a long time to make change. So, I wanted to be either somewhere smaller or somewhere that was able to like bring finance and small business together. I thought maybe startup or venture would be interesting. So I went to business school at that point because I was a little bit lost on where I wanted to be. And I worked for a really great angel investment firm, a venture capital firm called Hyde Park Angels in Hyde Park Venture Partners while I was in business school. And I loved the ability to work with small businesses and to work with startups and to figure out whether or not to invest in them. And then again, I was struck with well, I don’t want to invest in them. Like we would be in these board meetings, and I would want to just like shake the entrepreneur and say, like, no, don’t do it this way, do it that way. Like I wanted to be the operator. I was talking to my dad about this at the end of my two years of business school with University of Chicago. And he was like, “Well, it sounds like what you really want to do is run a business, like it doesn’t sound like what you want to do is invest in one. It sounds like you want to be the operator, you want to have a say.” And I was like, oh, I didn’t actually think about that. So I had got this Kaufmann Fellowship, which is like a VC Fellowship that you can have, and I got an offer in VC. And the last minute, literally, I think the week I was going to graduate, I was like, I can’t do any of that. I’m going to join the family business. And I’m going to see where it takes me. And with my family business, there’s no training, there’s no onboarding. I just showed up to work the first day and my dad didn’t really tell me what to do. So I just sat at the first desk that was open, and the phone rang, and I would just answer the phone and see what the customer said. So I noticed a lot of customers were talking like, “Where’s my order?” Like, “I placed this order, and I don’t know where it is.” So based on what they were saying, I decided like, okay, well, I guess I should work on the operations of the business. Like, they don’t know where their orders are, so how do I solve that problem? So I built out the whole warehouse system. Then the next question was on like the quality side, so I built out the quality system. Next question, there are a lot of like sales questions, so I built out that side. So it all just happened from hearing what customers wanted by just answering the phone. So that was my start with my family business.
Alex Bridgeman: And what’s the family business do?
Jamie Shah: Oh, yeah, we sell amino acids and peptides to pharmaceutical companies and laboratories across the world. So we help enable drug discovery, which is something that a lot of people don’t even think about or know about. But it’s been part of my family for a long time. Like my father started the company in 1981. But his father was a chemist, and on my mom’s side, her father was a chemist, and they actually had an arranged marriage because they were all working in the chemical world together. So, it’s just kind of, yeah, kind of bizarre how it all is like in our family and a very random thing.
Alex Bridgeman: It’s a chemical romance.
Jamie Shah: Yeah, exactly. A lot of puns that can be made about that. So one of the challenges I think working in a family business is that it’s very insular. Like, you know your family business, but a lot of times families don’t really want to share about their families. And I was really interested in learning more. I mean, I’m just like a learner, I love to learn how different people do things. I want to get an idea of like what best practices are. So I went to Northwestern; they had like a really great family business program. And I got to meet a lot of other families who were kind of debating the same things we were debating. And I had decided that at that point, I wanted to get another experience at a different family business to see if our family would ever consider selling our business and what it would be like to have a private equity investor. So, I worked at another family owned business that had sold to private equity investors and got that experience. And it was one that was very eye opening in so many ways, and for me, it really helped reassure that I wanted to be at my own family business that didn’t have any sort of private equity backing, so that I had the liberty and the freedom to grow the business in any way I saw fit, whether it was aligned with returning X percentage to whatever shareholders or whether it was about really pursuing something that was also based on our values instead of returns. So that was an eye opening experience to me. I would also say that the thing that I learned from working in a private equity backed business as the chief operating officer was, because the time horizon is so short, you’re really forced to make somewhat sub optimal decisions for the business. Like you don’t really get to think about what’s the best long term durable solution. And for me, coming from a family business, it was really hard to do that. Because usually in a family business, you’re investing for generations. You have such a long term perspective that you often want to think about, what am I going to implement that is going to be the most durable? And when you’re working in a private equity backed business, it’s like the difference between renting a car and owning a car, like you’re not going to put premium gasoline in it. So that was definitely a challenge for me. So, I joined my family business again and have been working on really kind of reinforcing a lot of the principles that I’ve kind of taken for granted, I would say. So that’s a bit about me and family business.
