The dream of many business pioneers is not just to accumulate wealth for themselves, but for their business to outlast them and to provide a source of wealth and pride for their descendants.
Yet it is striking how few multi-generational businesses there are in South Africa, says Arnold February, regional investment manager at Business Partners Limited. He estimates that perhaps about one in a hundred owner-managed businesses are in the hands of the third generation, if not fewer.
Another remarkable feature of multi-generational businesses is that the first handover of the business from the founder to the second generation seems to be the most difficult, which explains the scarcity of truly multi-generational businesses in South Africa, says Arnold.
It is a complex phenomenon with many factors, which has mostly to do mostly with the fact that the life experience of founders is usually different to that of their children.
Building a business from scratch is diabolically difficult, which tends to amplify characteristics such as thrift, grit, drive, and opportunism, and develops a deep understanding of how money works in the founding. The second generation, however, are often shielded from these forces, grow up in gentler circumstances, become highly educated and develop different attitudes towards money and how to make it.
The handover between the first and second generation is therefore usually filled with clashing personalities and approaches. Therefore, a successful intergenerational handover is not something that happens spontaneously. It is a process that requires a lot of forward thinking, says Arnold.
He offers the following pointers to increase the chances of a business surviving and growing from one generation to another:
- Work on a formal succession plan
A business can survive a forced handover if the founder suddenly passes away or falls ill, but the chance of a successful handover becomes so much better if it is part of a careful long-term plan involving both the outgoing and incoming generation. A long-term succession plan early on allows a business to be structured with boards, holding companies and trusts that facilitate intergenerational growth and wealth transfer. It includes a range of technical aspects from favourable tax strategies to key-person insurance.
- Develop the necessary skills in the next generation
With careful forethought, the current generation can encourage their children to learn the skills necessary to grow the business one day – not only business skills, but the skills related to the specific industry.
- Emphasize financial education and discipline
The generation inheriting the money does not automatically inherit the ability to take care of and grow money. In fact, financial skills and discipline can be neglected in children born into established wealth. But attentive parenting can go a long way to fostering a healthy understanding of how wealth creation works.
- Work on channels of communication
Families that successfully manage to hand over the business from one generation to the next almost certainly have healthy channels of two-way communication between the older and younger generation. The process can be tense, and each generation must listen carefully to concerns, fears, aspirations and needs of the other.
- Clarify the choice between active and passive involvement
Not all the members of the next generation will necessarily want to spend their careers in business. A good succession plan must clarify the responsibilities and benefits of choosing to be active or passive stakeholders in the business.
Family members who choose not to work in the business could receive income as beneficiaries of a family trust but forfeit a degree of influence over the daily running of the business. Those who work in the business earn professional salaries over and above their income from the trust, and usually have a greater say in shaping the future of the business.
It must be clear to everyone, however, that an active role in the business is earned through hard work, qualifications, and job performance. A business will not survive if it employs unqualified people just because they are family members.
- Make space for those who choose active participation
A family business can become crowded one or two generations down the line. It is very important not only to clarify the role of each family member, but to also make space for ambitious members to find career fulfilment in the business. Family members can help to expand the business not only geographically, but also upstream and downstream in the supply chain of the business, and thereby each find their niche in the greater family business.
- Avoid groupthink through continuous learning
Fresh ideas and new approaches are needed for any business to survive over time. A new generation taking over can therefore play an important revitalisation role. But when leadership comes from the same family, steeped in the same family tradition, there is a risk that groupthink will crowd out new, vital ideas. One way to mitigate this risk is to encourage a culture of continuous learning in the family so that new ideas are constantly brought into the business.
- Work at handing over the relationships as well
A robust business is so much more than an impersonal string of accounts and transactions. It is also plugged into an intangible but very important web of human relationships. A successful handover from one generation to the next includes making the children aware of these relationships and introducing them to the network, perhaps even well before they start working in the business.
KEYWORDS: Arnold February, succession plan, channels of communication intergenerational growth, family business, family tradition, inheriting family business
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