Text: Liz Black. Article from the August/September 2012 issue of Your Business Magazine.
These business owners have turned their family’s unique strengths into a sustainable competitive advantage…
According to the latest Adcorp Employment Index, 440 000 small businesses in South Africa have failed in the last five years. This means that, during that time, roughly 240 small businesses per day have closed their doors. It doesn’t paint a pretty picture, and it’s not a very inviting one for would-be business owners.
But one sector manages to defy the odds, building enterprises of all sizes that surpass the average lifespan of most firms. The question must then be asked; how do these companies survive and even thrive from one generation to the next?
Can a company live forever?
Family businesses with a commitment to proper governance structures and succession planning have what it takes to defy the odds and pass from one generation to the next, according to family business expert Andre Diederichs.
Family businesses thrive because the focus is on creating a lasting legacy for the family and the business. As Diederichs explains: “Those heading up family businesses see their roles as one of stewardship; they don’t focus on the here and now, but rather on creating a better tomorrow. They plant trees that they will never sit under.”
South Africa’s oldest family business – Boplaas – is living proof of this, adds Diederichs, as “they were taught from generation to generation, that they merely borrow the business from their children”.
Fly the family flag without friction
As is true of any business – or indeed any family – it is not all plain-sailing, even if you have a clear idea of where you want to be. And among the biggest challenges of running a family business is the fact that it requires an unusual openness where family members have to be brutally honest with each other in the best interest of the business. “It is not always nice to hear direct commentary on how you perform and behave from your nearest and dearest,” says Diederichs.
For Nita Luis, co-founder of the Cape-based family business Brights, communication between the different generations has been a challenge. “Communication, differences of opinion and managing the resultant conflict is always difficult. We’ve all learnt the importance of appreciating each other’s viewpoint, and airing our opinions. You definitely need patience!”
Nita and her late husband Delfino founded their electrical contracting and repair business Brights in 1971. The business has since grown to include three of their four children, and spouses, as well as a number of staff members who have become shareholders. Over the years the business has grown into a multi-faceted outlet for building materials and hardware supplies. The family has also opened a warehouse, brought their first franchisee on board and acquired Northern Trusses (now Brights Trusses). Growth has made keeping the lines of communication all the more important.
Founder and owner of the Cape Town Ostrich Show Ranch Gavin Kanigowski echoes Nita’s view that ongoing communication is crucial for a family-run business to grow. “You have to deal with divergent views almost daily – sometimes the issues are big, sometimes small. There’s a lot of compromise involved, and you may find yourself mediating between family members,” he says.
The Cape Town Ostrich Show Ranch has been in the Kanigowski family for more than 18 years. During this time the fully operating ostrich ranch has been built up into a tourist destination offering tours, leather and related products and an ostrich meat orientated restaurant. Polo training is a relatively recent addition to the family’s portfolio, but one that patriarch Gavin believes will bring even more tourists to the Cape’s west coast.
Gavin attributes part of the success of the family’s endeavours to their shared interests – particularly in the sport of polo. “Our enjoyment of the sport is one element of the cement that helps keep the family together and the business doing so well. When we’re on the field our enjoyment supersedes all that has gone on in the farming business.”
Getting a feel for the business
Farming is a hands-on business and so the Kanigowski clan were able to get their hands dirty from an early age and find out what interested them. “You will find that over the years with youngsters their interests change and their attention shifts. But you’ve got to let them make their own mistakes, and learn from them – unless of course they’re life-of business-threatening.”
Gavin considers the experience his children have had at other similar businesses in South Africa and overseas as a significant part of their education. This is particularly true of the tourism side of the business. “To operate a tourist destination, you need to be a tourist yourself. You can pick up ideas while overseas, bring them back and adapt them to local conditions.”
The Luis also believe in involving their children in the business from a young age. But with this has come the realisation that each person is different, and that they have unique talents and skills. One of the toughest things for Nita was letting go, when one of her daughters decided not to join the family business.
Diederichs says one way around this challenge may be to create subsidiary or side businesses. “Remember the business is there to create wealth for the family. You will have children who have talents that are not necessarily part of the core business; allow them to start their own businesses, and in doing so create wealth for the entire family.”