Alex Bridgeman: So, within the Northwestern program and just other folks you’ve talked with, how do you feel like your company or your family business is run compared to others? Is there maybe three to four general categories of goals or ways of running or operations or missions? Or is it like even more broad than that and there’s perhaps dozens of different ways that family businesses are run?
Jamie Shah: Yeah, there’s a saying in family business that all family businesses are the same, and they’re all different. So they’re all challenged with the same problems. Again, you’re always thinking about succession. Every single family business will have to tackle succession at some point. You’re always thinking about growth. Because as you think about each generation, you’re bringing on a whole new crop of people that now the business needs to support. But every business and every family is so different, that I think what I learned is, yeah, we’re all the same and we’re all different, which is helpful and challenging all at the same time. The thing that was most helpful is that you’re not alone in this. I think I was really struggling for a point in time in feeling like there weren’t any resources really available to people who are running family businesses and next generation leaders in family businesses. So, to just feel like there are other people out there who are going through the same challenges but also the same opportunities was really comforting.
Alex Bridgeman: I’m curious, what was the- what do you think was the most interestingly run family business? Is there one that stands out in your mind for having the most kind of unique set of policies around family or mission or what have you? Like any stick out in your mind the most?
Jamie Shah: In the class that I was in at Northwestern, we had met the Lee Kum Kee family. So they’re the family who does Chinese sauces and flavorings. I think they’re out of Hong Kong. And they’ve been around for like, I’m not even going to get the numbers right, but something like six generations. And what was super eye opening to me about this family was, one, they had so many generations that were in the business, but, two, they really invested in their family. So everybody in the family received some sort of stipend for any sort of educational expense they wanted- any sort of educational endeavor that they wanted to pursue whether it was related to the business or not related to the business, and they really did a lot to educate future generations of the business starting at a very young age. So, I think they had this level of pride in their business that I didn’t really think about for like a long time. Because sometimes in family business, you feel like a little bit of, I don’t want to say like shame, but people are like these are boring businesses. Nobody knows about them. Like I mean, if you asked me, what does my family business do, and I ramble on about something chemical related, like you’re at a cocktail party, and you’re telling someone, “Oh, yeah, I sell amino acids,” it felt like they’re immediately looking at the door, like they are not interested at all in what you have to say. So, I think for me, this is a small nuance, but in meeting the Lee Kum Kee family, I really loved just how much pride they had in their business and how they really valued education, both from a perspective of like, yeah, we will pay for your education, but also, part of that is in instilling this sense of luck, like they felt very lucky and fortunate to be part of that business. So I thought that was kind of eye opening to me.
Alex Bridgeman: Yeah, I remember we talked about how there’s a couple things that are true about really well run family businesses, those being like they’re more stable, returns are higher, and they’re often more trusted. And it sounds like keeping the business in the family and ensuring succession and kind of the long term investment planning that you talked about earlier with your private equity backed experience feeds into that. Why do you think those are generally true of well run family businesses? What goes into the like stability, trust, and returns pieces?
Jamie Shah: Yeah, so there has been research that’s been done on family businesses in general to show that they outperform their counterparts. So what that means is they have superior returns and that they consistently over time have outperformed non family owned businesses since- there’s a Credit Suisse research article since 2006. And coupled with that, the returns are more stable. So yes, during boom times, family businesses don’t earn as much money. But during economic slumps, they outshine their peers. And I thought that was really interesting because family businesses tend to be risk averse. You’re not going to bet the house on something, which is sometimes unconventional because, usually, particularly in a venture backed business, you’re thinking well, more risk, more reward. And then, family businesses, because you’re not thinking that you’re trying to minimize your risk, it’s much more of a steady, stable return. And then, related to that, people say that they trust family businesses more globally. And they would rather work for a family business, which I thought was interesting. I think that really- I’ve actually found that to be the case. We’ve had a lot of employees come to us and say like, we feel like working at a family business, one, you feel good because there’s a face there. But also, a lot of employees have been burned by mergers and acquisitions. And they feel like they don’t have control over their own life because their employment is uncertain. And then that trustworthy factor also means that people are willing to pay more for your product because they feel like you’re more trustworthy. So I think those are like the three pieces that I think are most interesting and somewhat under the radar about family businesses, that they have better returns, they’re more stable, and people trust them more.
