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In the modern business world, where large conglomerates and multinational corporations often dominate the headlines, the importance of family-owned businesses cannot be overstated. These businesses, which collectively account for 70% of the GDP and are responsible for 60% of all employment, have, in recent years, come under intense challenges, ranging from inflation and cost pressures to introducing new regulations and an increasingly dynamic & competitive marketplace.
However, the structural, long-term issue is that family businesses fail to last over successive generations. According to a study, only one-third of family businesses remain operational going into the second generation, with approximately one in eight succeeding when passed on to the third generation. By the time these businesses transition to the fourth generation or beyond, nearly 97% of family-owned businesses cease to exist.
The main reason behind the collapse of these businesses is the lack of effective succession planning strategies that can help build a lasting legacy that transcends successive generations.
Today, we will explore strategies that could help build resilience in your family business while adding dynamism and the ability to pivot to make it a sustainable business across generations.
This is our TRADITION!
A commonplace lament in every family business as that has been the foundation of their success; it also is often a reflection of the core values of the business. The challenge, therefore, is maintaining the delicate balance of heritage and opening doors to innovation and technology. Traditionally, these businesses have succeeded by building a core demographic of users and customers and focusing on them.
However, the rapidly changing market and evolving customer needs require a mindset and culture that embraces innovation and change. The need for this to fit within the traditional framework is essential for long-term viability. According to a PWC Global Family Business Survey Conducted, only 38% of those surveyed reported the presence of a strong digital capability, with 64% admitting that they needed to adapt their business practices to remain competitive.
To drive innovation and adoption of new practices such as automation, the younger generation of family businesses needs to rise to the occasion. Their fresh perspectives and technological savviness need to find a place on the table to enable the business to identify new opportunities and streamline processes.
Easier said than done; what is needed is an adoption of a dual approach that honors tradition – keeping the culture and values untouched while making room for new ways of thinking & approaches that enable the business to push forward with innovation. It would mean setting aside resources for research and development, training and development investment in employees to develop new skills, and creating a safe space for experimentation, allowing people to fail & learn from them.
When businesses embrace change anchored in their tradition, they have the potential to secure their legacy for generations to come.
Often, as family members multiply and many decide to pursue ventures outside of the family business, they feel uninvolved, left out & their stake threatened, often resulting in disputes and disagreements that lead to a business split or closure.
The answer to this dilemma is in creating a well-defined family governance structure designed to keep all family members engaged and aligned with the business goals and performance.
The foundation of a sound family structure starts with creating a family tree with each family member’s skills, roles, and responsibilities related to business clearly defined. Next comes assigning each person a functional or consultative role, which ensures that everyone contributes meaningfully to the business and stays engaged.
The next step is to create a family council designed along the lines of the board of directors, with clearly marked periodicity to meet with a clear agenda on discussing business progress and challenges, make strategic plans and take decisions, and resolve any issues that need collective decision making and address workload distribution if that is the need of the hour for improved productivity.
Next comes developing a family constitution. A document to guide the ethos, vision, and protocol for communication, conflict resolution, and ownership rights. A reference point for all family members, helping guide behavior, leading to improved decision-making, and promoting transparency and fairness within the firm. This includes everything from the mediation procedures and confidentiality agreements to leadership development, succession criteria, salary, and equity structures.
Finally, businesses can engage family members who are not directly involved in the company by keeping them on the board; this would help them bring their expertise to the table and continue to have skin in the game.
Family Businesses, by their very nature, do not have well-articulated goals or a road map. The lack of a roadmap and well-defined long-term or short-term goals creates an organization that lives by the day and is less capable of pivoting in the face of sudden changes in the market.
To fix this, business owners need to feel less threatened in articulating their vision and goals and sharing them with their leadership to percolate them down the line.
Having well-defined goals makes people accountable, brings transparency to performance evaluations, and helps drive all efforts in the organization toward a common goal.
It further facilitates better intelligence on competition and insights into industry trends, thereby, enabling the business to course correct in time to avoid losses or make good opportunities that market changes present.
When family businesses manage their operations professionally and make data-driven decisions, they can secure their position in the market for the future.
Financial resilience is crucial in helping family businesses, as in any other business, to attain long-term sustainability.
Building financial resilience starts with diversifying revenue streams to help marginalise the impact of market fluctuations or industry-specific downturns.
Expanding into new markets, investing in new products or services, or moving to complementary/adjacent businesses are a few options to consider and explore. For instance, family businesses operating in the sugar industry could explore alternative business models like ethanol fuel being generated as a by-product using sugarcane.
Implementing robust risk management practices is equally important. Businesses can achieve this by regularly assessing potential risks, establishing contingency plans, and maintaining adequate insurance coverage, ultimately helping them weather unexpected challenges and maintain financial stability.
Reinvesting a portion of profits back into the company can also help with financial resilience, as it ensures that the business has the resources necessary to fund growth initiatives, upgrade technology & equipment and maintain a competitive edge in the market. Traditionally, keeping between 6-18 months of business expenditure as cash in hand is considered sound practice.
Family businesses may face unique challenges when it comes to managing capital and wealth across generations. Balancing the financial needs of the family with those of the business can be a tightrope.
To avoid conflict and disbalance, establishing a clear dividend policy (from the portion of the profits) is a good move. It helps set expectations around personal expenses and prevent conflicts while ensuring the business’s financial health.
Finally, educating family members on financial matters can help ensure that future generations understand and are well-equipped to manage the family’s wealth and maintain the business’s financial resilience.
In conclusion, building a lasting legacy in a family business is not just about achieving financial success; it’s about creating a resilient, value-driven enterprise that can adapt and thrive across generations. By fostering strong leadership, establishing clear governance structures, encouraging open communication, and embracing innovation, family businesses can navigate the complexities of succession and intergenerational transitions. It is essential to blend tradition with forward-thinking strategies, ensuring that the business remains relevant while preserving the core values that define its identity. The success is measured by the ability to sustain growth, harmony, and a shared vision, passing on not just a business but a legacy of integrity, purpose, and enduring impact.
