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Can you avoid the traps that could destroy the future of your business in 2016?

By The Icon Team on 14/01/2016 - 0 Comments

CAN YOU AVOID THE TRAPS THAT COULD DESTROY THE FUTURE OF YOUR BUSINESS IN 2016?

Family run businesses have never been so important and are a backbone of the UK economy. There are now over 3 million family firms (approx. 60% of all SME’s) which employ over 9 million people and contribute 25% of total GDP and over £81 billion in tax to the UK exchequer.

Some of our oldest companies have been family companies who have endured for over 500 years. Companies such as RJ Balson and Son established in 1515 who started their butchery business in Bridport, Dorset and are still there, with the business now being run by Richard’s great-great grandson Richard Balson, who still uses recipes handed  down through the generations. Family businesses have also been the basis of sprawling corporations such as Walmart, Samsung, Tata Group and Porsche.

WHY ARE FAMILY BUSINESSES SO POPULAR AS A BUSINESS MODEL?

Logic would suggest that the ownership structure of family businesses gives them the long term stability and orientation that many large corporations lack. Fiona Graham at the Institute for Family Business believes that this is because “family firms are experts at evolving.” Whilst this may be true why is failure the order of the day with regard to second generation ownership?

George Stalk and Henry Foley (Harvard Business Review ‘Avoid the traps that can destroy family businesses’ Jan-Feb 2012) report that some 70% of family owned businesses fail or are sold before they pass over to the second generation. In fact, they found that just 10% remain active to the 3rd generation. They believe this in part is due to the fact that many CEO or business leaders remain in the same post for over 20-25 years, and that with the changes in technology, business models and consumer behaviour this can be no good thing. 

It is evident that the business model based around family ownership is popular but fraught with issues. When problems manifest in the workplace there is always the challenge of how to deal with this in the home setting for a family run business.

Getting a clear demarcation between family life and business issues is often impossible and disagreements can often surface in the home setting and can be present for many years causing splits in relationships. In many cases the second or third generations have no intentions or desire to succeed family members in running the business. There are numerous examples of where family members are forced to run the business, and eventually this impacts the operation of the business to the extent that there is a ‘fire sale’ for the value of its assets.

WHAT ARE THE KINDS OF PROBLEMS THAT FAMILY RUN BUSINESSES FACE?

Dan Scouler (Entrepreneur.com , back in Feb 25 2014) argues that these tend to centre on denial. He believes that family run business often do not take seriously the true pressures on the business. He believes this is the result of:

The family patriarch or oldest member of the family is always deferred to as the smartest – this discourages others from challenging him.
Family businesses do not watch cash flow carefully enough – this is a priority for any business yet many family businesses are not good at chasing monies due.

Many do not acknowledge the true financial state of the company – instead they deny the existence of any issues valuing kinship as more important fearing that having such discussions will lead to disagreements.

Harmony in the family has priority over sound business judgement – maintaining a sound business proposition and keeping a competitive edge does often mean change. The discussions to achieve this change are often not had in a family run business.

HOW THEN IS IT POSSIBLE TO AVOID THE TRAPS THAT CAN DESTROY A FAMILY BUSINESS?

The keys to the sustainability of a family business can be seen in terms of getting the management set-up and processes right and then building on this to put in place a sound succession plan. 

In terms of getting the family business running effectively Sam Prochazka has some suggestions (Entrepreneur.com April 2014). These are as follows:

Select a leader – don’t manage the business by committee but select the right person to take control

Avoid handshake agreements – avoid having ad-hoc discussions which then lead to changes in the operation in the business without this being properly formalised. There are always problems down the line if issues such as dividends, share ownership, decision making processes and disciplinary processes are not set out properly.

Relatives can’t be fired – Prochazka argues they should be. He cites the example whereby the ‘great grandson of a successful businessman recently told me about how the family fractured in the 40’s when one of his uncles fired a sibling from the family business. The business was sold long ago but the rift in the family remains to this day’.

Make criticism constructive – there is much greater potential for criticism to become personal and so feedback and comment must be framed in a professional and positive context.

Recognise blind spots – having a similar background does not guarantee that you view situations in the same way. There will always be blind spots in viewpoints. One way to avoid this is to ensure the team is composed of people with different backgrounds.

THE IMPORTANCE OF HAVING A LONG TERM PERSPECTIVE

In building a family run business beyond the first generation it is important to build these elements into your management and operation of the business. It is also vital that you build a longer term perspective to ensure the effective succession so that the business legacy can burn brightly for many years to come.

Steve Parriish (Forbes.com 2/3/14) sets out a 6 point guide in his article ‘Six Steps for Making Your Business a Family Legacy.’

Give the business a reason to continue the family business – first generation owners do need to motivate second generation members to participate. Give them the freedom and empower them to move it forward. This means allowing them to fully take over.

Develop a management team – enlist the team based on skills, experience and aptitude. If the second generation lack the vision to seek out opportunities and to develop the business then what additional help do they need to help them do this?

Structure a business succession plan – having something formalised where all members of the wider family buy into it is vital in avoiding any potential resentment and discontent.

Fund the succession plan – this means adequately resourcing the transition and on-going operation

Wealth replacement for other family members – for the family to remain a cohesive unit, then all need to fully buy into the future plan. If some family members will not be a part of the on-going operation, then how are they to be rewarded?

Have a successful business – this may seem obvious, but this ensures the transition is less turbulent. The tough calls about who is to be included in the operation into the future have to be taken now.

Whilst the family run business model is popular research does indicate that the high failure rate can be traced back to succession planning. This is not the preserve of family run businesses only but essential for all businesses owners that embark on some form of exit, whether this may also be through the sale of the business or MBO etc.  

Effective management and ownership succession planning is critical in ensuring the long term viability of any business. The start of this new year is the perfect time to review what plans you have in place for 2016.

Speak to your local Icon Business Advisor for a free consultation, and Business Health Check - and start the year in the best way possible.

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