Alex Bridgeman: You mentioned earlier how your family business might be boring to many people, like a chemical business, it’s not the most exciting thing at a cocktail party. You’re not running Apple or Google. But part of me wonders if that’s what all of these family businesses eventually lead to, or like that’s what the general makeup of family businesses is because they’re boring and more like less flashy. I can’t imagine if DoorDash, for example, was a family owned business, who knows if it’s going to be around for even the next 5 years or 10 years. So, it’s probably not possible for business like that to become a family business. Whereas like the local Mulhall’s, for example, here in Omaha is this huge landscaping business. They have an indoor nursery and greenhouse and they do a ton of stuff around the holidays. That business is a multigenerational business that’s huge. And it provides very basic services, kind of basic landscaping, you can buy trees there. We bought this Juniper wreath that smells amazing and reminds us of Oregon. But it’s like a very basic service. Like it’s not very fancy. But part of me thinks that’s why it became a family business because it was stable and doesn’t change much.
Jamie Shah: Yeah, it’s really interesting. I think the business models are fundamentally different because in order to build a business like DoorDash, you need like an incredible amount of money. And you need to be able to scale as fast as possible. And the ability for a family to do that is probably somewhat limited. But I do actually think that there are really interesting businesses that exist. I mean, I’m thinking about like my sister, she has a cosmetics line. And it is amazing. Her product is one that people really love and are just like very enthusiastic about, and she runs it very thoughtfully and conservatively, and she has this principle that she doesn’t want to over stretch her boundaries. So, I do think that you can still have an interesting business. But it’s just, I think it is just a matter of how fast and how aggressively do you want to create it. And I think that’s a personal choice. And I don’t think there’s a right or a wrong. I think sometimes people think that venture backed businesses are all kind of like, have a negative reputation because they’re not necessarily thinking about the customer or the employee. And that may be true in some situations. But I do also think that there’s a time and a place, depending on what you’re trying to do. But I do agree with you that there isn’t always this need to like reinvent the wheel, there is a lot of opportunity in just doing something better.
Alex Bridgeman: Yeah, I agree. We talked about that earlier in regard to the different paths of entrepreneurship, and a lot of the common entrepreneurial classes, like for example, some that I took in undergrad were focused on more venture style businesses, and that’s kind of what was the bulk of the topic of the class. But there’s, of course, dozens of different ways to be an entrepreneur. And I’d be curious to hear some of your experience talking with folks who took lots of different paths and kind of maybe some observations you’ve had from the variety of paths of entrepreneurship.
Jamie Shah: Yeah, I mean, the one thing I will say is when I was in business school, I felt like there was really only one path that was discussed, and that path was either you start a company, or you invest in a company. And when you’re starting that company, you need to, step one, create a business plan, step two, raise funding for it. Then as part of your business plan, you need to figure out when you’re exiting that business and what the return on investment is for your investors. And I didn’t actually even realize that there were other types of ways to start companies and to be entrepreneurial. And some of them are not very risky in the sense that you can work for a large corporation and be their internal entrepreneur, which I think is a really cool opportunity. But then there’s also, and you talk about this a lot on your podcast, but ways to either buy a business, and you can buy that either by raising your own fund or through debt, SBA. And even if you’re doing equity, you can do a minority investment. And I didn’t really fully recognize that until after I graduated business school. And I will say even now, business schools, I mean, this is actually the reason why I teach this course at the University of Chicago, is we focus a lot on kind of, again, building the business and the typical venture backed business. We’re starting to talk a lot about entrepreneurship through acquisition, which I think is a really great way to kind of be more entrepreneurial. The challenge, I would say, on the entrepreneurship through acquisition side is it’s turning into this like mini private equity. It’s again, how do you identify the business? How do you search for it? And then how do you flip it in like three years? Versus what does it mean just to build a business for a long time, create value for your employees, for your community, and not necessarily focus on selling the thing, which is more about just creating a profitable business that lasts for a long time. So, I think, yeah, entrepreneurship can be so many different things. But for some reason, there’s only like this very narrow lens that seems to be getting a lot of attention. And that’s like the Shark Tank view. Or even on the ETA side, it’s like how fast can you identify and turn around that business? Which I feel like is selling ETA a little bit short because there’s so much opportunity there. It’s like you found the business and you see value in it, but why do we feel like we need to change hands? Like that short term mindset is one that I feel like can pervert interests that aren’t really beneficial to the community or your employees.