Provision may need to be made for family members who are shareholders or beneficiaries, but not actively working in the business. Those working in the business are rewarded through their salary and other incentives. “Don’t mix up ownership and management,” Diederichs advises. Owners need to be compensated too.
Family business defined:
- The family must control the majority of the shares
- They must be in control of the strategic direction of the business
- They must have the intention to take the business to the next generation
Governing the business
Governance structures are crucial to ensure that emotions don’t impact business decisions, Diederichs says. It’s clear that different family businesses handle the matter of governance in different ways. Some family businesses have effective governance systems that are based on informal and casual methods. Others create more formal structures of governance involving family councils, advisory boards, family business constitutions, formal agendas, voting and the like.
Nita and her husband started out with a very informal and casual method of governance, but as the business grew, it became necessary to put more structures in place. Today all family members form part of the Board of Directors and there is a Directors’ Agreement in place. Orlando Luis currently heads up the company as CEO, and each family member has a specific function and responsibilities within the business.
Implementing the new structures was easily done, according to Nita. “We were at a stage where we all agreed that the extra order and structure was needed.”
Commit your vision to paper
In the businesses he advises, Diederichs usually starts by drawing up a family business constitution. This is a working document that helps the family clarify its vision and values and create the structures needed to guide the business forward. He also encourages families to set up two forums; an advisory committee or board and a family forum. The advisory committee would usually include people with strong business acumen who don’t have a stake in the business. Their role is to check that business decisions are made correctly and not emotionally.
The family forum takes care of the family’s interests. “The forum must make sure that the family gets together on a formal basis so that family members who work in the business can report to the other family members.”
Internal structures are crucial too, says Diederichs. Here family businesses need to focus on their company policies and procedures. Proper job descriptions with key result areas and measurements, as well as formal performance review procedures must be drawn up for all staff, including family members.
Business owners often make the mistake of taking more from the business than it can afford – and this is no less true of family businesses. This is where clear remunerations structures are important. Salaries and rewards must be market-related.
Passing the baton
Rules for succession are part of the family constitution and should be set out sooner rather than later, Diederichs says. There are many different options to consider here. They can stick to tradition and appoint a family member, or adopt a more modern approach and appoint a non-family member, a caretaker manager if the required new successor is still too young or inexperienced or a new professional manager. They can also consider selling all or part of the business.
Diederichs suggests that families start planning as early as possible and that future management and succession should be raised in non-threatening ways. “It is important to treat succession in a relaxed way and as part of normal business planning. Encourage family discussions and bonding among siblings and cousins so that they learn to trust each other and everybody is clear on the business’ objectives and future goals.”
Diederich’s final piece of advice is for families to realise that succession may lead to worry and a negative response from influential stakeholders. The retiree may be reluctant to go or have feelings of distrust about the successor. Employees, suppliers and customers may also have fears or expectations and the only way to manage the impact of these is through ongoing and clear communication.
Successful succession planning calls for maturity, trust and respect on the part of all individuals concerned, but will prevent problems in the long run. Succession planning can be a long and challenging process but ignoring it can endanger the future of the business.
Succession planning tips
Diederichs has the following tips regarding succession planning:
- Don’t force younger-generation family members into the business or into a position in which they are not interested.
- It is never too early to initiate or mentor young family members
- Identify, as early as possible, the skills and aspirations of all family members
- Educate young people to improve their knowledge and experience of the business and be realistic about their personal talents and aspirations
- Involve and mentor young people throughout their formative years and provide opportunities for them to help in the business to gain experience
- If any family member is not interested in joining the existing business, use this as an opportunity to encourage them into diversified, but supportive, business activities
- Help seniors plan for retirement and support them through this period.
- Continually discuss, within the family and with non-family managers, the progress of the business and the plans you have for the future.
Andre Diederichs is a well-known business expert, speaker and author. He has published six books and is a regular guest on radio and TV talk shows.
Contact him or order books at: www.andrediederichs.co.za or via email: awdiederichs@mweb.co.za.
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