Is succession a problem for family businesses?

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Is succession a problem for family businesses?

Journal Title: Kwartalnik Nauk o Przedsiębiorstwie - Year 2018, Vol 46, Issue 1

Abstract

Family businesses constitute the oldest form of doing business. They connect three ele-ments: a family, an ownership and a company. The element that distinguishes family busi-nesses from non-family ones is succession. To keep a family character, it is necessary to pass it to the next generations. The main objective of this essay is to draw attention to the issue of succession that is currently faced by many companies in Poland and other coun-tries. Improper execution of the generational change can lead to a demise of the company. The Author discusses various new initiatives and undertakings that aim at supporting the companies in the process of transferring management to the successors. Moreover, he emphasises the importance of preparation of the successors themselves to take the re-sponsibility for the family company. In 2006, the oldest family business in the world ended its operation as an independent company. The Japanese temple builder Kongo Gumi operated continuously for 1,428 years, from the year 578. It would seem that the reasons for the fall were trivial – the company incurred debt for the speculative purchase of land, and the management did not foresee the crisis on the real estate market. Masakazu Kongo, who was the 40th family member leading the company, claimed that the flexibility of the company in selecting the leaders was a key factor of its longevity. The company leadership was not always passed to the eldest son, but to that one, who had the best health, was responsible and had talent for this work. What is more – it was not always a son – 38th leader was Masakazu’s grandmother [Pilling, 2007]. It is not an isolated example of a company with a centuries-old tradition. For about 1,300 years, the descendants of Fujiwara Mahito – 52 generations – run a tavern, which was founded in 705, that is approximately 300 years before the arrival of the Vikings to America, and 255 years before the Kingdom of England was founded. Another Japanese example, Hoshi Ryokan – a hotel and spa, established by a Buddhist monk, is located in Komatsu and is exactly 1,300 years old. It is owned by one family since 718, and was managed by 46 generations. The famous hot springs belonging to the hotel heal its guests from 1291. Hoshi is also one of the world companies operating continuously for the longest time. The hotel currently offers approximately 100 guest rooms. According to the report published by the Bank of Korea in 2008, which presented the results of the research from 41 countries, there were 5,586 companies in the world that were older than 200 years. Among them, 3,146 (56%) operates in Japan, 837 (15%) in Germany, 222 (4%) in the Netherlands, and 196 (3,5%) in France [Yonhap, 2008]. Family businesses constitute the oldest form of doing business. For centuries such a business activity used to be identified with a household. Most of the existing large corporations also started their activities from a family form. In family businesses the perspective of conducting the business is long and engages also subsequent generations. It is a factor increasing the strength of such companies; it is a point of reference, identity in the anonymous world of business [Sułkowski, Marjański, 2009]. A family business connects three elements: a family, an ownership, and a company. Family businesses are everywhere. When buying a Porsche car, we pay to the Porsche family; Ford – partly to the descendants of the famous Henry; while buying in Auchan or Carrefour hypermarket, we make a tribute to the families governing them. But also, the products purchased there contribute to the wealth of families, such as Lesaffre (yeast) or Bonduelle (vegetables). No surprise there. It is estimated that in the former EU-15 and in the United States, family businesses constitute from one-third to more than 70% of all entities operating on the market, which employ from 27 to 70% of all employees. More and more often it happens (not only in Poland) that the companies are run by entire families. In the European Union as much as 55% of the companies are considered to be family businesses, whereas in the group of small and medium- sized enterprises – according to the research conducted in nineteen of them – approximately 82%. The leaders are: Italy (99%), Germany (75%), the United Kingdom (75%), and Spain (71%). In the United States, 90% of all companies are family businesses, in Mexico – 80%. In Poland, for now (with the exception of micro-companies) this share is lower, but is growing rapidly. What exactly is a family business? There are many definitions of a family business. The most general is the statement of J. Sten [2006], who finds that a family business is such a company, which sees itself as such. This approach can be accepted, provided that, however, it is treated as an initial assumption [Klimek, 2014]. Therefore, we can assume that a Family Business is an undertaking of any legal form or a person conducting business activity, the capital of which is wholly or in the substantial part owned by a family, at least one of its members has a decisive influence on the management or holds a managerial position by himself or herself with a view to permanently maintain this undertaking in the hands of the family [Statut SIBR, 2018]. In American literature, we can also find many other attributes that specify a family business, which very accurately define their nature. The following are recognized as the most important: • employees – at least two family members work in the company, for what they receive or do not receive remuneration, • goals and values – the way the company is managed is largely influenced by the values cultivated by the family, • management – the family has the possibility to control the company management, • career – having the company largely affects the development of careers of family members and their courses, • sense of responsibility – the family cares for the company and feels responsible for its future, • problem of succession – family connections significantly affect the fate of the company, • common history – an integral part of the legend, which creates a kind of myth [Frishkoff, 1995]. An element that differentiates family from non-family businesses is the succession. To keep a family character, it is necessary to pass it to the next generations. If this does not happen, they reach the endstage, consisting in transformation into an anonymous company, which is beyond the supervision of the family [Jeżak, et. al, 2004]. Why is it worthwhile to deal with family businesses? Family businesses are seen as trustworthy, because they operate long-term, and this obliges them to take responsibility for the products or services they offer. They pursue a strategy that takes into account the welfare of its surroundings, but also have interesting selfdesigned projects for the benefit of their employees, customers, society, or the environment. And the customers search for real, unique stories and experiences. This is why family businesses have an advantage in creating brands, so-called authentic brands: brands with original history, continuity, engagement of the family of the owners, values. A product manufactured by a family business has its pedigree, thus it is not anonymous. This makes it more reliable. The family nature of a company can be a source of a competitive advantage. The combination of traditional values, which constitute the main pillar of the strategies of family businesses, with flexibility, innovation, as well as growth in the scale of operation, is still challenging: currently, still more than 80% of the Polish companies are micro-companies. Professionalisation of functioning of a