Alex Bridgeman: Yeah, definitely, especially within private equity businesses, there’s that kind of unique or specific focus on profitability and quickly turning things around. One interesting concept I’ve loved talking with you about is how many different kind of almost sets of missions there are for family run businesses. So, businesses that fall outside the private equity realm and are either family owned or it’s the founder still running their business that they bootstrapped for 20 years, each of them kind of have a slightly different mission statement for their business or goal. That doesn’t need to be very grandiose, but just something specific or that’s driving them. What are some of the kind of examples of business goals that you’ve seen within family businesses that you’ve studied?
Jamie Shah: Yeah, so we’ve talked in the past, you and I, a bit about Chick-fil-A. And that’s a really interesting business because they’re so focused on like a religious base value. I think about my family business. And we’re really focused on like what can we do to make our employees proud? That’s one of the values that we hold true. I think the interesting thing about family businesses is that they’re often thinking about very different sets of goals. So the purpose of a family business is for continuity, like you’re thinking of how long you can keep this business running because it needs to support generations. But for a non family business, it’s like what’s the near term share price? Like, what are the shareholders going to think this quarter? And how do we optimize and maximize for that? I think for family businesses, the goal is how do we kind of preserve assets and like the values of the owning family, versus non family, its institutional investors and their expectations. Because those are the people who are holding the most shares. So how do you make them as happy as possible? For family businesses, I feel, again, like the fundamental belief is protecting downside risk, and in a way, they can be quite risk averse. And we talked a little bit about non family businesses, that more risk is more return. So it’s like very opposite. Then, I feel like with family businesses, it’s a lot of incremental improvement. I think I see this a lot in our family business, too, it’s a lot of like baby steps, partially probably to eliminate downside risk. But for non family firms, it’s a lot of like, how do we create stepwise change, like we need to innovate as fast as possible, because if we don’t innovate, then it’s not going to be reflected in our shareholder, in our share price. So, it’s a different type of urgency. And then I think the most obvious one is who are the most important stakeholders, and for family businesses, it’s customers, employees. For non family businesses, it’s like shareholders and management. So I think they’re just like fundamentally different. But there’s a lot that you can learn from family businesses and apply to non family businesses.
Alex Bridgeman: There’s also a number of family business paradoxes you’ve pointed out, one being that- one you’ve even just alluded to is the do we- we have this business, but there’s also a family, like, who are we serving here? And a lot of these paradoxes are kind of like they look at opposing interests but often complement each other. I’d love to kind of hear some of the paradoxes you’ve identified with family businesses.
Jamie Shah: Yeah, so a lot of this research comes from Amy Schumann, who was with the family business consulting group, she’s still with them. And she wrote a book on the paradox of family business. And the one that you just alluded to is family first versus business first. And there’s typically this push and pull in family businesses where they’re thought of as either doing everything for the family or doing everything for the business. And in reality, that paradox is a false choice. It’s not family or business, it’s family and business. And by having family in the business, you’re essentially eliminating the agency problem of hiring a manager that wouldn’t really be seen as vigilant as the owner. So it actually works to your benefit that they’re one in the same. Similarly, there’s this idea of like tradition versus change and feeling like there’s a false choice that you have to make. But actually, again, it works to your advantage because you can do both. Now you have the flexibility to do both. You don’t need to always change in order to continue improving. You can actually hone in on your core set of values that really make you who you are. And it sounds like this landscaping shop in Omaha is similar to that, like that’s kind of the charm in them. And then again, there’s this idea of investing versus harvesting, like how do you know when to keep putting back versus when to take out? And I think they actually play really well on each other and can provide opportunities for both employees to share in in value creation, as well as family members. So, I’m Jain, which is a small Indian religion. And there’s a parable called the Blind Men and the Elephant. And it’s this principle of- in Jainism, the principle’s called Anekantvada, the idea of non absolutism or many foldedness. And it’s the idea that reality is complex and multifaceted. And in this story, there’s like five blind men, and they come up to an elephant. And they’re all touching different parts of the elephant. So one person is touching the tail, and he’s saying, “Oh, it’s a rope.” Another person is touching the body, and he’s saying, “Oh, it’s a wall.” Another person is touching the leg and saying, “It feels like a trunk, it’s a tree.” And in reality, they’re all right. The thing that they are touching feels like that. And they are also all wrong. Because it isn’t a rope or a wall or a tree. There is no right or wrong. And the challenge is that paradox can be really frustrating. And because of the non absolutism, you feel kind of uncomfortable because there’s no kind of sense of reconciliation. But the idea is how do you move from this either/or perspective to a both/and perspective? Like, you can embrace tradition and change at the same time. You can be business first and family first. You just have to realize that you’re not forced to make that decision, you now have the opportunity to make those decisions and to work together on them.
