Governance encompassing sound succession planning is the key to family businesses' evolution through generations, 2M Management Consultancy managing director Mario Duca told The Sunday Times.

Relevant to any family business whatever its core competence, this notion will be the theme of the second Annual Family Business Conference at the Radisson Blu Baypoint Resort, St Julian's, on January 21. The event will launch a joint venture 2M Management Consultancy has just entered into with Family Business Solutions Ltd of Scotland, one of the taught leaders in the sector in Europe and the largest concern of its kind in the UK.

Family Business Solutions is a spin-off from the Centre for Family Enterprise at the Glasgow Caledonian University. Its two partners, Ken McCracken and Barbara Murray, are researchers in family business issues.

Maltese and overseas team members of the new company - FBS2M Family Business Consulting - will address conference delegates.

Mr Duca established his Pietà-based open management consultancy three years ago to provide services solely related to family business issues after identifying a gap of provision of services to this fundamental economic group.

Family business consultancy is a relatively new niche area in Malta - most services offered to these business structures locally are finance- and law-related. 2M Management, in turn, seeks to offer specialised advice on family business relationships and planning. Its first Family Business Conference showcased family firms' diversified structures.

Mr Duca explained that the family at the core of the firm is the prime factor differentiating family businesses from other commercial organisations. Many, however, have an Achilles heel. Families tend to take their business for granted: Because of the familial links, these businesses often do not see the need for governance and usually rely on the head of the family for leadership and guidance.

"One crucial factor that is often overlooked by these business structures is succession planning," Mr Duca pointed out. "Problems arise when, as the family grows, new family members join the business and there are no policies governing their entry into the fold. In the olden days, children would leave school and join the family business straightaway.

"The scenario is completely different now - family members must possess the required education just like any other candidate for the posts they aspire to occupy, if the company is to be successful and competitive. Family business directors are a case in point. I have found that many directors are not even aware of their legal responsibilities and obligations as they have no training in directorship."

Mr Duca said smaller Maltese family business still tended to be run under traditional, old school practices, but larger entities have re-organised and many have formal family agreements in place.

Conflict is a major threat to the survival of family businesses and many issues are governance-related, Mr Duca pointed out.

Governance comes in different guises: Family businesses may choose to establish a family office which would lay down family policies that cover matters like establishing a trust to fund the education of the second generation, or the criteria under which relatives are remunerated.

Mr Duca emphasised that it is imperative that these policies are established in good time before the fabric of the business becomes more intricate.

"Once there is a conflict, family members dig in their heels and problems become increasingly difficult to resolve. We always recommend families come to the table and lay down the rules of the organisation to avoid conflict arising in the first place. In that way, every member is aware of the parameters and the future of his or her role.

"The larger the family nucleus becomes, family and business matters become increasingly intertwined and planning for the next generations tends to be overlooked. It is a crippling mistake. Formalising matters ensures that all family members are able to enjoy the wealth generated by the business if they abide by the rules."

Despite the potential internal pitfalls, many family businesses evolve and thrive. A family business is the most flexible commercial structure and is usually one of the best performers when it comes to adapting to new and challenging economic scenarios.

Mr Duca pointed out that throughout the current crisis, most family businesses did not reduce their headcount and have proven to be the economy's motor in lean periods.

They are the backbone of Malta's business community. Up to 98 per cent of Maltese businesses are micro and small and medium-sized enterprises - 70 to 75 per cent of these are family businesses, varying in size from firms of two people to companies and groups in their fourth or fifth generation.

But several factors, like the lack of a business constitution, could prove fatal. Mr Duca said 70 per cent of first-generation family businesses fail to make it to their second generation. Just 10 per cent evolve to their third.

FBS2M Family Business Consulting will offer tailor-made solutions to its clients through a 'what-why-how' approach.

"Family businesses stem from enterprising families," Mr Duca pointed out. "They are people who want to generate wealth by working hard. We look at why a family wants to work together, the objectives of the ensuing company, and the life of the family before seeking to identify suitable business solutions to a specific structure.

"Family business advisory seeks to be as prudent and diplomatic as possible, but it can be painful. Intergenerational issues are complex - not all relatives may have the right, the qualifications, or the enthusiasm to join a family business. There have been situations in which we have advised a family to divest of its business because it was in its best interest. In that scenario, advisory takes on the guise of asset management."

Advisors may develop organisational structures and establish a family asset register. Some family businesses tend to think of their company as their main asset but it often turns out that they possess art, investments and considerable goodwill. Tax-efficient succession issues also come into play as the future of the business is mapped out.

Mr Duca said FBS2M aspires to be the motor to make Malta's family businesses more profitable and robust. Among the company's immediate plans is the setting up of Malta's first family business association to create a forum from which different family structures can learn and share experiences on their path to growth.

FBS2M, in turn, seeks to expand its advisory function in other locations in the Mediterranean.