It’s a dream for many – a family business. Working with your own blood, people you can trust, people you can rely on. But can you – really? If you can answer that question, maybe a family business is for you. If not, look out!
When it comes to family businesses, have you heard about the three-generation rule? The first generation makes the money, the second consolidates it and the third squanders it.
It also depends on where you live, according to research.
“Research done by PricewaterhouseCoopers (PwC) a few years ago shows that in Nigeria only 2% of family businesses transition from founder to next generation compared to the global 30%. This means on average 98% of businesses fail in this transition. In Africa most businesses, over 90%, are family owned and managed businesses. The lack of transition has caused the collapse and lack of development in a lot of industries,” says Tsitsi Mutendi, Co-Founder of African Family Firms which is arguably the biggest African family business association in Africa.
Experts say business coaching is the answer. This helps guide the business, identify problems and helps families use their strengths to protect what they have.
“I help family businesses set up the necessary stems when needed and assist the families to know what could be helpful for them and their business. There is no one size fits all to this. Each family is unique and a solution that may work for them is particularly suited to them and their nuances,” says Mutendi.
According to Mutendi, governance and succession planning are the key to passing the business down the generations. Without discipline in a family business, you can almost forget about corporate governance.
“[A successful family business has at least] three generations of transitions where the family learns to harness their conflicts and navigate different interests that family members may have. This is no easy task and requires communication, honesty, transparency as well as intentionality from the family and its members,” she says.
Ahmed Seedat, is a Director at Vector Consulting. He works with family businesses to try to help them function better.
“One of the fundamental causes of failure that I found was that the parents would take the next generation to university and become very proud of that. Once they graduate, they would bring the person straight to an executive role in the business even when they are not ready,” says Seedat.
‘’The problem with that is university prepares you to work for somebody, to manage but not to lead,’’ adds Seedat.
“The ideal scenario is for the individual to come into the business and go through every department learning everything bottom up. This process can take about 18 to 24 months if not longer. That way, they know everything about the business and can offer solutions that actually work,” adds Seedat.
Sedaat also recalls a story of a South African retail fashion business founded 100 years ago. The founders taught their children everything about the business and duly handed it over. Unfortunately, the second generation failed to do the same for the third generation. The second generation frittered away the money and the third generation didn’t work as hard.
“None of the third generation were able to lead. They were not leaders; they were only managers of departments and a few months ago the business went under liquidation,” elaborates Seedat.
Adequately preparing for the next generation means understanding the rules of family businesses.
“These are: implementing collaborative family governance; identifying shared history, values and vision; and using the three as a glue that holds the family together. Then, understanding how to use all this conclusively by allocating the people and processes to get the desired product,” Mutendi guides.
Tebello Motshwane founder of Collective Intelligence Legal Consultants, a consultancy that assists small and medium enterprises with quality legal services, agrees that professional business coaching helps minimize frustration, set clear goals and optimise growth.
“Any business which is well-managed and marketed will attain success. There are various aspects which will ensure that a business is well managed such as having legal and financial affairs in order, hiring competent staff, understanding the market (customer and competitor) and keeping abreast of technological or industry specific trends and changes”.
African family businesses also face limitations not directly in their control.
“For a continent dominated by family businesses our laws are still reflective of a past we would rather forget and taxation among other issues is prohibitive to generational transitions sometimes causing businesses to sell as it is a cheaper option,” says Mutendi.
To add to that, on a continent dominated by family business there is only one university on the continent with a Family business Unit – the Nelson Mandela University Family Business Unit in South Africa.
“Our next generation often leaves the continent and this causes brain and skills drain. We need to start creating educational content as well as knowledge repositories specific to Africa and its regions and experiences. We have a lot we can share with the world and this needs representation. The knowledge must come from us,” Mutendi insists.
All of these issues make it difficult for investors to put money into some family businesses.
“Many investors find family owned businesses overpriced and totally mismanaged. Most are sold because they are going into liquidation,” says Sedaat.
To make it worse, he says most family businesses are struggling to compete with China’s globalisation.
“China’s globalisation has affected the supply chain of many family owned businesses. The latest impact of high shipping rates also doesn’t help. Family owned businesses are looking for local supply and collaboration is taking place in the local economy to make sure that the consumer gets their product but costs for local production are high making market competitiveness difficult,” he adds.
Another issue is the death of a founder and the lack of proper structures. A good example of how these can bite you is Steinberg in Canada. This was a grocery chain which died with its founder. By the time the third generation came in they couldn’t run the business because they didn’t know how. It was sold in the hope of saving it but it soon shut down.
Motshwane urges that when the company structures are right the death of any shareholder, director or employee will not hurt the business.
“It is important for family members who are going into business to conclude contracts between themselves which set out each party’s obligations, deliverables, payment terms and what route to be followed where there is a dispute,” she says.
In order to thrive, Motshwane, Mutendi and Seedat agree that there must be people within the family who want to hand wealth down the generations and they must work as a team.
“Family business has for many years received negativity from people who have the belief that it caused rifts and negativity in the family. However this is not the case or it is not always the case. Collaborative relationships need work. Also our language and belief systems about wealth must be shifted. When one generation passes and wealth must be transferred, there must be transparency and people understanding that your wealth should be grown as well as taken care of. As the famous saying goes ‘With great wealth comes great responsibility’,” says Mutendi.
Family fights can be the worst, family politics can be exhausting yet many people dream of a family business. It can be more precarious than working with strangers but success can be achieved if you are very careful in the way you treat and train your own blood.