The dynamics of running a family are complex enough. Throw in a business and it’s easy to see why so few family businesses survive into the third generation. Staying in business means learning from those that have failed.
What lessons can family business owners draw from some of the more spectacular family business collapses? The stories are about family businesses getting in trouble when they over-extended themselves and weren’t structured to manage expansion, or when they failed to adjust to changing markets. They are very different stories but they have one theme: the protagonists failed to read the market. These are mistakes that any family business can make.
Founded in 1927 by UK-born Harry Lea, the company that was once Australia’s leading chocolate and confectionary maker producing sweet treats such as Rocklea Road, soft liquorice and Bulgarian Rock candy, was placed in voluntary administration in 2012. Sales had fallen by 20 per cent over the previous five years and the company posted a bottom-line loss of $3.3 million in 2011 after writing down the value of obsolete stock and booking restructuring charges.
With store numbers falling, the company had also been dogged by in-fighting between siblings over the family empire, not to mention a protracted legal battle with Cadbury over Darrell Lea’s use of the colour purple.
Darrell Lea failed to keep up with the increasing competition from premium chocolate makers like Max Brenner, Haighs, and Lindt. They had the niche Darrell Lea was losing. Darrell Lea came unstuck because it had dominated the chocolate world for so long that it didn’t see the market changing.
Companies like Lindt are at the higher end, opening Lindt cafes, Haighs have their own stores but Darrell Lea found itself in the middle of the road, selling its brand at outlets and at chemists, newsagents and petrol stations -- all very downmarket.
Haigh’s had also transformed much of its range to fair trade and organic, Darrell Lea failed to do that because the family was stuck in the past days of glory, refusing to see that the world had moved on.
Kell & Rigby
New South Wales construction giant Kell & Rigby, a family company spanning four generations over 102 years, closed down in 2012, owing money to employees and contractors.
A multiple winner of Master Builders Association awards, it had been involved in some of the biggest projects in the state, including the War Memorial in Hyde Park, the renovation of Sydney Town Hall, the Sydney Apple store, the State Hockey Centre, Epping RSL, Sydney University, the ANA Hotel and Parliament House Canberra.
The firm, which had been through two world wars and a depression, ran into trouble when it moved from its traditional field of commercial construction into the residential market.
The company wasn’t prepared for the extra costs that would bring. Losses from apartment projects weighed on the family-run business and it was propelled into financial difficulty in the late 1990s. One development recorded an $11m loss and a further $4m in legal costs and defect rectifications.
James Kell, the managing director whose great-grandfather founded the business, said the company was not ready for the transition into apartments.
"The traditional builder contract model for apartments does not work," he told The Australian Financial Review at the time. As a result, the company’s creditor ledger blew out. Creditors who voted to liquidate the century-old firm were told they would get nothing of the $16.18 million they were owed.
The firm’s 125 employees were reliant on the government safety net to pay most of their entitlements.
While Fairfax is now making profits and publicly listed, the experience with Warwick Fairfax was the beginning of the end of the family's involvement in the business it had created back in 1841 when John Fairfax bought The Sydney Morning Herald, resulting in generations of the Fairfax family controlling the company.
The 150-year-old family-controlled company was put in receivership in December 1990 after a disastrous takeover by young heir, the then 26-year-old Warwick Fairfax, an Oxford and Harvard graduate.
An attempt to re-privatise the company with the help of some dodgy West Australian entrepreneurs, he had launched a debt-fuelled $2.5 billion bid against all advice and family counsel. Indeed, Young Warwick was so convinced he was on the right path that he forced out the older Fairfaxes, including his half-brother James Oswald Fairfax and cousin John Brehmer Fairfax.
Then the stock market collapsed and the company was left with $1 billion in debts. The company was put through various traumas, including an attempted takeover by Kerry Packer in 1991. The company would survive to become today's Fairfax Media but it would no longer be controlled by the family.
It was the end of a dynasty. Today, no Fairfax family member serves on the board. Like Kell & Rigby managers, Warwick Fairfax was completely out of his depth. Following the debacle of the attempted takeover, Lady Mary Fairfax told the Sydney Morning Herald that her son “had no idea what he was doing”.
The lessons for family businesses? Adapt to a changing market, know what market you’re getting into and take advice when adopting a risky strategy.