Ways to help family businesses survive for future generations
Handing over a business from one generation to another is not easy
Family businesses struggle to be sustainable over multiple generations. In fact, most family businesses do not survive past the second generation. It has even been estimated that the average lifespan of a family business is 24 years, which more or less corresponds with the number of years the founder remains in control of the business. This is happening all over the world, and also in South Africa.
This makes the survival of family businesses vulnerable. What can be done to ensure that a family business can be sustained over multiple generations? The authors of this article developed a conceptual framework that can serve as a success map for such businesses.
But first, let us take a closer look at family-owned businesses.
What makes family businesses different?
Non-family businesses operate in two spheres: the business sphere where the operational activities take place and the ownership sphere. In family businesses, the family sphere is added to the business and ownership spheres.
Family businesses operate in a unique context that differs from that of non-family businesses. This includes complicated family dynamics (where emotions, loyalty and an inward orientation can hamper growth), risk aversion (due to high levels of ownership concentration) and business growth (which can struggle to keep up with the lifestyle demands of expanding families). Over and above this, family business also need to deal with business lifecycles, growing competition and new technologies.
… the average lifespan of a family business is 24 years, which more or less corresponds with the number of years the founder remains in control of the business.
This has created a need for advice to family business stakeholders – a need to empower the family business with a simple yet comprehensive tool to manage the business for sustained growth. That is why the core focus of this study is the distinctive challenge of guiding family businesses to be sustainable for multiple generations.
The development and validation of the family business success map
In essence, this study asked: What are the key leverages in family business practice areas that a family business should consider continuously in order to ensure multi-generational sustainability?
To answer this question, research was done in two phases. During Phase 1 (development), the researchers looked at current literature to identify success practices for multi-generational family businesses culminating in a preliminary conceptual framework. During Phase 2 (validation), they asked seven family business experts to review this framework. The outcome of this validation process is an integrated framework in the form of a one-page Family Business Success Map (FBSM).
Phase 1: Developing a preliminary framework
The initial literature review identified five key practices that successful family businesses can follow to ensure the long-term sustainability of their businesses: succession planning, the role of the board, family meetings, strategic planning, and the use of financial planning and management accounts. The intent here was to focus on an initial set of key leverages in family business practice areas that a family business should consider. These practices areas were evaluated and updated in the second phase of the research.
In essence, this study asked: What are the key leverages in family business practice areas that a family business should consider continuously in order to ensure multi-generational sustainability?
Next, the authors developed a user-friendly Family Business Success Map (FBSM) framework covering the success practices for the sustained performance of multi-generational family businesses.
The authors also simplified the theoretical concepts by likening these to a boat’s control panel – typically consisting of a steering wheel, speedometer, fuel gauge, compass and radar. These instruments need to be monitored regularly for the boat to stay on course. Therefore, in the context of this study, each “boat element” serves as a metaphor for an aspect of the family business:
- Boat – the family business
- Steering wheel – succession planning
- Speedometer – board leadership
- Fuel gage – family harmony
- Compass – strategic plan
- Radar – financial management.
The role of succession planning (steering wheel)
Succession planning is critical for the handing down of the family business from generation to generation. This is a complex and challenging process which arises from the different personal, business and financial objectives to be achieved. No two family businesses are the same, which makes it difficult to have one theory for understanding successions. Also, it is important to make sure that the next generation is interested in joining the family business and capable of managing it.
The metaphor used for succession planning is the
steering wheel
that turns the boat in the direction indicated by the rest of the instruments. However, the steering wheel can also take the boat on the wrong course. This calls for proper mentoring of and good support for the successor.
Also, it is important to make sure that the next generation is interested in joining the family business and capable of managing it.
