• Family-owned businesses can thrive with the correct advice and long-term business guidance

While South Africa is well known for its inherently entrepreneurial culture, too many promising family-owned businesses do not reach their potential due to a lack of objective external input and independent advice.

31 May 2017

South Africans have no shortage of tenacity to survive, but Ian Scott, CEO of Grant Thornton Cape, believes many local start-ups can achieve significantly more with the benefit of an outside perspective.

“Family-owned businesses face a great deal of challenges, but the single biggest problem in our view is an inability to choose the right trusted adviser early in the business’ life, to help the business to become more sustainable and to provide an independent perspective.”

According to US-Based Family Firm Institute, family-owned organisations make up two thirds of all businesses around the world and they are estimated to contribute 70% - 90% of global growth every year. But there is a high failure rate of these businesses.

Scott believes many of the hurdles that trip up businesses with great potential can be prevented with the right input from a trusted adviser who is not a part of the family. 

“It is understandable that start-ups want to keep the business away from too many outside influences, but having an adviser and/or non-executive director does not amount to giving away any control of the business,” says Scott.  “It is rather a way to cover the blind spots that entrepreneurs often do not see.”

Whereas accountants and financial managers are skilled at giving a backward-looking account of the business, the right advisers are experienced at looking forward, and identifying the inhibitors to growth and sustainability, explains Scott.

“One of the most important elements in ensuring longevity for family-owned businesses is having a documented succession plan that all the board members are aware of. An adviser can also be invaluable as a sounding board to evaluate the suitability of a new leader.”

He believes the wrong choice of CEO and family interference are the most common reasons why family businesses fail when they reach the second or third generation.

“No amount of passion or enthusiasm can compensate for a leader who does not have the right skills. Sometimes it is best for the founder to sell out and invest the proceeds for the benefit of the family, rather than to continue,” he says.

According to Scott, the right adviser who has the ability to work with a family business over time, can help the owners to focus on their vision for the company and make difficult decisions.

“Many family-owned businesses also neglect preparing contingency plans to ensure the company is resilient enough to withstand unexpected shocks, such as the founder becoming ill or incapacitated,” he says. “Succession planning is one such crucial element to any contingency plan and should start the minute a second generation joins the business.”

“South African entrepreneurs have the added complexities of ensuring that their business model and procurement processes are properly empowered.” This is another area where external advisers can be of incredible value. Scott explains: “It is very important – especially for a unit such as a family-owned business – to choose the right empowerment partner that shares the family’s vision and philosophy. Advisers have the benefit of providing additional insights as to a potential partner’s suitability.”

Scott believes the key to success lies in family businesses being agile enough to make successful changes to structures as they grow.

“A number of big companies in South Africa – including Pick ‘n Pay, Liberty Life and Remgro – started as family-owned businesses and grew successfully to their current stature.  Each one has a different story but all started with a visionary entrepreneur.”

Given family-owned business’ contribution to the global economy, he believes it is of absolute importance that South Africa nurtures its entrepreneurs.

“Our economy needs growth and job creation now more than ever, and it is therefore crucial that we support family-owned businesses to become more sustainable and to have the longevity required to reach their full potential,” Scott concludes.