Family business stories

Basic registrations and compliance for businesses
April 4, 2017
Using a trust for estate duty purposes
April 4, 2017

A2

1. James and Sarah have been avoiding each other like the plague for more than a week now. Sarah joined her husband James a year ago in his construction business as the accountant. They have been locked in battle since day one: About who must do what, how much time she can take off for home and children, finances, staff etc. There was an incident in front of the staff in which she threw his cell phone at him and he kicked a hole in the door and then disappeared for two days. The business is suffering because they don’t talk, postpone decisions and nobody supervises the staff.

2. The van der Merwes have a farming family business consisting of a father and two sons. The eldest son joined the business directly after school but the youngest went to college first. He got married and joined the business a year ago. The father still manages the business and pays the sons the same salary. The eldest brother’s wife is very unhappy with this. She feels her husband slaved for many years while his brother had a ‘jol’ at college. Now he gets the same salary! On top of this the business is paying to renovate the youngest son and his wife’s house on the farm. Daughter-in-law one has been asking for a long time now to have an extra bathroom added to their house. The excuse is every time: ‘There is no money’. Mother has added her bit by dropping a hint that she does not see the need for an extra bathroom – they have coped with one bathroom in their house for more than 30 years. The family did not get together last month for the youngest grandchild’s birthday and the father and sons have held no management meetings in the last two months.

3. The Smith family business is a third generation engineering works. It was started by the grandfather and continued by his only son. When he died his two sons and daughter inherited the business. The sons are active in the business, following in their grandfather and father’s footsteps. The daughter lives in Canada and quarterly receives her share of the profit. The business is suffering in the current economic climate and struggles to make ends meet. The brothers asked their sister to take a much smaller share as she does not work in the business. She refused and the family is now involved in a legal wrangle at great cost in terms of money, time, and energy spent on the business.

Family businesses are considered to be among the most important contributors to wealth and employment in virtually every country of the world. About 98% of businesses in South Africa are small to medium businesses, of which a majority are family businesses.

A family business can be defined as a business where a single family owns at least 51% of the equity of the business; where a single family is able to exercise considerable influence in the business; and where at least two family members are concerned with the senior management of the business.

The dilemma is that between two-thirds and three-quarters of family businesses either collapse or are sold during the first generation’s time. Only 5-15% make it to the third generation. Some international research shows that only one out of 10 family businesses make it to the second generation. Other research shows that only one in four family businesses in South Africa survive into the second generation, while only one in 10 make it to the third generation.

Family businesses differ from other types of business. The non-family business is only focussed on the interest of the business. Family businesses are about the interest of the business AND the interest of the family. And this is where difficulties and conflict develop, as seen in the three family business stories at the beginning of this article. Conflict develops in the overlap between the business and the family.
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The goals of a family are generally to nurture, develop, and support family members. In contrast, firms use profits, market share, efficiency, and other economic criteria to measure performance. Research on family firms indicates that family goals and needs often are the deciding factors in many businesses’ decisions and strategies. It is not the business that makes a family business different from other business arrangements; rather, it is the family. Keeping family separate from business is therefore harmful, as it attempts to extract the one thing that gives a family business its advantage over its non-family business rivals. In other words, a family business that is able to extract and separate the family element from the business will lose the one element that makes family businesses unique and allows them to outperform non-family businesses. Family influence is the one thing that is unique to family businesses, and could be regarded as a resource to a business.

Family influence as a resource is referred to as `familiness’. It is the unique bundle of resources a firm has as the result of the interaction of the family, the firm and individual family members with one another. Familiness is regarded as a capability, in the sense that it is firm specific, embedded in the firm and its processes, and is not transferable to other firms.

But family firms also have unique qualities, problems and challenges. They have unique psychological processes fostered in the closed environment of the family business. As one client put it: “At least you don’t have to love your colleagues in a non-family business!” The intertwining of family and business concerns is at the core of the issues and questions that surround family businesses. The Price Waterhouse Coopers Family Business Survey,  Kin in the Game, (www.pwc.com/gx/en/pwc.com./family-business-survey-2010-2011) found that the ability to manage differences of opinion smoothly is now more important than ever, but less than a third of family businesses have introduced procedures for dealing with disputes between family members.

The dynamics in family businesses become more complex and the problems multiply exponentially when more than one family unit becomes involved, with siblings ending up working together. The multi-family ownership requires a unique combination of people skills and attitudes to make it work and special steps to avoid intra-family conflict. Working side by side presents challenges of high intra-familial stress, strain, and conflict, especially when the family lacks skills in communication, problem solving, goal setting, conflict resolution, and strategic planning.

Couple businesses are a unique form of family business with the potential to be highly successful. But they also have the potential to damage or destroy either the marriage (and the family) or the business. (In most cases the business in any case collapses when the marriage collapses). Running a successful business and having a fulfilling marriage requires specific steps and skills. More about that in the next newsletter.

Marna Kleynhans has more than 30 years experience in marital and family therapy. She has an M-degree in Conflict Transformation and Management with specialization in family business. She has a special interest in farming family businesses and consults in the whole Southern African region.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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