The role of the board as leaders (speedometer)
In this study, “the Board” refers to the business governance body of a family business. This governance body can consist of family, non-family and independent members. The accountability of the board of directors is a central theme of corporate governance. In family businesses, this accountability includes not sacrificing the long-term health of the business for short-term gains. The board of directors must be able to strategically guide the business, monitor management, communicate openly and have a basic understanding of business risks and financial matters. Various authors have indicated that outside board members can contribute unbiased expertise on matters such as executive remuneration, succession planning, changes in corporate control, mergers and acquisitions, and the audit function. Every board should have a board manual outlining the company’s values, strategic plan, goals and evaluation processes.
The metaphor used for board leadership is the
speedometer
. The speedometer measures and displays the speed of a vehicle. Leadership in a family business plays a key role in the speed at which the business grows. Family businesses can fail when leadership fails to take action timeously.
The role of family meetings to foster family harmony (fuel gauge)
Family meetings help to unify and harmonise goals, desires and actions. It was found that family businesses holding regular family meetings expected significant growth. Family meetings, governed by a family council, serve as an important way to handle family disputes and conflicts. Family meetings can be used to develop consensus around key issues and to foster family harmony. Family highlights, family bonding and team-building activities help to promote such harmony.
In the control panel analogy, the
fuel gauge
measures the family harmony where a full reading represents a very high degree of harmony among family members. The more harmonious the family relationships are, the better their chances for a long-term future. Family relationship issues have been identified as a primary threat to the growth and survival of family businesses. Regular family meetings to address both business and family-related matters is an important mechanism to sustain family harmony.
The role of the strategic plan (compass)
Researchers agree that one of the things successful family businesses have in common is a formal, written strategic and/or business plan. However, non-family businesses are 2.7 times more likely to have a formal strategic or business plan than family businesses. Successful family businesses should share this plan with all their employees, not only with family members. It has also been found that family businesses with written strategic plans generate a better profit improvement than family businesses without formal plans.
Family relationship issues have been identified as a primary threat to the growth and survival of family businesses.
The metaphor used for a strategic plan is a
compass
because as a navigational instrument it indicates the direction. In a family business, the strategic plan provides this direction.
The role of cost management accounting practices as part of financial management (radar)
One of the reasons for the high mortality rate of family businesses is the use of fewer management accounting instruments, the lack of specialised management accounting skills, the lack of crucial information about the top-performing and underperforming areas of the business, and blind spots about business risks. The proactive use of management accounting practices is a potential cure for family business failures. Practices such as budgeting and the balanced scorecard can help family members to codify their implicit knowledge and to formalise the strategic planning process of the family firm. The three subsystems of a family business – the business system, the ownership system and the family system – can therefore benefit from using management accounting.
The
radar
function on the control panel represents the ability of a business to pro-actively detect cost-related and other financial information required to support management to achieve the strategic goals of the family business. Management accounting can provide this information.
Compiling the preliminary framework
The outcome of Phase 1 is the preliminary framework to enhance multi-generational sustainability for family businesses (see Figure 1). This framework represents a practical tool to aid family businesses in their quest to become sustainable.
Figure 1: Preliminary framework for multi-generational business success
|
||
Instrument | Critical element | Questions to ask |
Steering wheel | Succession planning practice | Do we have a succession plan?
Are the ground rules for succession clear? Does the plan include development of potential successors? |
Speedometer | Leadership practice | Do we have a board of directors?
Does the board of directors meet regularly? Are there non-family members on the board? Do directors have the competencies to act responsibly, timeously and are they accountable? |
Fuel gauge | Family harmony practice | Do we have family meetings?
Do we have transparent communication? Do we monitor potential nepotism? Do we foster family harmony in our family practices? |
Compass | Strategy practice | Do we have a strategic plan?
Do we revisit our strategic plan on a regular basis? Do we involve our trusted advisors in the process? |
Radar | Financial management practice | Do we use cost management accounting?
Do we use cost management accounting in our strategic decision-making? |
Phase 2: Validation of the framework
During Phase 2, the researchers interviewed seven family business experts: four expert members of successful family businesses, two expert family business advisors and one academic specialist:
- Expert members of multi-generational family businesses: To qualify as an expert member from a successful family business, the business needed to already have third and fourth generation family members as part of its senior management. The expert member needed to be involved in the family business for more than ten years and needed to be part of the top management of the business.
