By Christiaan Wessels – Futurum Financial Group (Pty) Ltd.
South Africa has a lot of successful family businesses. There are however a few factors to consider when thinking about preserving the family business from the second generation onwards. It might sound easy, but the statistics tells a different story.
The chance of a family-owned business surviving the transition from the first to the second generation is regarded in the region of 30%. Chances of surviving from the second generation to the third seems to be around 10%.
In the US, about 40% of U.S. family-owned businesses transition into a second-generation business, while 13% are successfully passed down to the third generation. Only 3% survive to a fourth and beyond generation.
Risks in a family business
When starting the business, all the responsibility and decision-making lies with the founder. As the business progresses there are more decision makers coming into the equation. Structures with regards to shareholding and management starts to change. As the business moves to third and beyond generations, the gap widens with regards to management, shareholding, etc. This basically means that the non-family members in the business become more.
For obvious reasons there are positives and negatives by having management changed, only if it is the right people in the business. What does this mean?
There must be alignment in the business with regards to what the business ethics are, how do we make certain decisions, how do we bring in other family members from the third and beyond generation into the business? Important to state what the requirements must be to join the business.
The ideal way is to draw a clear line between the business finance and personal finance. Especially if it is a business that must survive for generations to come.
What does a successful family business do?
- They are very focused on unity between key players and family members in the business.
- Living out the values of the business each day and when it becomes tricky to navigate through tough times, the right people were approached to give an opinion.
- Are the next generations’ ambitions and goals the same? Do they even want to be part of the business and do they have a passion for the business?
- There is a clear succession plan in place and how it will work.
- The structure that they have in place with regards to shareholding is solid – there are no uncertainty with regards to the business should one of the shareholders pass away or should the founder pass away.
Having honest conversations between family members in a business is sometimes difficult and pushed to the side. Do not form part of the statistics regarding this.
Solution
A good starting point would be to draw up a family constitution with the family members involved in the business. The person in charge should lead this conversation and must allow for open discussion. The family constitution is not a legally binding document but should serve as the blueprint for how the business must be run for generations to come. How to hire, who to hire, core values of doing business, what assets should be kept and what should be sold. It can also entail guidelines where there is reference being made to tough times in the business and what works and what does not work to get through it successfully.
Make sure the shareholding structure is appropriate and that everyone understands this and is sure how the shares will be transferred. You don’t want family members that is not part of the business knocking on the door each month asking for a pay-checque. Make sure this is addressed adequately and that the gate is solidly closed on this.
All the best and success for the generations to come.