Issues & Challenges in Family-owned businesses (FOBs) in SME Segment

The role of family business in the economy Family-owned businesses (FOBs) are a force to reckon within almost all economies across the world. They form a significant part of the global economy, accounting for up to 60 to 70 percent of it, contributing significantly to the set of top listed companies and employing a significant part of the workforce. According to the CII’s Family Business Network (India chapter), the gross output of these family-run businesses accounts for 90% of India’s industrial output, 79% of organised private sector employment, and 27% of overall employment, superseded only by the government and Public Sector Undertakings, companies in which the government own the majority of the equity.
• In the USA, 90% of businesses are family-owned. They contribute towards 40% of that nation’s GNP and pay approximately half of its total wages.
• 59% of France’s Top-500 industrial companies are family-owned.
• It is estimated that 70% to 85% of all businesses worldwide are family owned.
• 30% of family-owned businesses reach the second generation, and only 15% reach the third and beyond.

CHANGING TIME

During professionalisation, the company needs to keep on growing. But the family usually grows at a faster rate than the company, placing a lot of pressure on management to obtain higher profits. Continuity is critical, and a well thought out succession plan is not enough to guarantee success. It is important to guarantee a pipeline of successors within all management levels, not just for the CEO. And the chosen successor needs the approval and support of the owner and the other family members. Family-owned businesses have a long-term vision and commitment, and are not solely bound by quarterly results. For them, success is bound to personal success. They have the possibility of creating a culture where all employees feel more committed to the same cause and the organization serves to preserve family ties from one generation to the next. In such organizations, three icons are normally preserved in a successful succession phase:
(1) the Family,
(2) the concept of Ownership and
(3) the Company, and the Shareholders.
These three icons should be successfully professionalized.

SURVIVAL OF FOBs

One of the biggest challenges that owners of FOBs face is how to ensure the survival of the family enterprise at its most vulnerable point of existence—the passing of the baton from one generation to the other. Managing this critical transition well has a strong correlation to superior business performance and growth of the family enterprise. However, lack of readiness and discord at this time 2 may result in major value erosion and, in many cases, disintegration of the family enterprise into smaller units setting the unit back several paces from its growth trajectory, in some cases even leading to irreversibility of economic potential. So, what is the secret behind the success of some FOBs surviving multiple generations to create business powerhouses? And what is the kryptonite that prevents a majority of FOBs from making it successfully to even the third generation of existence? Research indicates that family businesses are vested with a high level of what we call Family Capital. They need to pay attention to their Family Capital and make it work for them in building a sustainable business for future generations.

CHALLENGES FACED BY FOBs:

Indian family businesses enjoy various advantages due to their inherent characteristics and a social culture that supports their structures. However, these advantages can be destroyed if the family is not united; as the family grows, the challenge is to keep a sense of unity. These are a set of typical challenges that Indian family businesses face today:

1. The Next Generation
The greatest challenge concerns the gap between family generations: A business founder is used to doing everything himself. Thus developed the unique culture of the present Indian family business: Inward-looking, owner centric, smaller scale, with a restricted perspective, and conservative mindset. This culture eventually becomes a hurdle in absorbing ‘outsiders’. The same culture also poses a serious challenge in absorbing the next generation family members: Different generations, seeing the world differently are supposed to work together. It can be a difficult thing as the young generation is often in a hurry and has big ambitions, while their elders are more conservative and skeptical.
2. Attracting and Retaining Non-family Employees
The culture, which has solidified over time, becomes a barrier for accepting ‘outsiders’. Business owners are often at a loss as to how much authority a non-family employee should be able to attain. In most Indian family businesses stakes are high: It is not easy to put their own destiny in the hands of nonfamily employees. Having founded the business, the owner is used to having insight into all aspects of his business. Allowing the same insight to an outsider can be hard.
3. Women of the Family Joining the Family Business
Indian family businesses are still largely male dominated. The role of women in business and employing women is largely accepted and encouraged in India. However, when it comes to hiring women in the family business, there are reservations. Within the Indian social context of business families, bringing up the children is considered primarily a responsibility of the mother. However, as more and more women are highly educated, they are demanding a say in the family business. The traditional family model is still disapproving of it, yet increasingly it will have to respond to these demands. It is only reasonable for family businesses to tap into this huge source of talent.

MAKING FOB COMPETITIVE FOR NEXT GENERATION IN SME  SEGMENT

Parallel Planning Processes All businesses require planning, but business families face the additional planning task of balancing family and business demands. There are five critical issues where the needs of the family and the demands of the business overlap and require parallel planning action to ensure that business success does not create a family or business disaster.
1. Capital: How are the firm’s financial resources allocated between different and family demands?
2. Control: Who has decision-making power in the family and firm?
3. Careers: How are individuals selected for senior leadership and governance positions in the firm or family?
4. Conflict: How do we prevent this natural element of human relationships from becoming the default pattern of interaction?
5. Culture: How are the family and business values sustained and transmitted to owners, employees and younger family members?

FAIR PROCESS

Fairness is a fundamental issue in family business decision-making. Solutions that are perceived as fair by the family and business stakeholders are more likely to be accepted and supported. Fair process helps create organizational justice by engaging family members, whether as owners and employees, in a series of practical steps to address and resolve critical issues. Fair process lays a foundation for continued family participation over generations.

STRUCTURING

When the family business is basically owned and operated by one person, that person usually does the necessary balancing automatically. For example, the founder may decide the business needs to build a new plant and take less money out of the business for a period so the business can accumulate cash needed to expand. In making this decision, the founder is balancing his personal interests (taking cash out) with the needs of the business. Most first generation owner makes the majority of the decisions. When the second generation is in control, the decision making becomes more consultative. When the larger third generation (cousin consortium) is in control, the decision making becomes more consensual, the family members often take a vote. In this manner, the decision making throughout generations becomes more rational. The assets that are owned by the family, in most family businesses, are hard to separate from the assets that belong to the business.

SUCCESS

Successfully balancing the differing interests of family members and/or the interests of one or more family members on the one hand and the interests of the business on the other hand require the people involved to have the competencies, character and commitment to do this work. 4 Often family members can benefit from involving more than one professional advisor, each having the particular skill set needed by the family. Some of the skill sets that might be needed include communication, conflict resolution, family systems, finance, legal, accounting, insurance, investing, leadership development, management development, and strategic planning. Ownership in a family business will also show maturity of the business. If all the shares rest with one individual, a family business is still in its infant stage, even if the revenue is strong.

CONCLUSION

The Indian business landscape has started expanding fast. With the involvement of the older generation alone, such growth is unthinkable. While the parent generation needs to accept this, the next generation has to learn to appreciate their parents’ wisdom and understand that there is no substitute for hard work.
The solution to these challenges requires an understanding of the family business dynamics and a separation of people from problems. Family business members should learn that no one is wrong but that each generation has a different culture. Once families learn about these cultures and understand the need to appreciate different perspectives, whether young or old, they will be able to harmoniously work with professionals as well as across generations. Thus, if family businesses can manage these dynamics, they will be better placed to reap the benefits of the great range of opportunities in the Indian economy and beyond.