Succession of family businesses from one generation to another has remained one of the biggest challenges facing family businesses. It is widely known that most family businesses do not transit to the third generation. There are varying statistics on the percentage of family businesses that have transited beyond the third generation. For instance, according to the Family Firm Institute, while the majority of family business owners would like to see their business transferred to the next generation, it is estimated that 70% will not survive into the 2nd generation and 90% will not make it to the 3rd generation. In Nigeria for example, most of the family businesses that were very prominent in the 70s and 80s did not survive beyond the first generation.
Majority of the leading companies in Nigeria today are owned by families and can be said to be family businesses. Hence, given the critical role that family businesses play in the economy, by way of their contribution to GDP and employment, it is important for owners of family businesses to take all necessary steps to ensure transition from one generation to another. As a member of an ultra-high net-worth family in the United States of America once said, "You don't inherit a family business; you borrow it from your grandchildren", this underscores the importance of transitioning.
This article highlights some of the critical success factors that owners/managers of family businesses need to be aware of to ensure a smooth and effective transitioning to the next generations.
Family & family business governance
The implicit nature of family businesses, which relies strongly on the concept of a family unit owning, running and managing a business, has left many family patriarchs hesitant to put up formal structures that will guide the inter-relationship between the family and the family business. This hesitation is usually borne from a place of fear that establishing a formal structure around the management of the family business equals bureaucracy, loss of control and yielding of the oversight function to external parties. These concerns can be addressed where the family develops a governance system around its relations with the family business.
Family & family business governance deals with the intra-relationship between the family members on one hand and the inter-relationship between the family and the management of the family business i.e. the board of directors/management team, on the other. It is a formal structure that defines the family values and aspirations, describes the responsibility of the various family members with respect to the family business, and provides a clear direction for the succession of the next generation in the family. In addition to existing corporate governance structure in the business, family business governance assists the family to develop a methodology with which the family can monitor the performance of the family business and create a strategic framework for business ownership retention.
For successful business transition, family business owners should begin to consider setting up these governance structures in line with their unique circumstance. This will enable them develop a business succession strategy well ahead of time. The framework to be adopted would depend on a number of factors such as the size of the family, number of generations, extent of involvement of each generation in the family business etc.
Well trained and qualified next generation leaders
Nepotism is quite prevalent in family businesses as family business owners are traditionally inclined to assign administrative and managerial responsibilities to their nuclear/extended family members. This is particularly common where the founder/patriarch is unable to entrust the running of the family business to persons other than himself. Hence, the option that comes to mind when the need to appoint a successor for strategic functions in the family business surfaces is naturally a relative.
Nepotism, especially where the respective family members lack the requisite competence, usually comes at the expense of having the right technical hands with the right managerial skills to steer the business in the right direction and ensure that it is run profitably and efficiently. Even worse is when the family business is thrusted into ill-prepared hands, who may or may not have interest in the business. The need to have a successful business should precede the need to provide some form of employment opportunity to members of the family
In order to ensure that neither the business nor family interests are disproportionately placed above each other, family business owners must put measures in place for the onboarding of the next generation. This implies that they adopt proactive strategies to acquaint and involve them in the family business; actively train them to acquire the requisite managerial and business skills; and enlist their interest in being a part of the family business rather than shoving the responsibility on them based on their status as members of the family. Getting the right persons to manage the affairs of a family business is a key determinant of the sustenance of the business which is quite necessary to ensure a successful transition.
Align family vision and mission statement to the overall strategy of the business
Families need to create and document their unique vision and mission statement in relation to what they stand for and the values they uphold. This allows the family members to envision the future outlook of the family, connect to aspirations of the founder/patriarch regarding the family and to have a form of direction towards attaining this. As expected, the individual investee companies of the family would also have in place certain goals and objectives that guides their daily activities and operations to ensure business efficiency.
The ultimate goal of a family business is to grow and outlive several generations. This can only be achieved where deliberate efforts are taken to ensure efficiency in family business management and involvement of family members in working towards attaining the goal. The time to start to make these efforts is NOW. Family business owners should aim at sustaining the family business and developing their business succession plans for efficient transition and preservation of their family legacy.
For a successful business transition, business owners need to ensure an alignment between the family goals and that of the family business. Where there is no synchronisation of these goals, there is bound to be chaos and misguidance which will ultimately affect the existence of the family business itself. Hence, family business owners should ensure a correlation between the goals of the family and the family business such that one is not sacrificed for the other.
Tax efficiency in succession planning
Companies, regardless of the nature of their ownership have tax and regulatory obligations in Nigeria and other jurisdictions as applicable. The manner and form in which the family holds its investments in the businesses, determines the efficiency of their succession plans from a tax perspective. Family business owners need to be aware of the tax implications of their succession plans and be more strategic in this regard by considering investment holding structures that will ensure that their returns will not be eroded by avoidable taxes and its attendant penalties. The structures should enable the family organise their business and personal affairs in such a way that will minimize tax footprints. It is also advisable for the family to adopt a pro-active rather than a reactive approach to tax planning.
The ultimate goal of a family business is to grow and outlive several generations. This can only be achieved where deliberate efforts are taken to ensure efficiency in family business management and involvement of family members in working towards attaining the goal. The time to start to make these efforts is NOW. Family business owners should aim at sustaining the family business and developing their business succession plans for efficient transition and preservation of their family legacy. Family business owners should consider seeking the support of external advisers and professionals with the requisite knowledge, skills and experience to support them through this process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.