World of Work: Family-owned businesses need to face tough issues

One of the biggest elephants in the room in any ‘Mom and Pop’ business is succession

Stepping back when you have given your energy and passion to a company for maybe 50 years is difficult and not every founder knows when it’s time to bow out

Stepping back when you have given your energy and passion to a company for maybe 50 years is difficult and not every founder knows when it’s time to bow out

 

Most companies have sensitive issues that nobody talks about, but avoiding touchy subjects in family firms can be catastrophic. Only 30 per cent of family-owned businesses survive to the second generation and about 10 per cent to the third. Among the main reasons for the high rate of attrition are little or no succession planning, family rows, failure to change, and a lack of competence to deal with the sometimes complex legal, financial and commercial problems that arise.  

 Eric Clinton, director of the DCU Centre for Family Business, draws a distinction between the family-first family business and the business first family business.

Those in the second category stand a much better chance of success, he says, because they’re commercially focused. By contrast, those putting family interests first can run into all sorts of trouble – from lazy offspring not pulling their weight to high staff turnover because employees quickly learn that being family trumps ability. 

One of the biggest elephants in the room in any “Mom and Pop” business is succession. Stepping back when you have given your energy and passion to a company for maybe 50 years is difficult and not every founder knows when it’s time to bow out.

Often, it would take a brave son or daughter to tell the “Monarch” (a founder who typically leaves in a box) that their reign is over.

Average tenure

Part of the reason successions don’t run smoothly is because they don’t happen very often. The average tenure of a CEO in a family business is 23 years compared with just six years in a multinational. Equally, the informal structures often found in family businesses can foster an environment where disagreements are allowed to escalate and become intensely personal.  

Clinton says one of the ways family firms can handle succession while also tackling interfamily scraps is by “professionalising” their businesses.

“Things like reporting structures are not just for bigger companies,” he says. “Family firms will also benefit from having good processes, defined responsibilities and specific ways of doing things.”  

“Professionalising” includes ensuring transparency and well-documented agreements around shareholding and ownership – a classic flashpoint in family businesses. It also means putting clear management structures in place [one person in overall charge with designated reporting lines beneath], having a succession plan and involving outsiders in the business whether at management or board level.

Where particular expertise is required and not available within the ranks, it should be hired in or the gap plugged with professional help.

“Around 75 per cent of companies in Ireland are small- and medium-sized family firms and they contribute more than 50 per cent of our gross domestic product and national employment. This is why it’s so important that they survive to the second generation and beyond,” Clinton says.

“Succession is not about someone walking in one day and saying, ‘I’m out of here’. It’s a process that should be worked out during regular meetings where issues such as ownership and control are openly discussed. The main concern is that people leave it too late.”

Easing transition

One way of easing the transition is for the founder to move from CEO to chairman or chairwoman of the company. They might also take on an ambassador-like role representing the company’s interests where desirable.

When business is doing business with a family-owned business in Asia for example the whole family, including the éminence gris, will turn up to meet a potential supplier or customer and they like the same to happen if it is a family business on the other side.   

Tully Nurseries is a 40-year old company employing 43 people in north county Dublin. It was started by Martin Tully and his wife, Joan, and is now run by their three children, Padraig (managing director), Niamh (sales and marketing) and Martin jnr (landscaping). Their father is company chairman.

“The transition from my dad wasn’t seamless,” Padraig Tully says. “There was no official handover, things evolved and, if we were doing it again, I think we’d take a more formal approach.

“It took a few years for everything to settle and it was a challenge to clarify what Dad’s role would be. He still comes in every day and his experience and creativity are invaluable, but there has been a change in how his advice is asked for and given, as we have become more comfortable running the business.

“The structure we have now works well mainly because we respect each other’s ability to manage our own areas. With the next generation now coming along, we are in the process of looking at issues such as ownership for the future. Second generation nurseries are unusual in Ireland, but in Holland they have fifth generation so it is possible to achieve.”

Route to ruin

Families often grow faster than businesses and one route to ruin is to have an open door policy around employing family members.

Clinton recommends laying down a set of criteria that family members should meet if they want to join the business. For example, they should have relevant formal education and a specified length of outside experience, preferably at management level and ideally in a family-owned business in a foreign market.

“They should make their mistakes with someone else’s money and build experience that will give them credibility within their family business,” he says.

While it may not be music to the ears of generations in waiting, in some family firms, family members have to compete for jobs in open competition, he notes.

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