Family businesses weather recession

Family owned businesses are made of strong stuff according to a new survey.

The PwC Family Business Survey 2010/11 found that the vast majority of these businesses survived the recession because of their ownership structure.

The global survey interviewed businesses on a number of operational and financial elements and the results are in some cases quite remarkable. The vast majority of the local respondents were SMEs who were polled between 2009 and 2010.

During this time, 55% of these businesses showed growth with 23% noting “significant” increase in the demand for their product or service.

Another notable finding is that the vast majority of respondents also believe that being a family owned business helped them cope with the economic slump.

According to PwC Private Company Services National Leader, Andries Brink, this is because these businesses operate with a different mindset to public companies or SMEs with investors to please.

He explains that a family owned business can take a longer term view in terms of profits and dividends and so make decisions during a crisis that serve the business’ sustainability better.

Brink adds that respondents believe that the business is an extension of the family name and its reputation. This is not only a significant competitive edge, but also an important decision making factor.

Longevity

Sustainability seems to be a key focus area for many family owned businesses: 14% of the respondents were third generation decision makers within the business. A further 7% were fourth generation and the biggest proportion – 44% – were second generation.

It is also encouraging to note that 32% were first generation owner managers, indicating a growth in the SME space.

When it comes to succession planning the survey has found that the older a business is, the more likely it is to remain within the family.

In contrast to this, nearly half of the businesses do not have a formal succession plan – the owners want to leave their shares to their family members but the details on this are sketchy.

This does not mean that the businesses are badly managed however from an operational or financial point of view. These businesses are actually growing if one considers that 47% increased their capital expenditure during the period under review. A further 33% kept their capital expenditure on par with previous years and only 20% decreased expenditure (probably due to tough economic conditions).

According to family business expert André Diederichs from André Diederichs & Associates, succession planning remains a huge challenge for family owned businesses. He quotes statistics which indicate that only 30% of family owned businesses successfully move from being a first generation to a second generation business. In addition, only 14% of second generation businesses successfully move to become third generation businesses.

“Succession is not planned and is seen as an event somewhere in the future. This is wrong. Succession is a process not an event. You have to identify and prepare successors who are willing and able to succeed,” Diederichs explains.

“Succession is also dealt with as a process which is separate from the business and this is wrong. Succession is part of long-term business strategy and vital for the survival of the business.”

Family feuds

Because of the specific ownership structures within family businesses, managing family relationships within the operation becomes a key focus area.

There are a number of different strategies to deal with family conflict and the most popular in South Africa are either shareholder agreements or the use of a third-part mediator.

Family council meetings are used by 41% of respondents. Brink points out that this strategy was the most popular in their 2007 survey. He believes that the recent recession lead a shift towards independent advisors,

“It is easy to agree when things are going well than when difficult and strategic decisions need to be made,” Brink explains.

On average, international family owned businesses are older than their South African counter parts and this usually means more formalised conflict resolution practices.

Diederichs says that managing family relationships within a business essentially becomes an extra level of governance.

Decision makers need to “find a sound balance between the interests of the family and the interests of the business.

“Furthermore they must ensure that emotions do not impact on business decisions. It is therefore vital to create governance structures to safeguard the business from emotional decision-making. The best practice is to appoint directors, with good business acumen from outside the family, to the board of directors or to create an advisory board to ensure sound business decisions are made,” he says.

Disagreements can stem from a number of issues. Some of the more troublesome highlighted in the survey include the performance of key family members, reporting to the wider family on key issues in the business and the role of in-laws in a business.

On the positive side, family owned businesses have an ace up their sleeve when it comes to dispensing entrepreneurial knowledge.

Brink explains that it is highly unlikely that a key decision maker will make a clean cut when leaving a business. Usually, the owner will groom an heir and phase in the ownership change.

Afterwards, they will also be on hand to dispense advice, meaning that a new leader has significantly more support than the average SME decision maker.

“In our experience, if you can deal with family relations, having someone around for advice makes a difference,” Brink adds.

Going forward

Brink says their surveys have found that family owned business decision makers are generally more optimistic than their counterparts.

But, being optimistic does not mean that the business will automatically do better. To this end, the survey shows that at least 56% of respondents have reviewed their business plans in the last six months. A further 30% have done so in the last year.

This does not however mean that the decision makers are radically overhauling the businesses and very few are actually changing business models. The majority of businesses have tweaked their business models and expect to do so going forward as well.

It is interesting to note that the local statistics are almost exactly on par with the international trends.

Diederichs says that it is crucial to keep the entrepreneurial flair alive in a family business if it is to succeed over time: “The entrepreneur is normally found in the first generation. If this generation does not expose the second to entrepreneurial thinking then they might not be able to adapt to a changing marketplace.

“But, the structures created in the first generation (the entrepreneurial phase) are not necessarily suitable for business demands later generations will face.”