Ensure family business will sustain
Many family business ventures decay after the founder hands it over
to the next generation. The family business that survives the inter
generational curse are those that successfully integrate professionals
to supplement the skill gaps of the owning family.
Director, Horizon Partners Ltd, Nirosh De Silva who has worked with
many family business ventures in the country said that "most family
businesses in our country have started small with limited amounts of
Nirosh De Silva
In many cases the success goes beyond the expectations of the
promoters when they commenced the business. Generally, these founders
are frugal and reinvest most of the profits in the business for long
periods. After 30-40 years the business acquire a lot of assets and
require complex management skills to continue operating efficiently."
When the time comes for the founder to exit the business and hand over
the reins to the children, the first challenge is to ensure that these
children have the requisite skills to run the business. Generally, the
second generation would be used to the good life and on many an occasion
have not acquired the skills to lead the business.
At this time the promoters must decide to recruit competent managers
with the right skills so that family members' skill gaps can be
supplemented. Family business ventures that fail to do this generally
He said for business ventures to succeed today they need excellence
in all areas of business. For example if you are good at manufacturing a
product, that alone will feature only about 30 percent towards its
The ability to manage logistics, purchase efficiently, handle the
distribution and finally build a perception in the eyes of the consumer
that is the product they require all come together to making a
Therefore, shareholders should understand and attract professionals
to ensure that their organisational skill gaps are limited and that the
foundations are set for the business to flourish and be taken to the
De Silva said that many family business ventures worry about handing
over the reins to professionals while professionals also generally have
reservations about working in family business concerns.. Generally
professionals don't like working in a family business venture as they
perceive interference and believe that prospects for promotions are
Family business ventures that overcome these generalisations and
attract skilled managers to overcome the weaknesses of the family
members will become stronger in the years ahead. Family business should
work extra hard to demonstrate to talented individuals that their firm
is different from the typical family business. This will ensure that
professionals feel comfortable.
De Silva said that another aspect is that family business is very
relationship based. For example the supplier arrangements are long-term
which has its own merits and demerits.
He said that negotiations are difficult in this atmosphere while
everybody has comfort zones. Family business tend to have long standing
As the management is also longstanding, the managers are not
challenged and renewed this also on occasion leads to lethargy. Many
family groups tend to have accountants who do not have the skills to add
value after the business grow beyond a point.
Companies like this on occasion end up having serious losses either
because they had systemic weaknesses that lead to fraud or losses due to
He said that when the founder hands over the business to the next
generation they should look at the governance aspects. It is important
that employees and stakeholders respect the incoming family leader for
the attributes he brings to the table to lead the business.
If the newcomers from the family don't have the requisite skills they
may quickly lose the respect of the management and employees. It is
better to appoint an outside person to the top post if the family member
lacks leadership, so that the financial value of the business is better
For some family business getting external leadership may be too
However, Leadership must evolve in a 2-5 year horizon to take the
business forward and if a family business does not have leadership for
whatever reason it is better to sell the business and enjoy the benefits
than letting the business fade into oblivion.
Unfortunately many families rests on the laurels of the founder and
refuse to see the setback, not only causing losses to themselves but
also to other stakeholders in the business.
If a family member works for a business he should be paid according
to his input and not based on his relationship to the owner. A culture
of building meritocracy as opposed to favouritism is key to attracting
good management into family businesses and the subsequent success of
family businesses. Non-family management should not feel that they
derive lower benefits because they are not family members. What owners
enjoy from dividends or by way of sale of shares is a separate issue.
The second and third generation should know to respect the
experienced staffers who have been with the company for many years and
also respect the professionals who give their experience to the company.
Many founders make the mistake of not bringing in their children into
the business early on in life.
A large industrialist in the US who is a second generation
businessman told me that his mother had spoken to his father when he was
thirteen and asked that he be given a suitable job to learn the trade.
The father had invited the son to work in the cleaning department,
that also on occasions entailed cleaning the factory workers toilets. At
60 years this second generation businessman from the US still fondly
remembers his introduction to the family business. I wonder how many of
us would be this brave in introducing family business to the next
Many founders of businesses forget that they may not have had all the
academic credentials when they started business. However, they make the
mistake of having a false sense of security that the business will be
better off if the second or third generation is academically qualified
before entering the business. Academics are important and can be a
useful tool, but the next generation needs to be introduced to the
business at an early age.
The skill of taking calculated risks or the skill of converting a
business hunch into a profitable business idea cannot be learnt too late
in life specially if you are a second or third generation businessman
who did not have to take much chances in life.Another aspect is that as
family business grows they should adopt the best management practices
and work hard to become good corporate citizens.
For example many family businessmen may attempt to avoid paying tax
in manners that are illegal. When this happens employees view the family
in a negative manner. Once you have lost the respect in the eyes of
employees it's very difficult to gain it.
He said that for a family business to succeed the family members
financial needs should be separated from the business.
For example if a family member is building a residence the burden of
funding that should not automatically fall on the company.
Many family business ventures fail to have this kind of basic
discipline and then fall into financial trouble.
I have been to factories that have generated good profits suddenly
getting into financial crises. On closer analysis you realise that the
working capital of the factory was used to fund a residence and then
banks end up losing confidence in the business.
Another challenge faced in family business is that they have to grow
with internally generated funds. During periods of rapid growth such as
at present family businessmen may have to limit their growth because of
constraints of capital. Internationally family business projects have
overcome this issue by taking their businesses public.
Therefore De Silva is of the view that Sri Lankan family businessmen
should start exploring opportunities of raising equity in the public
markets if they see expansion opportunities that internal funds cannot