Growthline - May 2017

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

Family-owned organisations make up two thirds of all business around the world and US-Based Family Firm Institute estimates they contribute 70%-90% of global growth every year. Yet, there is a high failure rate for these businesses, despite the common pitfalls being well-documented.

The position is no different in South Africa, well known for our entrepreneurial culture and ability to survive tough conditions. At Grant Thornton, we have found that many promising family-owned businesses do not reach their potential due to a number of factors including the lack of objective external input and independent advice when planning for the future.

Family-owned businesses arguably often face more challenges than other start-ups, due to their unique make-up but with the right external advisers they are often better placed to take advantage if opportunities are to overcome obstacles.

South Africa has a long and strong history of entrepreneurs and family-owned businesses, some of which have been around for generations and which have even grown into publicly traded companies, such as Pick n Pay (Raymond Ackerman), Liberty Life (Sir Donald Gordon), Remgro (The Rupert Family) and other well-known families/ entrepreneurs – e.g. The Oppenheimers, Richard Maponya, Pam Golding, Patrice Motsepe, Sol Kerzner and Douw Steyn.

Outside of the urban hubs and stock exchange, family businesses often form the backbone of many a town in our vast countryside and are important employers in communities.

Yet, in all too many instances their growth can get stunted and some businesses with great potential fail after the first generation. In addition to the challenges that all start-ups have to overcome, we must recognise that family-owned businesses do face added difficulties.

Added hurdles of the family unit

One of the most common challenges for most companies – regardless of their structure – is that of succession planning.  This becomes notably more difficult in a family unit where there might not be an obvious successor.  There are often many contenders for – and expectations about – the position of the next CEO. The wrong choice of successor can lead to unintended consequences and long lasting damage.

More so than other businesses, key-man risk is a significant challenge for family-owned firms. We have seen many high-performing companies being faced with a sudden crisis if the founder dies or becomes incapacitated. Either the rest of the business is not well-versed enough in the operations for it to continue seamlessly, or the business is saddled with large amounts of debt that they were unaware of previously.

Family businesses need to combine ownership, the business and family relationships in a sustainable way which includes shared goals and values.  Conflicts need to be managed and dealt with sensitively. The relationship between family and professional management needs to be defined and managed as well.

In addition to facing the same challenges that all family-owned businesses globally are subjected to, South African entrepreneurs have the added complexities of ensuring that their business model and procurement processes are properly empowered.

An independent set of eyes and ears to monitor the blind spots

Globally Grant Thornton has a strong history of working with family-owned firms, and helping them grow into strong and sustainable companies. We have found that many of the hurdles that trip up businesses with great potential can be prevented with insight from an outside party.

Businesses often believe that they alone know what is best and they can be reluctant to get outside advice on sensitive matters from someone who can be viewed as a trusted adviser.

It is understandable that entrepreneurs want to keep the business away from too many outside influences, but having an advisor does not amount to giving away any control of the business. It is rather a way to cover the blind spots that owners often do not see.

Whereas accountants and financial managers are skilled at giving a backward-looking account of the business’ success or otherwise, advisors are experienced at working with the organisation and identifying the inhibitors to growth before it becomes a problem.

The value of a trusted advisor is the ability to understand the family business and help the owners materialise their vision for the company, even if this means making difficult decisions.

Overcoming familial challenges

One of the most important elements to ensuring longevity for family-owned businesses is having a documented succession plan that all the board members are aware of. In this regard, an advisor can be invaluable as a sounding board to evaluate the suitability of the new leader for the future direction of the organisation.

No amount of passion or enthusiasm can compensate for a leader who does not have the right skills to grow the business. Sometimes, if the entrepreneur is reluctant to have the business led by an ‘outsider’, it may even be best for the founder to sell out and instead invest the proceeds for the benefit of the family.

Advisors can also be a major aid to ensure that plans, procedures and structures are documented, which would make the business resilient enough to withstand shocks, such as a key person leaving.

External advice can be of incredible value in deciding on empowerment partners for family-owned businesses, as it is very important to choose a party that shares the family’s vision and philosophy.

Success is a sustainable family business

The key to success lies in family businesses being able to make successful transitions for continued growth. Given the hard work that entrepreneurs and their families put into starting and growing a business for generations to come, they should also put special care into planning for the future, to ensure the family’s legacy and wealth remains intact.

Family-owned businesses make a significant contribution to the global economy and therefore it is of absolute importance that South Africa nurtures its entrepreneurs.

Our economy needs growth and jobs now more than ever, and so we should do all we can to support family-owned businesses to become sustainable and have the longevity required to reach their full potential.

For more information about family-owned businesses, please contact us.