According to Harvard Business School, family firms account for about two-thirds of all businesses around the world. The 2012 European Family Businesses Report found that 50% to 80% of jobs worldwide are created by the family-run business and, in most countries, make up to 95% of all business entities.
“Family owned businesses feature quite prominently in South Africa’s business landscape and a number of them that started out as small operations in one location have grown substantially,” says Ravi Govender, head of small enterprises at Standard Bank. “Success stories such as Nando’s and Pick n Pay are prime examples that have thrived over the years and firmly rooted themselves as major players in their respective industries.”
Govender believes that one of the primary advantages of running a family business in the current economy is that they tend to be less driven by short-term financial gain, and are willing to make sacrifices that ensure the sustainability and success of the business in the long term. This allows for the business to be more agile and flexible, giving them a significant advantage over their competitors and allowing them more freedom to exploit gaps in the market.
The PwC Family Business Survey 2013 has uncovered other advantages: quicker and more flexible decision making, a more personal approach to a business based on trust and a more agile organisation.
The survey found that 93% of the business owners anticipated steady or aggressive growth over the next five years, with 53% demonstrating confidence in their company’s prospects over that period.
The family enterprise faces very specific challenges that include a mercurial market, an extended retirement age and a lack of succession planning or training of the younger generation, plus governance and establishment of a corporate culture that goes beyond the family and into the business as a whole.
Succession remains a concern. As the older generations do not retire as early as they used to, in some cases returning due to financial constraints, many small to medium enterprises (SMMEs) no longer have a seamless pathway to succession. Today it is more likely than not that several generations will be working alongside one another, waiting for succession to come into play.
“The main shareholder or owner often leaves this decision too late and hasn’t done any succession or expansion planning,” says Richard Pople, director of Quickberry, a company that specialises in the sale of SMMEs. “In a recent survey only 40% of family owned businesses plan to pass on ownership to the next generation, but the trend of succession has diminished.”
Pieter Scholtz, co-master franchisor for ActionCOACH Southern Africa, adds: “Research has pointed to the fact that most businesses last no more than two generations before being sold or closed. Succession should not be an automatic process if the business stands any chance of sustainability. Instead, family members who demonstrate the required passion and capability should be earmarked early in their careers and a clear development plan should be implemented to ensure a smooth transfer between generations.”
A recent report by Sanlam Private Wealth found that 70% of second-generation families squander assets received from an estate transfer and 90% of the family wealth will be lost by the third generation. Two of the primary reasons for these statistics are distrust and lack of communication between family members. The solution is simple — talk about the business and the plans going forward, involve the family in decision-making and have proper succession planning.
“The most crucial element of family business is the planning that should occur at the start-up phase,” says Govender. “Most families who go into business together do not take into consideration that, as their children grow and have children of their own, they may have diverse ideas on how the business should be run and the overall strategy. Planning also has to be made for family members who exit the day-to-day running of the business due to retirement, illness or death.”
Another element of succession and the hiring of family members is ensuring that the right people sit in the right roles. Absa has found that when family members are not suited to the positions they hold, then the performance of the organisation is affected and poses a risk to the bank, clients and stakeholders. Those entrepreneurs who have family buy-in present less risk than those who do not have family members or spouses willing to get involved in the running of the business, and this does impact on the bank’s readiness to provide financial support.
“The family owned status of a business is not assessed as part of our mainstream lending criteria, but it is taken into consideration when assessing development finance transactions,” says Happy Ralinala, Head of Absa Business Banking. “We have found that the entrepreneurs of SMME businesses are generally more successful when their immediate family buys into the demands, responsibilities and rewards of the business. From an enterprise development perspective, corporates are keen to get involved with family owned SMMEs if the family acts as a support system to the entrepreneur or where the family members perform functions within the business that are suitable for their skill sets and abilities. The involvement of family support cannot be over emphasised, as its existence ensures seamless transition from one generation to another.”
Husband and wife team Avri and Chata Romano run Chata Romano, a makeover consultancy. Avri provided the initial financial investment and now runs the administration arm of the business, while Chata deals with clients. She believes that: “To run a successful business you have to have one anothers’ backs; there has to be trust and loyalty and you need to give the other person the freedom to operate within their area of expertise.”
Making a life partner into a business partner is not for everyone, nor is working with siblings or parents. Sibling rivalry can play a part in the success, or failure, of a SMME. Sisters Anna Olivier and Judi de Jongh have launched Umatie, an organic children’s food brand, and managed to find a way around their rivalry.
“It was tough initially as we went through the growing pains and challenges of starting up our own business, but Umatie is ours and we put all our effort into it and both care for it equally,” says de Jongh. “Running a business together is challenging and we soon realised that being in the same room doesn’t work as we’re both too bossy. Now we run different sides of the business and it works.”
A family business will always be impacted by a family dynamic, and this can either be an advantage or a disadvantage. On one hand it allows for the development of a good working culture, on the other it can be negatively impacted by issues such as divorce or lack of internal governance. Dr Amanda Hamilton-Attwell, founder and executive director of Business DNA, says a business needs to consider more than just the family to create success.
“If an enterprise only appoints family members it will automatically appoint people who have no interest in it, and who may not fit the profile required for the business,” says Hamilton-Attwell. “There are numerous case studies of very successful family businesses — the Ruperts, Venters and Oppenheimers come to mind — there are, however, many more that did not survive more than one generation. The recipe is a balance between keeping it in the family and including well-qualified outsiders.”
Many family business models that plan on bringing successive generations into the fold insist that the children go out into the world and start their careers elsewhere. Not only does this allow for them to gain valuable work experience, but it goes a long way towards mitigating issues around nepotism.
“The benefit of a family business is that the siblings will be exposed to the realities of the business from childhood,” says Hamilton-Attwell. “The senior members can coach the younger ones in various roles and see if they fit in. It is imperative that the children know they are free to join the business or find their own way.”
The other consideration is the employee. The family business doesn’t operate in a vacuum and it’s important that staff feel family members follow the same rules and carry their responsibilities as seriously as everyone else. This has the potential to instil a rich working culture within the organisation and is recognised as yet another of the advantages of this business model.
“Family owned businesses seem to be able to engrain the company culture and values much better than their corporate counterparts because of the level of interaction between owners and customers; this also pushes up brand loyalty and support for the business,” says Govender. “The family dynamic plays an integral role in promoting and building a strong business culture.”
Govender does add that this same dynamic can turn on itself. A lack of external objectivity and internal governance and the inability to fire a family member who is not qualified and not performing to the required standards can have a significantly negative effect on the culture and productivity of the enterprise.
“Governance structures are critical and complex and serve to ensure there is transparency as well as accountability for the execution of key roles within the business,” says Scholtz. “It is equally important to separate professional time from business time; this is especially relevant in organisations that span a number of generations.”
For the Carey family — father, mother and daughter running the Courtenay Carey School of Etiquette — this separation is key to their family dynamics remaining positive.
“Most conversations revolve around our work and we’ve now made it a rule we do not discuss business at mealtimes or on weekends,” says Courtenay Carey. “I run most of our courses, my father Fraser Carey coaches success principles and my mother, Sharon Carey, coaches other segments. We have found that our success lies in all the planning and setting ground rules from day one to ensure we all know our boundaries.”
The SMME run by family will always have its own dynamics and challenges, but these are no more or less so than those that are faced by the entrepreneurs who set out to start SMMEs without their parents or siblings. Ultimately it will be down to cohesive planning and governance, and an awareness of how the family dynamic differs from the typical work dynamic, to ensure that the family SMME can weather the occasional storms and thrive for several generations.