Avoiding Traps That Kill Family Businesses

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Obinna Chima highlights tips that are essential for the survival of family businesses even beyond the demise of the founder

Prior to his demise on July 7, 1998, the late Chief Moshood Kashimawo Olawale Abiola, popularly known as MKO Abiola, was a very influential business mogul who had investments in critical sectors of the economy. His business interest ranged from aviation, agriculture, sports, bakery, real estate, publishing, communications, among others.

The acclaimed winner of the June 12, 1993 presidential election was no doubt a successful industrialist whose business chains created job opportunities for thousands of Nigerians.
Unfortunately, few years after his death, his business empire started crumbling, until theyfinally fizzled out, throwing its employees into the labour market, due to dispute among his children.

Beyond the case of the late M.K.O Abiola’s businesses that have since gone under, a lot of family businesses in Nigeria have died due to the demise of the founder. For some that are still alive and struggling, they are enmeshed in controversies as the children continue to fight over their share of the investments while the business nosedives.

Some of such businesses include the Ekene Dili Chukwu Transport Company that was founded by the late Chief Augustine Ejikeme Ilodibe, who died on July 1, 2007; the founder of the Henry Stephens Group of companies, Henry Oloyede Fajemirokun, whose business grew rapidly and diversified into several spheres such as engineering, banking, insurance, shipping and oil, but went under after his death in 1978; the Odutola business empire, which was owned by two brothers – Late Alhaji Jimoh Odutola and Late Timothy Adeola Odutola; and Sir Joe Nwankwo whose beverage factory used to produce Gina soft drink, but perished alongside his other businesses soon after his death. All over the country, there are cases of businesses that went into extinction immediately the founder is no more.

But the Harvard Business Review (HBR) pointed out that in the United States, a familiar aphorism—“Shirtsleeves to shirtsleeves in three generations”—is commonly used to describe the propensity of family-owned enterprises to fail by the time the founder’s grandchildren have taken charge.

Throwing more light on this adage, the Family Line report explained that it is used to describe the tendency of the third generation of a family to squander the wealth obtained by the first.
Furthermore, it pointed out that the the First Generation usually comes from a life of hardship and always determined to have a better future for themselves. Typically, they are willing to work hard and make sacrifices to achieve their goal. By their later years, their efforts have paid off. They enjoy a more comfortable lifestyle, often with assets to pass on.

Their children, the Second Generation, grow up a witness to their parent’s struggle and understand the importance of hard work, the report explained. Althoughmembers of this family in this generationnow live a more comfortable lifestyle, they may still remember a childhood filled with frugality.

“Because of this awareness, they make sound educational and financial choices that help them build upon the foundation their parents worked so hard to create. By their later years, the second generation has acquired even greater wealth.

“The Third Generation, however, has no memory of want or struggle. They only know a life of plenty and often lack an understanding of the effort that went into building the lifestyle they now enjoy.
“Without this awareness, it is of little surprise then that the third generation has a tendency to squander what their parents and grandparents worked so hard to achieve,” the report stated.

According to the HBR, about 70 per cent of family-owned businesses fail or are sold before the second generation gets a chance to take over. It further revealed that only 10 per cent remain active, privately held companies for the third generation to lead.

In contrast to publicly owned firms, in which the average CEO tenure is six years, many family businesses have the same leaders for 20 or 25 years, and these extended tenures can increase the difficulties of coping with shifts in technology, business models, and consumer behaviour. Today family firms in developing markets face new threats from globalisation. In many ways, leading a family-owned business has never been harder.

Nonetheless, a family business is unique, in that it needs to keep both the needs of the family in mind with every business decision, without deterring from what’s right for the business itself. Anyone running a family business will attest to the fact that with every decision the interests of the family must be held in one hand, and then interests of the business in the other.

When one is favoured over the other, things fall apart. If the owners set aside the interests of the family for those of the business too often, then they will soon find that the family starts to resent the business and pull away from it – making it difficult to pass it on to a committed next generation. On the other hand, placing the family’s needs above those of the business will lead to the quick deterioration of the company’s health, making it unlikely that it will sustain itself much further, let alone thrive.

Tips for Family Business Survival

To the Managing Director of Fidelity Bank Plc, Mr. Nnamdi Okonkwo, the principles every enterprise requires to survive and outlive their founders are the same.
He stressed the need for entrepreneurs to adhere to corporate governance principles, proper book-keeping among other best practices for their businesses to survive.
According to him, most of the companies that employ thousands of persons in the country today started as SMEs.

