Birthright yields to bottom line in family businesses

Building financial success while protecting personal relationships is a double challenge for family businesses, and when the pressure to make profits is on, it seems family ties are not always so binding.

Traditional family businesses that automatically pass ownership down to the next generation are being replaced by hard-nosed companies where children can no longer expect to find a chair reserved at the boardroom table with their names on it.

Instead, children must fight for their right to a share of the family firm, according to business advisers, Grant Thornton, which has launched a new online forum for family business owners at www.familybizz.net.

A Grant Thornton global research report, conducted by the company's PRIMA service for family businesses, found that more than half of Irish family businesses - 53 per cent - believe children who join the business should not receive shares. This compared with a European average of 32 per cent and a global average of 33 per cent. In addition, only 15 per cent of Irish family businesses included in the study believe a management successor should be chosen from the family, compared with a European average of 24 per cent and a global average of 26 per cent.

"I don't know if it's because of our upbringing, but you have to prove yourself in Ireland, whereas in other cultures it's a bit more automatic," says Mr Brendan Lane, PRIMA co-ordinator for Grant Thornton in Ireland.

The survey of over 8,700 companies in 26 countries found that, globally, family issues often take second place to business concerns. Most owner-managers studied were able to build up their businesses using experience gleaned from the wider business world, with 62 per cent having worked elsewhere first.

Most are not keen to have their children join the family business, with almost nine in 10 not intending that their children join the firm. In Ireland, seven in 10 owner-managers believe children should only join if they want to, with just 6 per cent insisting on it. A global average of 68 per cent believe that children who join the business should start at the bottom.

"Whilst owners in some countries still regard the business as a family heirloom, this view may be gradually disappearing worldwide. With business owners having nightmares about financing their firms properly, commercial considerations are taking precedence," says Mr Lane.

According to a 2002 report on Irish family businesses by accountancy firm Pricewaterhouse- Coopers, only a small percentage of family businesses survive to the third generation. But over a half also fail to prepare strategic development plans and some 85 per cent were found to use overdrafts - suitable only for short-term finance - as a means to fund their business.

The two main issues facing Grant Thornton's PRIMA clients, notes Mr Lane, are how to manage a smooth succession and how to invest outside the business.

"You must create wealth outside of the family business, so that when you take a step back from it, there's something else there," he says. PRIMA's research report suggests that 40 per cent of business owners are concerned about all their wealth being tied up in the business.