SHARES

Why family businesses fail

The chance of a family-owned business surviving the transition from the first to the second generation is in the region of 30%.

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 tell 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%. The chance of it surviving the transition from the second generation to the third seems to be around 10%.

In the US, about 40% of family-owned businesses transition into second-generation businesses, while 13% are successfully passed down to the third generation. Only 3% survive to a fourth generation and beyond.

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 start to change. As the business moves to third generations and beyond, 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 of having management changed, but 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 generation and beyond 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 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?

  • It is 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 have a passion for it?
  • There is a clear succession plan in place and how it will work.
  • The structure that is in place with regards to shareholding is solid – there is 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.

If you only earn a rand based income, try to generate an income in a different currency like USD. If you generate business from cross-border activities you should have a look at setting up an offshore structure that is more tax favourable and helps create wealth offshore.

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 are not part of the business knocking on the door each month asking for a paycheque. 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.

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Christiaan Wessels

Futurum Financial Group (Pty) Ltd.

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