In the third of our series on family firms, Peter Leach, Juliette Johnson and Daniel Sacerdoti, of BDO Centre for Family Business, explain the pitfalls and how to avoid them.
Life in family firms can be stormy
Family businesses form the backbone of both the UK and world economies. Research has found that some 50% of the UK private sector workforce is employed by family businesses.
A family enterprise represents the coming together of family and business, which are diametrically opposed in their outlook.
This often tempestuous relationship gives rise to a particular set of challenges that family businesses must overcome to survive, but also gives the family business strengths that few non-family companies can replicate.
The potential pitfalls facing family businesses are numerous and can be terminal, the good news is that many of them can be predicted and overcome with appropriate planning. Two key issues are succession and communication.
The issue of succession is a particularly unpalatable one, as it reminds the older generation of their mortality and requires them to make some difficult decisions.
The result is often a dirty mess swept under a rug. Failing to plan for succession is planning to fail, and one reason why only 13% of family businesses continue beyond the third generation.
Conflict is inevitable, the key is whether you handle it well
Succession planning need not be traumatic. By tackling the issue well before it arises, the expectations of all those involved can be managed and a considered plan can be enacted in a controlled manner.
Succession planning should be separated into the succession of ownership and management, for example the best solution may be that the ownership of the business remains within the family but the management is left in the hands of outside professionals.
Business decisions should be taken for business reasons, not family reasons, as often happens.
Giving everyone a say
The key to "success in succession" is to start early. Decide what your vision is for the business. For example, is it something to be passed down for generations to come or is now the time to sell?
By involving others in the process, you will gain valuable opinions, vital buy-in and manage the expectations of all concerned.
If the business is going to be passed to the next generation, who will run the business? If it is going to be family run, how will the next leader be chosen and later prepared for the role?
One solution is to allow the next generation to choose from amongst their own ranks, rather than a parent making the difficult choice between children.
Communication, or lack of it, presents another complex set of challenges for the family firm to surmount.
Typical of the problems encountered is that of "assumptions". Often, difficult conversations are only touched on or skirted around in order to avoid the pain and conflict that they may cause.
This leads to family members making assumptions about the views of others or the situations that they are in.
When it comes to the crunch, they are often surprised to learn that the assumption that they have held for years is far from reality.
To communicate successfully, it is important to set the ground rules and clear mechanisms to structure and develop communication.
Conflict is inevitable, the key is whether you handle it well or allow it to destroy the business and/or the family. Conflicts should not be personalised.
The key differentiator for family businesses, and the glue that holds them together, is the values set of the family.
By preserving and perpetuating the values within the family, the long term prospects for continuity and success are significantly increased.
Key to this is working together to articulate these values so that all can understand what they mean.
With foresighted planning, family businesses can continue to flourish for generations.
Consider the world's oldest family business, Hoshi Ryokan, this Japanese hotel was founded in 718 and is now in its 46th generation of family ownership.
It has not always been smooth, but with careful planning and open communication it can be done!
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