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Blog: Want Your Family Business to Survive? The Strategic Decisions You Must Make

  Apr 1, 2016

Tuskys, a family business jointly owned by five brothers and two sisters, has for the first time appointed a non-family CEO in the retail chain’s 25-year history to inject professionalism in the business as it prepared to go public. However, Mr Mugweru declared the appointment as invalid, having been made at a time when the family is embroiled in wrangles arising from allegations of fraud, mismanagement and assault and that the board and shareholders have not met nor resolved to appoint Mr Githua as CEO.


This confirms the fears that approximately 70% last just one generation. Another 50% don’t survive the transition from second to third generation. Since an estimated 80% of businesses across the globe are family-owned, the low survival rate is worrying. In the United States alone, for instance, family-owned businesses (FOBs) are responsible for 60% of total US employment and generate 78% of all new jobs. Further, some of the world’s biggest companies are family-owned—News Corp, Samsung, Tata Group, and Walmart to name but a few. What drives this negative statistics among family-owned businesses?


The biggest issue with many family businesses is that they get stuck doing things the same way they have operated for years even when the business out grows that structure. The founding generation holds on to the reins of leadership too long. What makes it even more difficult is that the company’s hierarchy typically reflects the family’s pecking order regardless of the organization chart.


Family members play the same role inside their company. For example, the bully brother/ sister is the same bully in the business forcing everyone to do it his way. Whoever is seen as the head of the household wants to tell everyone else what to do. The peacemaker in the family tries to smooth things over when tempers explode. The mother who controls the budget at home wants to approve how every dollar is spent at the business.


Family businesses only change when the pain is so great that they can’t stay where they are. When this happens, the family has four choices. They sell the business, merge or stay the same. If they decide to stay the same, the key questions they then must decide are: Do they all stay in this business together or does someone exit? Is it time for the senior generation to pass the company on to the next one? Do they bring in a professional manager? But these choices are hard to make since for family businesses that are so rooted in tradition, the most difficult part of the decision is to actually implement a change that will bring a more profitable and happier business. The high failure rates of family businesses may seem unavoidable. They’re not.


From experience, it’s clear family businesses are repeatedly caught in the same traps. Recognizing and learning to avoid these traps can boost the odds of long-term survival. The first trap is “There’s Always a Place For You Here”. Some proprietors of family-owned firms make their children feel obligated to join the company, which can backfire by creating a crop of managers who aren’t interested in being there. Despite their lack of experience, these offspring may ascend to leadership positions because of the family connection, increasing the chances that the business will fail. To escape the trap: Insist on proper training and screening. It’s natural for a family business to welcome members of the next generation, and it’s healthy to expose them to the company at an early age, so that they can make an informed decision about whether to pursue a career there. But a job with the company shouldn’t be an entitlement.


The second trap is that The Business Can’t Grow Fast Enough to Support Everyone. An underappreciated problem is that families often grow more quickly than their businesses do. If a company founder has three children, each of whom marries and produces three more children, each of whom marries; within three generations there could be 25 people or more working or looking to work at the company. Many businesses simply don’t have enough work to employ every family member.


To escape the trap: Manage family entry and scale for growth avoided Trap #1 by ensuring that only committed, qualified relatives are allowed to join the firm. Another solution is to develop strategies to grow the business and create responsibilities for additional family employees. The third trap is the fact that Family Members Remain in Silos. One of the most striking things we’ve noticed about family businesses is the tendency of fathers and sons (and increasingly daughters) to specialize in the same aspect of the business, whether it’s finance, operations, or marketing. This can be problematic for several reasons. First, by staying in specialized silos, next-generation managers fail to gain the cross-functional expertise needed for executive leadership. Second, when close family members supervise one another, the personal dynamic can prevent candid feedback and interfere with coaching.


Together these factors can create a leadership vacuum in the up-and-coming generation. This may prompt the current generation to stay in the top positions too long, limiting the company’s adaptability to change. To escape the trap: Appoint non ­family mentors. Some companies assign an experienced non ­family mentor to each younger family member, to provide the objective performance evaluation and critical advice an employee in a non family business typically gets. For this to work, the coach must operate under a protective umbrella, immune from retribution by the family. It’s unrealistic to think you can create a nepotism-free family-owned business, and it’s important to recognize that family enterprises will always operate by different rules. However, to survive over the long haul family firms need to adopt formal policies about whom to employ, whom to promote, and how to balance family and business interests. If more companies take these steps and survive the treacherous transitions from one generation to another, the statistics of survival will change and Kenya will be better.

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