- Expert family business advisors: Family business advisors needed to be directly involved with different family businesses over more than ten years. These family businesses should have had one or more successful successions.
- Expert family business academic specialist: The academic specialist should have been studying family businesses for more than ten years. The specialist must have published at least five academic articles on family businesses.
Although the context of this study is South Africa, the family business experts probed are internationally recognised through the global basis of their institutions. As a result, the principles identified in this study could be universally applied in family businesses aspiring to become sustainable over multiple generations.
… non-family businesses are 2.7 times more likely to have a formal strategic or business plan than family businesses.
All of the family business experts accepted the preliminary framework as a potential tool that family businesses could use to become more structured and sustainable. However, the experts also added to the following elements to the framework:
- Ownership succession: The experts added this to the framework as every family business should have a succession plan that includes both ownership and managerial succession, and which needs to be revised regularly.
- Governance: Two types of governance practices are important for a family business, namely family-orientated and business-orientated governance. Family-orientated governance includes the determination of shared family values, the maintenance of a financial mandate within which the business must operate, space to address unhealthy rivalry between family members, and principles for the appointment of family members in the business. This calls for a formal family council and family constitution with ground rules. Business-orientated governance relates to the application of generally accepted best practices in corporate governance, for example King IV. The experts agreed that without proper governance structures, communication will always be a problem, leading to a situation where emotions rule the business.
- Communication: Clear communication was highlighted as important for the framework. According to these experts, ongoing feedback along with formal employee performance evaluations, for family and non-family members, is crucial for survival. Proper communication practices help to build trust and acknowledge everyone’s position.
- Entrepreneurial orientation: The family business experts indicated that the development and maintenance of an entrepreneurial orientation and culture was critically important because without entrepreneurship and innovation it is difficult for a family business to grow and accommodate the next generation. They also believe a family business needs to be at the forefront of technology, which calls for an entrepreneurial orientation. They said successful family businesses should have the ability to transfer the entrepreneurial characteristics of the business from one generation to the next as the business environment is changing all the time.
Compiling the final one-page Family Business Success Map
The outcome of the second phase of this study is a concise one-page Family Business Success Map which shows some of the key management practices that could be leveraged to enhance the sustainability of multi-generational family businesses (see Figure 2 below).
The sequence of the critical practices was changed in order to accommodate some groupings, as suggested by the experts. The questions under succession planning, family harmony and financial planning were expanded; and the three aspects of governance, entrepreneurial orientation and communication were added. Governance and communication are the two pillars holding the FBSM together, while entrepreneurial orientation forms the foundation of any family business.
Using the Family Business Success Map to start a conversation
Responding to the vulnerability of family businesses over multiple generations, a user-friendly Family Business Success Map was developed using a two-phased approach. The success map depicts the eight key leverages that family business stakeholders can use to enhance the sustainability of their businesses: succession planning practices, leadership practices, strategic plan practices, family harmony practices, financial planning and monitoring practices, governance practices, communication and an entrepreneurial orientation.
The revised FBSM therefore serves as an integrated managerial framework on one page aimed at helping family businesses and their advisors to evaluate and benchmark their current business practices against the identified family business practice areas. These eight practice areas can be used as a starting point to identify gaps and improvement areas. However, family business success spanning multiple generations is not a once-off intervention but the continuous leveraging of key business practices.
In short, the intent of the FBSM is to stimulate constructive dialogue between the various stakeholders of a family business to enhance the longer-term sustainability of the business.
- Find the original article here: Ungerer, M. & Mienie, C. (2018). A Family Business Success Map to enhance the sustainability of a multi-generational family business. International Journal of Family Business and Management Studies, 2(1): 1-13.
- Prof Marius Ungerer lectures in Strategic Management and Strategic Leadership at the University of Stellenbosch Business School.
- Carel Mienie is an MBA graduate of USB. Prof Ungerer supervised his MBA research assignment on the sustainability of family businesses.