"In Failing To Plan, A Family Business Plans To Fail"

Vanessa Conneely - 20th April 2019

According to Dr Nadine Lia, Regulator at the Family Business Office, there are three main areas where families go wrong when it comes to passing on their business to the next generation.

The phrase “in failing to plan, a family business plans to fail” is one that defines Dr Nadine Lia’s role as the Regulator for the Family Business Office. The office was set up in 2017, shortly after the introduction of the Family Business Act – an innovative law introduced to assist family businesses, which was a first for Malta and internationally.

“More than 85 per cent of all businesses in Malta and Gozo are family-run,” Dr Lia said – which translates into a great deal of people who need advice and assistance in ensuring that their businesses operate and transfer at their optimal strength.

“From an international perspective, 175 of the Fortune 500 companies in the US are still largely family-owned, and family firms internationally account for 78 per cent of new jobs, 60 per cent of employment and 50 per cent of Gross Domestic Product,” Dr Lia explained.

“In Malta, micro, small and medium-sized enterprises make up a huge majority of businesses, with many of them being family-run. More significantly, 95 per cent of these SMEs are classified as micro-enterprises, having fewer than 10 employees. These companies generate around 80 per cent of all jobs in the economy and create 71 per cent of the overall value added. For both variables, this is about 14 percentage points more than the EU average.”

“More than any other member state in Europe, Malta’s economy depends on its SMEs. These groups have managed to remain robust over the past decade, despite the global economic crisis of 2008. Since then, the number of SMEs increased by almost 1,000, and the employment level grew by 2,320 or 2.5 per cent over the period of 2008-2012. These increases in and by themselves are rather modest, but when put against the backdrop of one of the most serious economic crises in decades, this performance is quite remarkable.”

Dr Nadine Lia

Dr Nadine Lia

Even though many Maltese businesses managed to pull through this difficult period on their own steam, it was deemed on a policymaking level that there was a lack of a support structure in place on a larger scale. “Before we set up the Family Business Office there was no sectorial recognition, direct assistance or a reference point in Malta, and this is the situation the world over. As family businesses form the backbone of the economy and are the biggest contributor GDP-wise, it is essential that they are provided with assistance.”

According to Dr Lia, there are three main areas where families go wrong when it comes to passing on their business to the next generation. The first is planning, the second is the emotional impact, and the third is executing the transfer smoothly during the founders’ lifetime and avoiding the business shock when it is forced to be done on the sudden death of the owner.

“The Achilles heel of family-controlled enterprises appears to be planning – or more accurately – the lack of planning. Family businesses are very dependent on the current generation of owners, because children of self-made entrepreneurs develop different personalities, skills, work ethics, confidence levels and interests than the parent who built the business.”

“An informal survey carried out in 2010 revealed that the majority of family businesses do not have formal structures governing employment, education and remuneration of family members. The figures available for training and skills development also point to a need for catch-up in this area, which show that, for example, only 16 per cent of businesses in Malta provide training to their employees. This represents just two-thirds of the EU average. So, in failing to plan, a family business plans to fail.”

FBO

Dr Lia says the second pitfall many people encounter is the emotional boundaries connected with working with family members.  “Handing over any business is a difficult task in normal circumstances, but when you factor in the emotional dynamics involved within families, it can become a lot more complicated.  But the statistics don’t lie; it has been found that roughly 70 per cent of business successions don’t work and 70 per cent of businesses have no succession plans in place. It is often the most neglected area of activity by the typical family firm owner.”

Finally, and crucially, the more challenging hurdle is executing the actual transfer. This is no easy feat and requires sound financial and fiscal planning and resourcing, clear identification of the new ‘leaders’, demarcation of new roles, maintaining the trust and confidence of employees, collaborators and all persons associated with the business in the new management – all this without disrupting the momentum and operation of the business.

The Family Business Office serves as an advisor to a broad spectrum of family businesses, ranging from carpenters to manufacturers to hoteliers to name a few. And while family-run businesses are nothing new in Malta, Dr Lia observed that the traditional model is changing. “We see businesses that started out as a sole-trader for the first generation, converting to fuller companies as they are passed on to the next generation. There’s also been the introduction of new legislative instruments such as trusts and foundations, which are given new scope to be used by family businesses.”

Dr Lia added that businesses can save a lot of money by educating themselves on incentives Government has to offer. “In 2018, more than €29 million worth of savings were made by family businesses in Malta and Gozo thanks to the fiscal benefits, governance schemes and tax credits made available,” she said. “Another €12 million were generated for public funds after people transferred their businesses and benefitted from a reduced stamp duty. This was more money that went back into the public funds to be utilised for the common good.”

The Family Business Office holds regular events where members of the public can get more information. “Last year we held 15 events across Malta and Gozo. They varied in size and style from one-to-one sessions, to larger events hosting more than 150 people. The aim was to raise awareness, as well as educate the business community about the numerous incentives which are available to them. We were also able to hear the concerns of people and provide a reference point for future contact.”

For further information about the incentives and benefits available or for assistance from the Family Business Office, contact T: 2220 9524; E: familybusinessact.meib@gov.mt; Fb: Family Business Office Malta; www.familybusiness.org.mt 

This article originally appeared in The Malta Business Observer


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