This article originally appeared in the March 2015 issue of Smart Business Philadelphia.
In light of the sheer volume of short-term challenges businesses face, it can be easy to forget to focus on activities that lead to long-term success.
“Companies generally don’t demonstrate success over decades by accident,” says Christopher Meshginpoosh, director at Kreischer Miller.
“When you analyze the traits of those that are successful over the long term — that is, those with sustainable businesses — many common themes emerge.”
Smart Business spoke with Meshginpoosh about the common traits of sustainable businesses.
What do executives at sustainable businesses do differently than others?
One of the obvious things is that they do a better job of focusing on long-term objectives. This is an area where family businesses often outperform others. Because of their sense of obligation to the family, owners tend to make decisions based on the potential impact on future generations rather than on near-term results.
Are sustainable businesses often more frugal than others?
There are times when all businesses tend to be more frugal, such as during economic downturns. One factor that contributes to long-term success is managing costs with the same degree of urgency in both good and bad times. This is another area where family businesses tend to do a much better job. They often avoid committing to unnecessary fixed costs during good times, which reduces the risk of losses during economic contractions.
Another benefit of lower fixed cost levels is that it reduces the need for layoffs during a downturn, which can foster employee loyalty and reduce long-term turnover rates.
How do sustainable companies measure their performance?
They tend to focus on traditional profitability and leverage metrics even when others no longer think they are important. Remember the dot-com bubble? There were plenty of companies, investors and analysts that said profitability and cash flow did not matter.
While it’s possible to trade profits for revenue growth while capital and credit markets are open, it can be a recipe for disaster when the economy tightens. Closely-held businesses often thrive in this regard because the higher cost of capital requires that they monitor profitability, cash flow and leverage.
Are there aspects of long-term success where public companies have the upper hand?
Public company boards often do a much better job focusing on management succession plans. Additionally, incentives offered by public companies — like stock options or stock awards — can help them lure top talent. Private companies also have a variety of financial incentives at their disposal, such as phantom stock programs or deferred compensation programs.
How do sustainable companies keep employees engaged?
They don’t rely solely on economic incentives. Many studies have shown that employee satisfaction is highly correlated with the level of control or autonomy granted to employees. This is where family businesses often struggle, because granting an outsider a seat at the table can be difficult.
Unless there is an unlimited bench of talented family members, a family-owned business may not be successful in the long-run without granting some form of managerial control to outsiders.
What approach do these businesses take toward mergers and acquisitions?
These companies tend not to bet the farm on risky acquisitions, such as those involving large targets or those that require a substantial amount of debt financing. Avoid those two, and your odds of thriving in the long term will dramatically increase even if a particular acquisition doesn’t turn out as planned.
While there will always be risk in business, adopting some of these techniques can reduce risk and increase the odds that your business will outlast you. ●
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