Why Family Businesses Fail – Moneyweb

South Africa has many successful family businesses. There are, however, a few factors to consider when thinking about preserving the family business from the second generation. It may sound easy, but the statistics tell a different story.

The chance for a family business to survive the transition from the first to the second generation is estimated at around 30%. The chance of him surviving the transition from the second generation to the third appears to be around 10%.

In the United States, approximately 40% of family businesses transition to second-generation businesses, while 13% are successfully passed on to the third generation. Only 3% survive to a fourth generation and beyond.

Risks in a family business

When starting the business, all the responsibility and decision-making lies with the founder. As the business progresses, more and more decision makers enter the equation. Ownership and management structures are beginning to change. As the company moves into the third generation and beyond, the gap widens when it comes to management, ownership, etc. This basically means that non-family members of the business become more numerous.

For obvious reasons, there are pros and cons to changing direction, but only if it’s the right people in the business. What does it mean?

There needs to be an alignment in the company in terms of business ethics, how do we make certain decisions, how do we integrate other third generation family members and beyond into the company ? It is important to clarify what are the requirements to join the company.

The ideal is to draw a clear line between business finances and personal finances, especially if it is a business that must survive for generations to come.

What does a successful family business do?

  • It is very focused on unity between key players and family members in the business.
  • Live the values ​​of the company on a daily basis and when it becomes difficult to go through difficult times, the right people have been approached to give an opinion.
  • Are the ambitions and objectives of the next generations the same? Do they even want to be part of the business and are they passionate about it?
  • There is a clear succession plan in place and how it will work.
  • The shareholder structure in place is solid – there is no uncertainty about the business in the event of the death of one of the shareholders or the founder.

Having honest conversations between family members in a business is sometimes difficult and overlooked. Are not part of the statistics on this.

Solution

A good starting point would be to write a family constitution with the family members involved in the business. The responsible person should lead this conversation and allow for an open discussion. The family constitution is not a legally binding document, but should serve as a blueprint for how the business should be run for generations to come. How to hire, who to hire, core business values, what assets should be kept and what should be sold. It may also involve guidelines referencing tough times in the business and what works and what doesn’t to get through it successfully.

If you only earn income based on the rand, try to generate income in a different currency like USD. If you generate business from cross-border activities, you should consider setting up an offshore structure that is more tax-efficient and helps build wealth overseas.

Make sure the shareholding structure is appropriate and everyone understands it and how the shares will be transferred. You don’t want non-company family members knocking on the door every month asking for a paycheck. Make sure this is handled adequately and the door is securely closed on this.

Good luck and success for generations to come.