Family bonds bind businesses

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.


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.”

Contain the clash

How to close deals and deal with conflict

In any business, partnership or joint venture, there will be conflict.

Mostly, SME decision makers will enter the fray thinking of the outcome in terms of winners and losers.

Similarly, when these decision makers enter into negotiations with a potential partner, client or supplier, the battle lines are often drawn around who will win and who will lose.

Negotiation and conflict resolution are arts of the business world and one needs to know how to play the game.

How to haggle

When SME decision makers enter into negotiations on a deal, they accept that it is a give and take situation. Usually, everyone wants to be the taker but this is simply not the reality.

Big business will always try to negotiate from a position of strength and Business Partners Executive Director, Christo Botes, says you cannot negotiate as an SME if your back is against the wall.

“If you back off continually and constantly cut your margins, you will lose the other party’s respect. Your reputation in the industry can also be adversely affected,” he explains.

“You need to stand your ground on matters of principle and never allow your integrity to be questioned.”

Jan Steenkamp, the Executive Head of Sanlam Cobalt, echoes this: “Before you enter into a deal you have to be sure of its purpose… It is natural for people to try win at all costs and get all the benefits stemming from a deal. When you try to get too much, it almost always leads to conflict.”

It is also important to be transparent and honest and you need to balance your needs and the other party’s expectations.

“Never bluff – if you create a perception that is not accurate, you will be caught out and you will lose your credibility.

“When you go into a deal you need to ensure that the deliverables are well defined for both parties… you need to define the end goal upfront and take the emotion out of the deal,” Steenkamp says.

It is called batna

Gibs’ Associate Professor Albert Wöcke, says whenever you enter into negotiations, you need to set a BATNA: the Best Alternative To a Negotiated Agreement.

“People think they need to compromise, compromise and compromise until everyone is happy. Or, they try to win at all cost,” he says.

Wöcke explains that once you have set your limits – your BATNA – you enter a negotiation with a sense of power. In addition, if you have set and defined limits, you will know when it is time to walk away.

He adds that not all negotiations are about possessions and that you need to identify quickly what the other party’s motives are.

In a win-win scenario, the conversation revolves around different, and congruent interests.

In a win-lose scenario, one of the players has a positional bargaining ace-card.

“Typically, you need to look at their sources of influence and your own. If it is a large company you need to look at what makes you attractive,” he explains

The deal goes south

Deals with customers, suppliers or joint venture partners will come undone from time to time and it is important to handle the situation professionally.

To Wöcke, conflict is not always a negative word and he says that it is essential to promote innovation and change – it can be a driving force in a business.

When it does move into a negative space, he says that conflict management comes down to the way you want to see the situation play out.

Wöcke explains these intentions are either competing, avoiding, compromising, accommodating, or collaborating.

In other words, you need to decide what outcome you seek through managing the conflict. You also need to decide how important the issue is versus continuing the relationship: “If you have this in the back of your mind, you can generally manage the outcome because the other party will probably respond to your approach.”

Steenkamp adds to this, saying that if the conflict is between business partners, or joint venture partners, one needs to quickly identify the true cause of the disagreement. This is because conflict often manifests itself in issues different from the true cause.

“Most business owners want to be in control and when someone starts stepping on their toes it leads to conflict. The different roles need to be defined clearly and for the benefit of the greater good of the company…

“In some cases the best answer may be to walk away but you need to be mature enough to do this in a way that ensures both parties are not negatively affected,” Steenkamp says.

When the conflict is internal, the rules do not change: “Quite often, conflict stems from emotion and personal management styles or backgrounds. If this happens, you need to improve your communication lines and try to understand the other person’s way of thinking – here an outside person can help you to remove the emotion and facilitate an open an honest conversation…

“You need top be able to listen and understand the other person’s perspective. It does not help communication if you defend your position all the time,” Steenkamp says.

Glass houses

Botes says that when shareholders and directors start to work against each other, it usually signals the beginning of the end.

Shares and voting rights are almost always a source of contention, as SME decision makers want as much control as possible.

Rather, he believes that a business needs a clear leader who has the casting vote in a partnership. Capital, he adds, does not automatically define knowledge or ability.

“If conflict starts to snowball, it can often be too late to save the business. You need to work at your relationship with your business partners every day.”

He adds that silent partners also often become involved in a business when things go wrong. While they did front capital, silent partners are usually not operationally involved in a business for a reason.

“It is always best to set out the relationship from the start… A good way to deal with potential conflict is to have regular meetings to update silent partners. But, do not let these meetings adversely affect the business.”

Botes adds that reverting to a shareholders agreement is only a last resort. Rather, the spirit of the agreement should guide the relationship.