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Sunday, 18 September 2011

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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 capital.

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.

Excellence

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 face decay.

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 success.

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 successful company.

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 next level.

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 complicated.

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.

Negotiations

He said that negotiations are difficult in this atmosphere while everybody has comfort zones. Family business tend to have long standing employees.

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 weak accounting.

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 preserved.

External leadership

For some family business getting external leadership may be too drastic.

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.

Input

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 generation.

Profitability

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.

Challenge

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 fund.

 

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