Family businesses difficult to sustain | By Ikram Sehgal

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Family businesses difficult to sustain

DIFFICULTIES are present for all family businesses regardless if they are run by first, second or third generation.

Once established the difficulties will get easier for family business in later generations. What really leads to the failures of family business in the second or third generation is the difficulty in succession planning and handing over the business.

There are deeply rooted psychological hurdles to be taken by the founder/father of the company who had created it with his sweat and effort; the company is the legacy of his life and he wants it run by his children in the spirit he had created it.

He may also fear that handing over responsibility makes him dispensable; the son may resent his interference or even advice and want him out.

If there are disagreements between the first and second generation about how to handle a situation, serious family trouble is inevitable.

The son may have a business education from a modern university and feel his father is too traditional, too stubborn and not flexible enough to handle matters under modern circumstances.

In many cases the younger generation feels that the older generation is more emotionally attached to employees than the practice western corporates permit.

And finally, the difference of business and even family values between generations may create a rift.

In case there are more children available the founding father will have to decide which of his children is most suited to run the family business.

In case of more than one suitable child there may arise competitions, even fights between siblings.

It takes a lot of communicative power, trust and accommodation to overcome such problems.

Take the German family business of the Bahlsen family that are leading in the “bakery/cookie” and “nimco” market in Germany, a succession fight threatened to ruin the business.

Therefore the company had to be divided between the contenders into ‘sweet’ and ‘salty’! The same happened with Adidas.

The feud between two brothers and shoe manufacturers, Adolf (“Adi”) and Rudolf (“Rudi”) Dassler, in the latter half of the 20th century led to the division of the business and of Adidas.

With the creation of Puma, they became two of the biggest shoe manufacturing companies, and started a long-lasting conflict, reflected in rivalries between football clubs and a culture of animosity between Puma and Adidas employees.

The conflict even divided their home town. Another case is the one of the Italian fashion brand “Armani”.

The founding father Giorgio Armani had no children and handed over the running of a part of his company to his niece.

Recently he announced that under his succession plan part of his fashion empire will be transferred to a foundation he has created in his name and that his heirs will hold the remaining stakes of the group.

In other cases the sons/daughters of the founding father did not take interest in taking over the business and opted to find his/her own way in life, running away from the obligation of a business and a family with set rules and values and the business had to be sold or run by a foundation/board of directors.

A growing number of family businesses are succeeded in the next generation by a female. According to a study by Forbes Magazine, currently, 24% of family businesses are led by a female CEO or President, and 31.3% of family businesses surveyed indicate that the next successor is a female.

Nearly 60% of all family-owned businesses have women in top management team positions (MassMutual American Family Business Survey, 2007).Of the non-family firms in the Fortune 1000, only 2.5% are currently led by women (Fortune magazine, 2007).

Sometimes the hand-over to the next generation does work out. Perhaps education, or family loyalty provokes commitment and the business thrives on.

But so many times, that isn’t the case.It is so often that the 2nd generation comes in and turns a once thriving operation into nothing more than remnants of what was and thoughts of what might have been; and when that happens there are some consistent reasons why.

One of the means to make sure that the next generation is successful is a close family relationship.

Children could grow into the business the father or parents have built. They learn by doing the joys and sorrows and pick up the spirit of the enterprise, the values by which it is run.

Often children are not given enough attention because the parents work so hard. That may later backlash when children are not feeling themselves part of the family effort. Spoiling the next generation is also not a good idea.

It is too often that the 2nd generation feels entitled. It isn’t uncommon that the company is handed to them on a silver platter, perhaps paying nothing and immediately being put into senior management.

This sense of entitlement is risky as in many cases the new owner doesn’t learn all aspects of the business, and/or they just don’t appreciate what they have and the opportunity associated with it.

Most of the family-owned businesses need to have mediation, succession and progression plans, they have vanished due to the non-existence of business rules.

The constitution should carry clauses defining procedures and conditions for hiring sons-in-law and daughters-in-law, etc, retirement plans of family members and a proper procedure to welcome the next generation into the businesses.

Leadership should be given on merit rather than seniority within the family members. If the family lacks a suitable person for leadership a CEO may even be hired from outside.

Families are globally under pressure and falling apart, apart from everything else, family businesses depend on family.

That is certainly a problem in the West, but it doesn’t escape eastern Asian societies. This process is driven by the speed by which the world, technology, lifestyles and values are changing.

There is a gap between the generations so that experiences that the elder one has made are no more relevant for the next generation because by then conditions have changed so much.

Another problem is the rising aggressively in the business world, the need to ever fight for larger shares in the market that undermine the values of a more considerate, family and people-oriented business style of family businesses.

One of the major tasks of a business founder is to give a maximum thought and care to the preparation of the next generation to run the family business.

(This is the third part of a series on “family business”, Ikram Sehgal gratefully acknowledges the research-in-depth by Dr Bettina Robotka.)

—The writer is a defence analyst and security expert, based in Karachi.

 

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