The strength of a successful first generation family business is often the vision, energy, tenacity and experience of the original, together with its ability to adapt since it does not have complex governance structures. However, as the family and business grow, the strengths of a family business can become its most significant weaknesses if it’s unable to evolve beyond the original owner.
What is notable about family businesses is survival rate from generation to generation. The transition from one generation to the next can often be one of the most problematic and least planned for events in a family business.
At the heart of every family business is usually a strong and passionate individual who is intrinsic to its success. Such individuals can be reluctant to pass control to a successor, or deny there is a need to change, and many stay beyond a time that is reasonable given the options available to them.
Furthermore, it can be alarming to find that a founding or current owner could pass away, or become unable to act in their current capacity, without providing some form of legal mechanism document or succession plan regarding their wishes and the transfer of their business.
Succession planning is critical to all companies. The companies that succeed and prosper through the generations are those that have put the business first and embraced change brought about by economic, technological and environment shifts. A succession plan can address the who and the how. However, the when is often the unknown, although consideration and agreement of trigger events is worthwhile.
Self-interest, different interest, inability to differentiate between ownership and management, weak leadership, lack of governance, poor communication and management skills, resistance to or inability to cope with change, family tensions, and unwillingness to open doors to non-family members are all common features of family businesses that fail the transition. An effective succession and transition plan can address these.
Business objectivity – being able to stand back and take stock – is key to survival. The decisions made as a business owner may differ significantly from the decisions that would be made if the family considerations were given priority over the business’s needs.
Plans, mechanisms and frameworks that are understood and agreed upon enable a smooth succession process, one that is not damaging to either the departing family leader or incoming successor.
While gentle disengagement of an owner may be hard to achieve, there is no reason why a phased departure cannot be implemented, with the business benefiting from their wisdom and experience while at the same time allowing change.
Family and owner managed businesses are often founded on strong relationships and what in the due course of time become gentlemen’s agreements and family traditions. Structures and mechanisms of authority tend to evolve by experience or default rather than design. However, there often comes a point where neither tradition nor experience will be sufficient.
Family businesses in the early stages of establishment require less complex planning structures and frameworks than those that have been running for a number of years and are already employing various family members. Business growth gives rise to the need for a more structured corporate governance framework. Proactively addressing the conversion of tradition and experience into a structured corporate governance framework, should pay dividends rather than being forced into dealing with governance structures in the midst of a significant business event.
For a family business, a primary concern is that any initiatives or framework are not implemented at the detriment to the business continuing to operate in the spirit it has done to date. Any professional advisor needs to be sympathetic to this.
While the need for more robust corporate governance is often recognised, the value derived from family governance remains relatively unrecognised as an essential element in governing the family and its interaction with the business. As one generation transitions to the next, with the addition and inclusion of spouses, children, in-laws and grandchildren, bringing different viewpoints and experiences, the relationship between family and business becomes more of a challenge to manage.
Recognising these challenges and establishing some form of family council helps to address these challenges. This gives family members an opportunity to meet and discuss the current and future state of the family business. They can establish policies or strategies on matters affecting the family and their shared vision can be jointly represented.
The benefits of establishing a family council could include improved business performance through better management of family relationships needs and expectations, by fostering enhanced trust and communication.
Family businesses make a significant contribution to any economic, social, industrial and cultural infrastructure and their survival is paramount. To discuss succession planning and other family business matters, contact Raphael Aloisio, financial advisory leader at Deloitte Malta on raloisio@deloitte.com.mt. For more information visit www.deloitte.com/mt/familybusiness.