Family businesses….. pros and cons
On a recent trip to India, I stayed at a hotel that was founded by a unique gentleman. He’s now passed away but his son runs the hotel and his grand daughters are fully integrated into the running of the business. This is quite a usual phenomenon in India – The family business. This is a situation where the controlling or majority of shares in a business is owned by a particular family. In truth, most businesses are family businesses, because they were started by an individual who has intentions for members of his/her family to participate in the business in some form, but in practice, family businesses are defined by a generational succession of control and ownership. Most businesses end with the first generation/founder not being able to pass on the business to future generations.
However Indian businesses have been able to do this with great aplomb. As a matter of fact, many companies that are now public companies were once family businesses. Recent data estimates that family business account for almost two thirds of India’s GDP. In addition, these companies employ approximately half of India’s work force.
Around the world, also we see some of the largest companies in the world being either family owned or family run- These include businesses like Walmart, Samsung, Mars, Mango, Toyota, Ford Motors and Tata Group.
The question is why have Nigerian businesses struggled to pass businesses from one generation to another when others have been able to do it successfully?
I think the first place to look for an answer is to understand the particular nuances that are associated with family businesses in general. Running a business with your spouse or children has its benefits in the sense that, there is an inherent sense of loyalty from family members because, they are protecting the family wealth after all. There is also the benefit of quick decision making without having to approach any external party. On the flip side, there are many emotional hurdles to cross. For instance, what happens when the husband and wife have a terrible quarrel and have to work together the next morning to fulfil an urgent client order? Or what happens when the first born is not necessarily the most qualified to take over the reins of the business and insists that it’s his or her right to do so? This just mirrors the type of emotional roller coaster that could happen within family businesses. Those family businesses that will succeed this phase are those ones that are able to successfully manage these types of conflicts. Essentially, they don’t wish these conflicts away but they plan ahead for them. This brings me to some of the qualities that are required to make the trans generational transition for family businesses.
•Strong Patriarchs. Henry Ford, Sam Walton, Jamsetji Tata. These men had a strong vision driven by a Trans generational mission. Whether it was the fact that they wanted every American to be able to afford a car, or they wanted people to be able to shop for everything in one location, or they wanted people to look good in clothes. They all had an overriding vision driving them. They had grand plans and visions of a better society driven by their businesses. They did not see their business as just a way to make money but how to make the world a better place and they made sure this grand vision wasn’t going to die with them. So the obvious lesson here for entrepreneurs is to be mission driven. If you’ve got a vision that outlives you then you’ll do whatever it takes to ensure that generations after you follow in those footsteps.
•Driven by a family constitution. The logic is simple. Strong families produce strong businesses. Invariably the values that run through a family also run through the business. If a family is run in an atmosphere of bitterness, lack of commitment, no regard for integrity and does not keep to rules, then the company will only mirror the fabric of the family. Essentially, patriarchs that want to build enduring businesses must first build enduring families. The values of hard work, respect, love for reading/education, trust and a deep sense of responsibility must be cherished. In the family constitution which may be written or not (Although it’s better for it to be clear), areas like which qualities are required for family members to run the business, what to do in terms of conflict between family members, how much shares In the business will be given to outsiders and the rest should be addressed. Again this flows from a strong patriarch with a large vision and an enduring mission.
•Strong Boards. This flows from the concept that no matter how good you are, you need external help and you also need others to be a check on your activities. Research has shown that companies that have boards, on the average perform better than companies that don’t. So it’s imperative for family businesses to first constitute independent boards and then nominate individuals or institutions that have the same values as they have and have competence and experience in running businesses. These external board members will serve as checks and will give impetus to the ideas and vision of the business.
•Getting professional help. Family businesses must recognize when they need to get professional help. If they are going to grow, attract top talent and outlive the first generation, then they must be willing to engage professionals in the area of book keeping, strategy, financial advisory, human resources and the likes. They should also get technical help when they want to branch out to other sectors or deepen their knowledge of an existing sector. Often times, the founder or patriarch is very knowledgeable in the area of business he founded, whether it’s the hospitality, textiles or agriculture, construction or wherever he/she has an area of expertise. The founder often has strong contacts in the industry, knows the trade secrets and is influential in a particular area. However that knowledge or aura usually doesn’t last beyond one generation, which is why it’s important to get professionals who are able to put this knowledge and expertise in a body of documents translated as policies, strategy documents and business plans.
•Starting early. For instance, many second or third generation Indian business men and women talk about how they got involved in the business at an early age. This allowed them to understand the business, to gain insights into how to run companies. This fired their passion, and often times it influenced their course of study. The typical model is; the founder, who might have been illiterate or semi-literate; gets his children involved at an early age; the children take up the study of that industry or business management in school; then they come back and apply what they’ve learnt formally in addition to their prior informal training. Businesses that want to perpetuate the owner must get the children, spouse or other family members involved at an early age to fire their passion and increase their understanding of the business.
Individual businesses must imbibe these traits if they are going to outlive the founder and contribute meaningfully to economic growth.
The Nigerian government is prioritising improvement in the business climate in order to encourage more business to start, grow and expand. This will ensure that more people start business and have the right tools and support to ensure that these businesses adopt best practices, become publicly quoted and eventually outlive their founders.
We already see some good examples locally in the likes of the FCMB group, Honeywell group, Diamond Bank group and Dangote group. In other African countries, we also see examples such as Bidco Oil, Ramco group, The Kenyatta group (Kenya), Madhavani group (Uganda) and Pick n Pay, Remgro (South Africa).
We believe we will see more start-ups, outliving their founders and expanding beyond their local borders in the coming years.
What are you waiting for? JUST START.
Oguche Agudah