Sustainability is an age-old problem for businesses of all shapes and sizes across the entrepreneurial landscape. Measuring the success of non-family businesses is typically generational, whereas the judgement on family businesses is over a longer timeframe with sustainability analysed over decades.
Considering that one job in three within the UK is family business-based (IFB 2008), an understanding of the phenomenon which leads to the vast majority of family businesses failing to progress to the second generation and even fewer to the third is essential. In short, why do so few family businesses succeed at sustainability with only 1 in 10 surviving to the third generation (BERR).
The ability of the family business to disseminate the tacit and explicit knowledge required to deliver competitive advantage is at the heart of the successful succession. The central drive for sustainability, coupled with familial ownership and management, delivers a unique identity. The stakeholders of the succession process are the family, the founder, the successors and the advisers. Each can be a significant reason for success and equally the cause of failure. The article will continue by discussing these areas along with conflict which acts as a further primary cause of the family business breakdown.
The successors’ role
Lost tacit knowledge and the inappropriate replication of old decisions can lead to poor quality successors and an inability to deliver the same added value as the previous generation. Encouraging the potential successor to gain external commercial experience and either quality educational or practical expertise will provide the tools to aid independent decision making. It is important that this encouragement does not lead to a stifling sense of pre-destiny but provides the opportunity to develop ideas and independence.
The role of the founder
The majority of founders refuse to discuss succession plans and continually change retirement plans and dates, aiming for an individual sustainability. The perception of indispensability becomes endemic and represses the next generation; so firm plans are needed to avoid the ‘just five more years’ sentiment. The overall strategy for the founder will include addressing their financial, business, family and psychological concerns amidst a backdrop of a strong board and an established peer network to enhance the succession potential. The founder can further play a part by helping to develop a robust family business culture that will endure without their central leadership.
Areas of conflict and resolution
Conflict can greatly affect the chances of developing a sustainable family business through the generations. Typical conflict issues include the capacity and capability of the successor, family issues that directly affect the business, poor communication, and non-executive shareholder issues.
Non-executive family shareholders are those individuals or groups that hold an ownership stake but are not part of the day-to-day running of the business. Arguments typically develop around the direction of the business, the dividend policies, the executive remuneration policy, the succession policies and other family employment rules.
The implementation of a family charter and family council can go some way to addressing these associated issues and can give a formal feedback channel to address emergent and long-term issues that the family members face with the help of advisers.
The role of advisers
Trusted, knowledgeable and experienced advisers can deliver detailed input to the succession strategy via skills audits, family charters, forecasts and business plans or they may simply act as a sounding board throughout the process.
Integral to succession success are the actions of the family. The introduction of the family charter can aid the long-term reduction of conflict. Included in the charter would be a set of rules on the entry and exit of family members to the business, capital rights of each participant, the salary and bonus structure enjoyed by the members, and a route for mediation resolution.
Evidently, the facets of the family business problem are inter-related, no more so than the connections between founder and successor which exist in adult-child and founder-successor forms. This creates tensions and blurred bonds that will often drive the ultimate outcomes and sustainability. It is important that the relationship becomes an adult-to-adult rather than adult-to-child during the antecedent phase of the succession process. This will create the change dynamic and aid the removal of ambivalence via a combined professional-emotional bond.
Bringing together the pertinent complex issues and strategising as a whole leads to enhanced opportunities for the sustainability of a key part of the global economy; family business.
Of course it matters…
This article began by asking whether sustainability in family business matters before moving onto a strategy for improving the success rate. Maybe there is space for an alternative view of family business sustainability that takes a step back from the prescribed wisdom.
It may be worth considering that a large number of family businesses only ever intend to ‘survive’ for one generation; the available figures for survival rates do not examine the thousands of businesses that provide funds and resources to the next generation and their successors to continue entrepreneurial endeavours outside of the banner of the initial family business. The ‘failure’ rates may be hiding a sustainable business family ethic developed from within the initial family business too.
About the Author - Richard Alun Jones, Commercial Finance Director who can be contacted on firstname.lastname@example.org