Don't Let Family Ties Lead to Family Business Failure

Date: 16 September 2004

Family run businesses often face complex and conflicting issues in managing business development.  According to the BDO Guide to Family Business, only 24% of UK family businesses survive through to the second generation and only 14% make it beyond the third.  These statistics reflect the failure by some family businesses to manage the intricate and emotional issues of succession from one generation to the next. 

Unlike ordinary businesses, family run organisations are often torn between family loyalties and a commitment to ensuring the business is successful long after the previous owner manager retires.  These issues were highlighted in a BBC television programme aired last night (Thursday 16^th September 2004), in which an industrial laundry plant, run by the Moore family faced some difficult managerial and development issues during its second succession.

The programme told the story of County Linen, a laundry company who wash the linen of the Savoy Hotel and Houses of Parliament and has been in the hands of the Moore family for more than 150 years. The father, Dudley nearing retirement handed the baton over to his sons, Tim and Anthony.  However, the business was losing money fast, productivity was in freefall and staff morale was plummeting.  As a result despite Dudley’s plans to retire, he was working harder than ever to get the business back on track.

Joyce Duncan, director of operations at Enterprise North East Trust says, “The BBC television programme flagged up some common issues faced by many family run businesses.  In the case of County Linen, the chairman of the company, and father, had handed over the management of the company to his two sons, who both had equal managerial responsibilities.

Joyce continues, “By not nominating a single person to run the overall business, there is no clear leader.  This can lead to problems, as was shown in the BBC programme.   Subordinates don’t have someone to take direction from and employees are often left up to their own devices.  This in turn can be detrimental for the business. Productivity and morale can go down, the company will not retain good employees and in the end the business will lose money.  In many cases it can be difficult for an entrepreneur to choose one of their siblings to carry the business forward into the next generation, due to family loyalties.  Traditionally the business is handed over to the eldest son or daughter, but this should not always be the case.  The elder sibling may not have the ability, education or skills to successfully lead the business into its next stage.”

According to NewBusiness.co.uk family members should be recruited into the firm only if they possess the right skills for the job, and the same principle should apply to the selection of a new managing director.

Succession management can become more complex as the business evolves explains Joyce, “For successful change, successors need to communicate honestly through every part of the transition process.  The manager thinking of retiring must be practical in choosing a suitable candidate for the job – they should resist the temptation to favour succession candidate just because they recognise their own characteristics in the successor.  They should choose someone who will bring innovation and fresh thinking to drive the business forward into the next generation.  If no-one fits the bill, then they must consider alternatives such as appointing non-family managers, selling the company or dividing the business.”

However, many family businesses fail to look honestly at the successors and will often select replacements out of obligation, even if the successor has no skills or characteristics to run the business effectively.  Joyce explains, “The founder of the business may not be the right person to identify a suitable successor, and it can be useful to bring in an outsider to help identify vital characteristics in the family members, and to ascertain the best leadership and talents required to motivate the staff and exercise good judgement.”

Research carried out by Glasgow Caledonian University in the early 1990’s proved that over 70% of Scottish businesses are family owned, however over 50% were due to have a succession issue within the next ten years.

Joyce continues, “Lack of succession planning is the greatest factor in many businesses not seeing it through to the next generation, the founder may not be willing to face up to the fact that they will not always be around to look after the business and therefore, not take the steps to plan effectively when this time comes around.  Family pressures can also have a bearing on this, children may not want to discuss their relative seniority or some may not want to go into the family business at all.  If founders do nothing until the time comes for them to retire and hand the business over, it is likely that the successor may not be equipped with the necessary skills, knowledge and ability to move the business forward.”

Joyce advises companies to plan their succession early, involve family members and take advantage of outside help, “At Enterprise we have been advising family businesses over the past ten years.  Working in conjunction with the Family Enterprise in Glasgow, we have run courses in family business throughout the north east advising them on issues such as governance, management issues, training, selection of successors and bringing non family members into the business.”

“Seeking advice from an outside party can help in the correct selection of a replacement company leader in a strategic and prepared manner.  It is necessary to put in the extra effort to ensure the business continues to run efficiently in the next generation, as the company normally has a commitment to its employees, suppliers, customers, as well as the immediate family.”

Joyce adds, “Enterprise can assist family businesses by helping them to understand that they are different.  They can and should make decisions based on the family, but they do need to follow a strategy which promotes the sustainability of the business.  To aid the sustainability of the business, it may be necessary to bring expertise in from outside, which is something that family businesses often won’t do, but this can help when family members cannot provide the skills, leadership or are too young to be given the responsibility.”

Enterprise North East Trust’s’ experienced and specialised business consultants can provide individual consultancy support for family businesses throughout north-east Scotland.  For further information please contact the business team on 01467 672595 or email info@enetrust.com

Ends

For more information contact:
Laura Cox
Account Executive
Tricker PR
Telephone: 01224 646491
Email: lcox@trickerpr.co