Alex Bridgeman: You mentioned it’s kind of uncomfortable being in these paradoxes. How do you like your family business handles being uncomfortable within these?
Jamie Shah: Yeah, that’s a really good question. I feel like for us, we’re still learning. So sometimes we don’t manage it well. But we’re in it together. But I think for us, it was really important to recognize there was no right and there was no wrong, and because of that, it created a lot of conflict in our family business, in a good way. Like, I think originally, we didn’t- we would avoid conflict at all costs. And again, when you think about a paradox, you would think like arguing is a bad thing, or arguing, how could you even think that arguing is a good thing? But for us, we’ve recognized that being able to have a very strong sense of the importance of conflict and to be able to resolve that conflict, and it helped us kind of create buy in, it helped us move together, it helped us feel like we weren’t leaving anyone behind, which for us was more important. So I think the challenge for us was individual versus group. That was a paradox that we were struggling with. Like, who do you put first? And I think what we learned is you put both first. That can sometimes mean that you’re arguing, but in the end, you move forward together. And it’s not necessarily compromise that we view it as but collaboration that we view it as.
Alex Bridgeman: Yeah, do you think that conflict is good because it forces clarity or something else?
Jamie Shah: I think it’s good because it forces buy in. I think if you don’t have- there’s like The Five Dysfunctions of a Team, that book has been really helpful in bringing light to this topic. But if you don’t have conflict, one, it shows that you don’t have trust. You don’t even have the trust of the foundation to be able to say, I don’t think this or I do think this. So one, I think conflict- like a foundation for having good conflict is being able to trust one another. And then, two, if you don’t ever engage in kind of speaking your mind or hearing someone else’s mind, you’re never going to buy into what they said because you kind of stop short. So, I think without conflict, you can’t have buy in, and without buy in, you can’t achieve results. Because there’s no accountability then, and without accountability, then there aren’t results.
Alex Bridgeman: So within your class, are some of your conclusions that these companies or these family businesses can be studied and some of these elements can be replicated? Or like which of these benefits of family businesses do you feel like can be replicated and used in other businesses versus some that are very specific to family businesses and are really hard to kind of bring that over to your own company?
Jamie Shah: Yeah, I don’t even know if I fully even explained what the class was. So let me maybe step back for a second, if that would be helpful context.
Alex Bridgeman: Please, yeah.
Jamie Shah: At the University of Chicago, I teach a class called Outperform and Outlast: operating and investing in closely held businesses. So it specifically doesn’t speak to necessarily just family businesses. It is the idea of family businesses do outperform and outlast their counterparts, but what can you do to apply those principles to non family businesses? So we talked a little bit about this idea of paradox. Like how do you use paradox to your advantage? So, I think first recognizing what those paradoxes are and recognizing that you are not forced to make that- you’re not forced to choose this or that. It can be both/and. And so that, I think, is something that’s helpful for non family businesses as well, to think about okay, well, I don’t have to always think about just my shareholders. How do I think about a values based business as well that also happens to support my shareholders? How do I make sure those are aligned, that purpose is shared? Similarly, I think there’s a lot of unconventional wisdom in family business. And this is a concept from John Ward who’s like the father of family business. But family businesses, they tend to be much more frugal, they don’t carry that much debt. And sometimes, that I feel like in traditional business school was considered like something that, of course, you get as much debt as possible, then you get to take advantage of the tax shield. And why wouldn’t you do that? But I really think that in family businesses, they tend to associate debt with like fragility and risk, and being able to really understand what true risk is, I think, is really valuable for businesses in general. I also think family businesses tend to have- research has shown that they tend to have better talent retainment compared to competitors. So, being able to know like, okay, well, what is it about family businesses? Well, they tend to be longer term perspective, which is better for their employees, that gives them this feeling of, like we talked about trust, but also gives them a stronger work culture. That’s something that I think could be applied more broadly as well. The idea on like how you decide to spend on capex, a lot of family businesses, they won’t spend more than they earn. So this can sometimes lead to missed opportunities. But in times of crisis, their exposure is limited. So these kind of unconventional principles in family businesses, I think, can be applied more broadly and be used to people’s advantage.