“You must know what to do with the finance. You must know even simple booking-keeping practices,” he explained.
He urged entrepreneurs to embrace proper business planning, so that to survive in any sector they chose to operate in.
“Another issue is poor corporate governance. Have you asked yourself about all those big names we knew when we were growing up, where are
they today?

“So, the question is why do family businesses fail? Poor corporate governance, no succession planning and that is why such businesses don’t grow beyond the operators.
“You need to bring equity investors and step aside to let that business thrive. Beyond this, the access to suitable finance is also important for SMEs,” he said.

Also, the founder of LEAP Africa, Ndidi Nwuneli, urged operators of micro, small and medium scale enterprises (MSMEs) in Nigeriato always put in place the right structures for their business to outlive them. Nwuneli, also stressed the importance of governance for any organisation to survive.
According to her, every forward-looking firm must have a strong board of directors.

“You can’t have a one-man business if you want your business to outlive you. The second is strong financial controls and management and the third one is innovation.
“You also need to continue challenging yourself to new ideas. And the fourth is management.
“You can’t do everything yourself. You need to find the right persons, empower them, equip them and sustain them,” she added.

According to her, once the right structures have been put in place, it would be easy to attract capital.
“Are you separating your personal finance from your companies’ finances? Do you have budget? Do you carry out audit?” she asked.
On his part, the Managing Director, UPS Nigeria, Mr. Ralph Ozoude said: “Part of the challenges companies have is sustained growth and some of it has to do with corporate governance and compliance.

“Every entrepreneur who is starting needs to have a long-term goal. If the goal and objective of that entrepreneur is to make profit in the short-term, then he may not be creating structures and systems that would be sustainable, replicable and that would enable his business to grow and outlive the owner.”

Also, in its latest survey titled:“Nigerian Family Business Barometer,” KPMG Nigeria, pointed out that respondents in Nigeria and across continents surveyed agreed that preparing and training the next generation prior to assuming leadership positions, and improving financial literacy among family members are critical success factors to building businesses that will outlast the founder’s generation.

It also noted the importance of succession planning, stating that a factor that affects the quality of management in such businesses is that in certain cases, the heirs may genuinely not be right for the job -they may be more extensively and expensively educated than their parents, but lack the managerial skills to command a big organisation.

Joachim Schwass of IMD, a Swiss business school, argued that the most common characteristic of failed successions is that the family marks out the eldest son for the top job from an early age, and hands it to him regardless of ability.

“The list of companies that have ended up being sold, or handed over to professional managers, for want of a suitable family member willing or able to take over, include two of the world’s biggest hotel chains, Hilton and Marriott; and one of its biggest toymakers, Lego.

“To avoid this fate, and increase the chances of producing a strong successor, business families need to grasp two things. The first is that inheritance is a process, not an event. That process involves giving potential heirs a chance to prove their worth. The second thing that business founders must grasp is that behind a successful family firm lies a successful family,” the KPMG report added.
Bernard Arnault, the boss of LVMH, and Rupert Murdoch, the boss of News Corp, have both given their children bits of their empires to run.

Also, Samsung created the role of “chief customer officer” for Jay Lee, the son of its boss, Lee Kun-hee, to give him experience in handling all-important partnerships with other tech firms, such as Apple. Another Lee family, which owns Lee Kum Kee, a Hong Kong-based maker of sauces, has created a “family learning and development centre” to prepare the next generation to take over. According to experts, another way to ensure that heirs are ready for the jobs they inherit is to make them prove themselves outside the family firm. This can broaden their experience, boost their self-confidence and prove to doubters that they are more than just daddy’s pet.

The foregoing clearly shows that by keeping family stories and history alive, younger generations are able to understand and appreciate their parent’s and grandparent’s efforts as well as the work needed to build and maintain family wealth. Combining awareness of one’s past with thoughtful strategy for the future can help families overcome the Three Generation Cycle stated earlier.
Importantly, most of the preparation and training for the next generation will have to start earlier rather than later, to ensure a seamless transition in later years. Also, financial literacy amongst members of the family business cannot be over-emphasised as it is the key to making sound business decisions.Taking the company public by listing it on the stock exchange is also crucial for its survival in the long run.