Etienne Borg Cardona

Founding partner, Capital Advisory Limited

Etienne Borg Cardona is the founding partner of Capital Advisory Limited, an independent advisory and consulting firm. He currently advises on corporate finance, financial management, business optimisation and corporate governance, drawing on over thirty years’ experience in leadership positions in the private sector.

Family Business Succession - Not The Whole Story

Monday 07th August 2017

Family firms are in fashion. Everyone seems to like them – management thinkers as they take a longer-term view, politicians as they weather crises well and provide relatively safer jobs, and the public as they appear to practise a more benign form of business, and are closer to local communities. Yet, as Schumpeter wrote in an article in The Economist titled “Reluctant Heirs” some time back, one important stakeholder seems to be increasingly absent from this fan club – the next generation. Surprising? Not really.

Pick up any book or article on family businesses and inevitably the question of succession will feature. Generational succession is rightly considered to be one of the red zones in the family business life history, and one that has the nasty habit of coming back to cause trouble with every successive generational transition. This is a reality and well researched, but it is in my opinion, increasingly no longer the whole story.

Generational succession within the family has, until recently, been considered a given. Passing on the family business baton from one generation to the next was, after all, seen as the most natural thing to do, binding generations together in securing the transmission of the management of the patrimony of family wealth and reputation, thereby extending the business legacy, and keeping it “all in the family”.

Increasingly, however, we come across family businesses where family members in the upcoming generation are uninterested or unwilling to take over the family business. Millennials particularly are seen to be more predisposed to follow career (or life) paths that they feel passionate about rather than falling unquestioningly into the family business. Many feel reluctant to rely on a position within the business as though by birth right, opting to go out into the world and cut their teeth in industry, gaining their credentials before (possibly) returning and taking up their position by right, and not by birth right. And patriarchal business owners many times do not make the situation any easier – the “sticky baton syndrome” remains a problem, particularly with the new generation, who do not take kindly to the command and control mindset.

All this means that increasingly, family business owners need to seriously think about a very real scenario where family succession is not automatic. This means that being prepared to eventually sell the business is a distinct possibility - and this requires a mindset that is not natural where family businesses are concerned. The issues associated with generational succession are well documented. What may be less well appreciated are the unique difficulties associated with disposing of a family business.

The reality is that many family businesses still have an unhealthy dependency on a single business owner, who retains a disproportionate amount of business knowledge, network of contacts and authority. Apart from the well-documented negative effects of this outdated management style, the paralysis it fosters, and the difficulties it presents to an eventual succession, another problem crops up. The business is rendered unmanageable without the owner, as management and staff have been kept away from taking ownership and are not able to effectively run the business should he or she move out of the scene. Not only – this state of affairs renders the business effectively unsaleable without the owner remaining on the scene, at least for what is usually a considerable period of time. This makes it an unattractive proposition for a would-be buyer.

Another drawback that can, and often does arise is that the compelling narrative that is normally associated with successful businesses unconsciously remains untold. The family business may well be a success story in terms of prestige, branding, customer loyalty, financial results and market share, but its unique business proposition – the story that would make it attractive to an outside buyer – is many times neglected as there would normally not be a compelling reason to publicise that story. After all, everybody within the family probably knows the legend and lore from an early age, and probably lived it hanging around the retail store or factory floor as a young child!

The point to be made here is that family businesses today need to accept the very real possibility that the next generation will not be around to take over the wheel. Increasingly, this creates a new scenario where business owners need to be conscious of the fact that the family business needs to be positioned to be attractive not just to family members, but, increasingly, to potential outside buyers. Getting there requires thinking that may not come naturally within family business environments.