Alex Bridgeman: The debt piece is pretty interesting. Do you think maybe the hurdle in family businesses to take on debt is just so much higher? Like there has to be an amazing reason for us to use debt versus maybe a private equity business where debt is more default and there’s less of a- hurdle is much lower for using debt. Do you think that’s what’s happening? Or is there like a deeper- I love like your discussion on risk, like how does a family business view risk? What does that look like? I’d love to kind of- like debt and risk I feel like are really interesting.
Jamie Shah: Well, I mean, if you think about the cost of debt, it is essentially a proxy for risk. And whoever is taking that risk on, they’re going to value that slightly differently. I think for a private equity business, debt is very much just a math equation. How much debt can you service? And that’s like the basic math question that you’re figuring out. I think for a family, it’s less how much can you service, but how comfortable do you feel servicing that debt? So I mean, you personally, it’s like, okay, if I’m going to buy a house, like, yeah, I could probably afford to pay that mortgage if all these factors are in place, but if I lose my job, or if I decide I want to do something different, like now I don’t have that flexibility. And now that mortgage has now kind of taken on a higher value to me, higher cost to me. So I think it’s much more of a personal question when it’s you and your money and your livelihood. And also that made me think about your generations, both the ones that were behind you and the ones that now you’re hoping to provide for in the future, versus in like a private equity business, it’s very different. It’s, well, how do we take out as much as possible? And then also, maybe, how do we sell this as quickly as possible, so we don’t have as much exposure to that debt? Whereas again, in family business, this is like you’re holding on to this for perpetuity, like maybe forever, ideally, if you can do it well. And do you want to be saddled with that burden for as long as possible, for so long? Probably not. I think the next question to really ask is, okay, well, clearly, these businesses are successful, but a lot of them fail. Like a third of family businesses make it through to the next generation, like that’s not a huge number. And why is that? So how do you set yourself up for success? And how do you manage continuity? And I think the way to do that is making sure that we’ve created a shared value system across generations. And I think that’s something that is actually quite difficult to do, to have this set of values that transcends generations that people can buy into. And that needs to be somewhat adaptable and flexible because different generations value different things. But at the same time, you need to kind of hold just enough the same, which I think again, goes back to this tradition versus change mindset. So some of it is like, okay, these principles exist, but now, how do you do it? And I think a huge challenge in family business is that CEOs tend to stay for a very long time. So, in family businesses, the CEO is generally there, the tenure is like 20 years. In a publicly traded business, it’s like four to five years. And the right answer for maybe the optimal CEO tenure is probably somewhere in between. So I think, the challenge in family business is that when is the right time to let go? And how do you create the right system so that letting go is comfortable for the person who has to let go, and part of that is making sure that they feel like the next generation is able to and even capable of and interested to take on. So there’s a lot of pieces that are moving that make it difficult to actually make the family business perpetuate. But I think if you could make it work, it’s worthwhile.
Alex Bridgeman: How often is the CEO of the family business a member of the family? And does that change over time? Like in generation five or six, is it still a family member? Or by that point, are fewer people interested in it, it’s now most of the time an external CEO?
Jamie Shah: Yeah, there’s actually research, and I think I have this book here, let me tell you, because in family businesses, they all kind of go through a certain lifecycle. The first, of course, its founder owned and led. And then afterwards, it’s probably sibling led, a sibling partnership, and then a cousin consortium. And I would say the CEO or the outside manager usually comes in when it’s too hard for the groups to manage together. So then, it tends to be after the third generation. I think there’s actually research on when that is, and I’m trying to remember which generation that is, but I think it is usually generation three or four. But there’s no, again, like no right or wrong. Like you could very well be a founder who decides I don’t want to pass- I’ve seen this happen, like, I don’t want my children to be involved in the day to day, we’re going to hire an outside CEO. And the children’s responsibility is just to manage the business as owners. So in family business, there’s this concept of the three circle model. There’s the business, there’s ownership, and then there’s management. And in family businesses, there’s the three circle model, and there’s business, which can be viewed as management, then there’s family, and there’s ownership. So, if you think about those circles as overlapping, each one of those people has a different set of interests. So, it all depends on like what you’re trying to optimize for in your family. So, there’s no right or wrong answer. Again, every family is the same and every family is different. But I found, and this is just like what I’ve found from just talking to different family members or different family businesses, that usually is in the third generation where it’s difficult to kind of get all those people on the same page.
