Privately held business

Family business succession planning is a tricky business

Johan Blignaut Johan Blignaut

As if operating a company is not challenging enough, family-owned businesses face a unique set of obstacles that introduce elevated levels of complexity. These become most pronounced when the question of succession raises its head.

Johan Blignaut, managing partner at Grant Thornton Pretoria, says that this is a universal issue and is not unique to South Africa. The auditing firm has established global expertise in privately-held and family owned business, of which between 60% and 80% fall into the family-owned category. He explains that the term “privately-held” applies to a business that is majority owned by a family, while the term “family-owned” business applies to an entity that is owned outright by a family.

“Succession can be a very sensitive subject if it’s not managed correctly,” Blignaut says. “Apart from having to navigate emotional and hierarchical issues, the business owners also have to face up to the reality that few family-owned businesses survive beyond the second generation.

“Either the business fails, is bought out by management or a competitor, or goes public. While these outcomes are at the opposite ends of the scale, it is clear that the dynamics of the family-owned business change from one generation to the next.”

Blignaut says that one of the biggest mistakes for these businesses is to delay the conversations about succession until the family head decides to step down. He suggests that succession planning should start the minute a son or daughter joins the business.

By taking a long-term view, all family members have clarity on their career path and the expectations and prospects for the younger family members. Failing to set these parameters can lead to dissatisfaction, bickering and political in-fighting that is to the detriment of the business.

These issues are accentuated when the chosen successor falls outside of the expected hierarchical principle of the first-born assuming leadership. The decision not to adopt this approach could be due to personality, technical issues, qualification or attitudinal differences between siblings.

“A good business decision does not always translate into a good family decision given that it could lead to divisions in the family unit,” Blignaut says.

He suggests that an external, trusted business advisor would be best to introduce impartiality that could defuse any such tensions. This is a role that he has played numerous times - not only to company founders but also to successive generations of business owners.

One way to overcome many of the potential sticking points is to put firm governance structures in place, including external board members who are able to provide guidance and direction. This will also ensure continuity of the business vision, even if the younger generation identifies the need to shake up the business.

Blignaut says this is often the case as young blood sees the need to modernise or adapt the business to market changes that have taken place since the business was established.

Some continuity can also be gained by elevating the company founder to a position such as chairman, although that potentially leaves room for the ‘retired’ founder to frustrate the new leadership.

“Many of these issues correlate to the type of relationship that exists between parents and their children. If that relationship is strong and mature, many of these issues can be resolved without upheaval. If the opposite is true, then a rocky path lies ahead for the business,” he says.

“It takes a very special patriarch or matriarch to step away from something that has been integral to their life. It’s not uncommon for them to struggle to let go, particularly if they have doubts that their children will be able to continue their legacy. Outside perspective is crucial because it allows them to see that their future can be secure, even if they’re no longer directly involved in the business.”

 

Notes to editors

About Grant Thornton South Africa
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