family business becomes a must, if the company thinks about subsequent generations. G. Maliszewski, a chief economist of the Millennium Bank, claims that the role of family businesses in the Polish economy is invaluable, although their share in creating the GDP is significantly lower than in the developed economies. According to his estimates, family businesses defined as companies with family identity (36% of the overall group of companies) are responsible for approximately 18% of the GDP. In the developed countries this percentage is more than 50%. Following the examples of the oldest family businesses in the world, it might seem that the problem of succession is non-existent. The situation in this regard varies depending on the country. In Poland, succession is currently one of the most important issues of family businesses. The problematic aspect of this area is particularly evident among the companies operating as business activities of natural persons, in which the death of the owner is equivalent to the cessation of business. It must be remembered that the vision of passing the company to children can be an important motivation for the parents to care about the development of the company, and for children – an incentive to engage in the family business. In reality, it is often otherwise. The importance of the process of passing the company into the hands of the next generation is demonstrated by the fact that if it is carried out improperly, it may lead to the fall. The most frequently mentioned causes that result in short life of family businesses include: bad planning of succession and resulting therefrom inability to pay the inheritance tax by the next generation; failure to pass the company to the younger generation at the right time; inability to choose the successor (many families have more than one child, which raises the question of how to solve the issue of inheritance and which child should be given the leadership of the company). Taking over the company from parents – the founders of family businesses – is related not only to the benefits to the successor. From the point of view of the successor, it is an enormous responsibility that not everyone is able to bear. From the point of view of successors, the main barriers are the fears: of disappointing parents, of responsibility, and of the lack of competences. Necessary competences of successors, according to their opinion, include: diligence, courage, accuracy, and commitment. Therefore, it means that the development of these competences must start in the process of education of children in business families. How to carry out a successful succession? • Develop a coherent, long-term succession plan that will respect the principles listed below. • Select a stable industry and create flexible strategies of succession and change the company according to the requirements of business conditions, without being carried away by temporary enthusiasm, assessing their risk well. • Be flexible while selecting the successor, who does not have to be the eldest son or daughter, but the person who is the most competent, willing, interested in the company and its development. • Educate the successor in terms of directions that are helpful while managing the company to be acquired in the future (in doing so, the successor should be provided with a continuous contact with the company, otherwise the time of learning in the place away from the company may result in permanent “isolation” from the company, and the lack of interest in its acquisition). • Enable the successor to gain professional experience away from the company, so that he or she enriches their competences (going beyond what can be learnt in the company) and so that they are open to innovations coming from the surrounding. • Build the authority of the successor among the most important associates. • Engage the successor in the functioning of the company, allowing him or her to realize their vision (of course, as long as they are not in contradiction with the realized vision). • Do not impose decisions on the successor. • Start the process of succession relatively early to allow a gradual introduction of the successor to the company. • Familiarize the successor with your plan of life in retirement, so that they know that after taking over the company he or she will actually manage it. Family businesses are on the eve of many changes. Within 5 years, 40% of family businesses in the world should be passed to the next generation. However, this process is not easy both for the current owners, as well as for their successors. The practices of economies of Western Europe and the United States show that around 30% of family businesses indeed stay in the families. Others are sold or closed after the death of the owner, and the reason for such a situation may be not only a bad economic situation of the company, but also inability to take care of the company by heirs apparent. In Poland, the situation in this respect is very difficult. Concluding from the GUESS study on the entrepreneurship among students, conducted by the Institute for Family Business, only 8.1% of the successors want to take over the company from their parents [Raport IBR, 2017]. The problem emerges, among others, because the owners of family businesses postpone the starting point of preparation of the process of succession to an unspecified future, without being aware of the fact that sooner or later every family business will face the problem of passing the company to a successor, and almost none of them is ready to do it. Polish family businesses have not developed: • the ways of preparing a successor to take over the management; • legal solutions to make the succession as easy as possible; • mechanisms securing the leaving senior. There is also no legislation that would allow the continuity of operation of a family business conducted in the form of sole proprietorship after the death of the owner. Therefore, the draft of the act on successor management of a company of a natural person (so-called act on business succession) must be evaluated positively. After the death of the owner of a company, during the period of its acquisition by an heir or heirs, it would be managed by a designated institution. It can be a special inheritance proxy, who would lead the company through a period of ownership transformation, so that it can survive it, without losing its contractors, customers or contracts. Closing of a family business after the death of the previous owner is a real loss to the economy. Employees lose their work, and contractors must find a new partner for cooperation. Digital transformation increasingly exposes the differences between the older and younger generation in family businesses. Only 7% of the successors believe that their companies have business strategies adapted to the present day, and 36% feel frustrated due to the fact that their parents do not fully understand the opportunities and threats posed by new technologies – these are the conclusions from the report of the consulting firm PwC and the Institute for Family Business „O biznesie rodzinnym głosem sukcesorów. Różne ścieżki, te same priorytety” (On family business – view of successors. Different paths, same priorities) [IBR, 2018]. I think that this is the reason why almost half of the surveyed successors want to use the experience from working in a family business to set up their own start-up. Although it may threaten the continuity or the growth in the scale of operation of family businesses, still, the established companies can also be a support for the companies run by their present owners. In this situation, an effect of synergy should be achieved, which would combine new technologies, innovation, and tradition.

Authors and Affiliations

Prof. Roman Sobiecki

Keywords

EP ID EP346561
DOI 10.5604/01.3001.0012.0963
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