Family businesses come full circle

Only three out of every 100 family businesses make it through to the fourth generation. Can this be improved? Yes, with a few simple steps.

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Ninety per cent of start-ups are family businesses. For the family involved, how the business pans out over time can have serious implications, for better or worse, for several generations.

Success factors can turn destructive
Unfortunately, the very characteristic which enables these businesses to succeed in the early stages – financial and physical commitment to the cause beyond that which any employee could be expected to deliver, or put another way, the enmeshing of the family and business goals – are the same characteristics which can ultimately destroy it. The demands of the family and the business gradually diverge and begin to conflict over time.

There are many well known family business dynasties that have managed the medium- and long-term evolution, delivering a great ongoing legacy for the family, employees and other shareholders. These include household names such as Ford, Walmart, Rothschild, Reckitt & Coleman.

Each of them had to face the inevitable conflicting pressures from the family and the business and had to develop their own policies to deal with them. Unfortunately, for each of the great successes, there are thousands that are destroyed by these pressures.

Worrying facts on family businesses
The facts on the table are worrying. A Bournemouth University study in the South of England* found that out of 1,310 family businesses just ten per cent had reached the third generation and only three per cent a fourth generation. This does not mean that 90 per cent have failed within three generations, as many will have started recently (although 53 per cent of the sample already had more than one generation in the business).

The point is that the drop-off is dramatic. Sixty-six per cent intended to pass the business to the next generation and 33 per cent planned to retire and pass on control within five years. So the intention of the majority is to evolve the business smoothly through the next generation, but the stats show (and this is the same in most developed economies) that most will fail.

Lack of skills identified
Why? Some of the reasons can be found in the same survey data. Over half had not identified a successor and 75 per cent that had were not aware if the planned successor had the requisite key skills. Few had strategic, accounting or marketing knowledge apparently, and only 25 per cent were thought to have appropriate people skills.

Here is the rub. The majority had no succession plan and most “successors” who had been identified were either not ready, or not suitable, to take the business forward. As night follows day, the business will decline under their stewardship. They will not perform well themselves and any quality non-family management will soon start leaving.

Vicious circle of underinvestment
Apart from sound management, the other crucial ingredient a business needs to survive and grow is money. This is the second main area where many family businesses are compromised in favour of short-term needs of both the active and passive family members. A vicious circle is easily started of under-investment and underperformance, which may not appear critical at the time, but which inexorably destroys value in the business to the detriment of the whole family.

So the first thing a business family needs to realise and agree in order to get through this mid-stage of development is that the business is already, or will potentially be, the biggest asset of the whole family. If it is put first, ahead of short-term family interests or divisions, it in turn may easily meet the needs of the whole family for many generations.

Management must be professional
To achieve this though, one needs to forestall or reverse the vicious circle and replace it with a virtuous one, where management is at a professional standard and the company is adequately financed, with a clear forward plan. In short, this amounts to undoing the many things that come up that compromise the business for “family” reasons.

Of course, the whole point for many starting their own businesses is to be able to compromise for the family when one wants or needs to. That is the point of many lifestyle businesses and quite right too.

Let’s learn from the US
So in real life, to ensure the business value for the family is optimised over time, the family need to agree a set of principles by which decisions will be taken and disagreements, if there are any, will be resolved. In the US Family Councils, backed up by a constitution setting out these matters and the approach to be taken, are common. They provide a rational framework that the family has signed up to, which then becomes a powerful tool as issues arise.

I believe these must become the accepted norm in the UK too for any serious family business. The trick in creating and implementing them is that they are custom built for your own situation and provide a superb opportunity to bring out and understand the various family members’ and their spouses’ views about the business and their personal goals inside or outside the business – an essential part of the matrix.

*Source: Bournemouth University Business School, Study of Central & Southern England – Data from 1,310 Family Businesses, Sept. ‘99

Peter Williams is a serial entrepreneur and co-founder of Myles & Co, an advisory firm focusing on family and business strategies for family business owners. For further information contact pw@mccl.co.uk.

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