Alex Bridgeman: One kind of balancing act within those interests that we talked about, as well as kind of liquidity and control and some want to maintain as much control as possible, or some want dividends or to be bought out. And there’s like a whole bunch of different ways to kind of set up what each family member gets. How is that balancing act kind of thought through among family businesses?
Jamie Shah: Yeah, so the framework that a lot of people use is called the family business triangle. So it’s how do you manage liquidity, control, and capital. So that capital is being used to fund growth, and the more kind of control that you want to give up, then generally, you’re going to take on more outside investment. So, I think it’s a balancing act between all those three pieces. And it really, again, depends on what you’re trying to accomplish to maintain that equilibrium depending on your family. Like some people are very okay giving up some control in order to have more capital so they can grow their business faster. And that is totally fine. I think it’s just important to understand well, these are kind of the three pieces that are playing, factor in your decision making with how much control you want to have or need to have. And I know in our family business, like that’s probably the most important thing we probably over indexed on, the need to have control. But again, now we don’t have to like have a board meeting or present financials to anyone. But at the same time, we don’t get to move as fast as other people. And that’s the trade off that people- that you have to make personally.
Alex Bridgeman: We have two closing questions. The first one I’m really excited to hear your response on is what strongly held belief have you changed your mind on? I’d be curious if there’s anything in family business that you’ve changed your mind on or your family over generations has changed their mind on. I’d love to hear what your thoughts are there.
Jamie Shah: I would say two things. One, I mean, I truly feel like family businesses are gems. Like, there’s a lot of challenges. There’s a whole new set of things that you need to deal with. I mean, sometimes when I tell people I work with my parents, they’re like, I could never work with my parents, I could never work with my siblings, I could never work with XYZ person. And I think when you’re on the outside, and sometimes when you’re on the inside, I totally understand that. But I honestly feel so fortunate that I get to come to work every single day, and I get to see my dad, and I get to talk to my sister. And it’s actually really awesome to get to experience family in a different way. So there’s that. And then I talked about this a little bit before, but just the role of conflict and how important it is to be able to engage in healthy conflict, even if it can be uncomfortable.
Alex Bridgeman: I like that. That’s a great one. What’s the best business you’ve ever seen?
Jamie Shah: I mean, that’s an easy one for me to say – of course, it’s my family’s business. But I say that half joking, but also quite honest. Like in all honesty, I feel like we are truly the luckiest people in the world to have this business as part of our lives. And my dad was able to kind of identify a niche where we’re supporting people who are really changing the world, people who are kind of developing drugs for cancer and diabetes and like huge problems, but also other huge problems like baldness, things that just affect people. And I love that we get to support the scientists and the chemists in that endeavor. And at the same time, it’s a business that is profitable and has great margins. And the people on our team, our employees, are just outstanding. So I really do feel very fortunate that this is the space that we’re in, which is one that, I think again, is one that people don’t think about very often. And of course, our customers are ones that don’t change very frequently. Once you’re with them, and you’re part of their FDA process, it’s very difficult for them to move away from you. So, it’s quite sticky. So I’m very thankful to be in the business that I’m in.
Alex Bridgeman: Yeah, definitely the best one for a lot of reasons. Well, thank you so much for coming on the podcast and talking about not only your own family business but your other endeavors around family business, generally. I hope eventually there’s a stream that I can download of your class and your class segments I’d love to be able to watch one day. But until then we’ll keep having podcasts and have stuff come out. And I’d love to keep reading about all the resources you have. We’ll find a way to link to a couple of articles that you sent me over and we’ll have those for folks to read. I think those would be really helpful.
Jamie Shah: That sounds great. Yeah, my pleasure. I’m happy to chat with anybody who is interested about these topics or wants more insight or anything like that. I’m really interested in exploring this and I think it’s something really special. So thank you for taking time to learn a little bit more about me and the things that I’m excited about.
Alex Bridgeman: Absolutely. There’s so much interesting stuff that you’re working on and covering. It’s fun to chat with you. So until next time.
Join small company investors, search funds, private equity firms, business owners, and entrepreneurs in reading the Think Like An Owner Newsletter.