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Preventing and repairing ruptures in family and business

Katrien Baetens  is researcher at the Research Centre for Entrepreneurship at EHSAL European University College.
Johan lambrecht  is director of the Research Centre for Entrepreneurship at EHSAL European University College and professor at EHSAL.

Little is known about how family business members define success and how it can be realised. Katrien Baetens and Johan Lambrecht take a closer look at this issue and provide some solutions on preventing family business ruptures

We state the obvious when we say the world of family and the world of business are entwined in family businesses. However, little is known about how families in business define success of the family and the business and about how that success can be realised. What is the definition of success? What causes a decrease in success or a rupture in a family business? How can success be regained or ruptures avoided? Is preventative ­medicine available?

What is a successful business and family?
Researchers usually answer this question using quantitative yardsticks like financial standards (profit, turnover) or economic measures (productivity, quality). They also compare family businesses with non-family businesses. On the basis of financial standards, family businesses perform better than non-family businesses. Using economic measures, non-family businesses are more successful.

Members of family businesses, however, do not use financial or economic standards to define their success. Rather, their definition of success is in qualitative terms. A successful family business thinks about its position in the market place. The founder of a family business explains: "A successful business closely watches its environment and makes adjustments if necessary. Some businesses just rust. Just because the business worked well yesterday does not mean it will tomorrow. It is important to keep one's eyes open and to listen to the needs and concerns of the clients".
 
A successful family business can be self-critical. A cousin of the fourth generation in a family business says, "The business must constantly evaluate itself and dare to question itself". Lastly, a successful business is a business that has a true strategy and takes (controllable) risks.

But the definition of success shouldn't end there. Researchers need to also ask, "What is a successful business family?" The answer to this question is also usually defined in qualitive terms by family business members. In their eyes, a successful business family is where family members live in harmony and trust each other. It is also a family where there is a good balance between work and private life.

In the intersection of the family and the business, success is defined in different ways. Success is reached when the vision of the business corresponds to the vision of the family, when family members are involved in business decision-making or when there is an open communication between family members.
 
How are ruptures caused, repaired and prevented?
Causes of ruptures can be either family-related, business-related or family- and business-related. A family-related rupture tends to be caused by bad communication between family members who are working together. Regular communication between those family members can prevent ruptures. The founder of a family business, now in its second generation says, "You always have to discuss everything. I was the one who had the final responsibility but I discussed everything with my siblings". The leading third generation family member of a fourth generation family business explains, "We go skiing every year. My sons travel by car to transport the luggage. The rest of the family goes by plane. My sons make use of the journey to chat. They say this is a very useful exercise. They tell each other where the other one could improve".
 
Being largely dependent on one or a limited number of clients is the leading business-related cause of ruptures, as illustrated by the following example. The founder of a family business, now in its second generation, won a large client and the business worked day and night to fulfil the client's orders. Unfortunately, the client withdrew its contract and the young business got into serious problems. Although the results were bad after this rupture, the founder did not lose heart. He immediately started to look for new clients. He would only consider smaller clients, to prevent another similar scenario happening. He made a rule that no client could exceed 20% of the turnover – which worked well for the business. A potential client pulled out of a deal, because the founder refused to supply more than was allowed according to the 20% rule. However, a colleague of the founder accepted the assignment. Two years later, the client stopped the assignment, which led to the bankruptcy of the colleague. The client bought all the installations of the colleague and started its own production. This had been the main goal of the client from the beginning.
 
This story illustrates how vulnerable a business can be when its revenues are dependent on one or a limited number of clients. If one of these clients drops out, the business suffers severe damage, potentially beyond repair. To avoid this, the business should limit the dependence on one or a few clients.
 
A second business-related cause of ruptures is a difficult relationship between the successors and the employees. For a fifth generation family business any collaboration between the successor and the employees was an uphill battle at first. The successor had not yet won the employees' trust. It was the transferor that managed to repair this rupture. The successor explains: "The transferor has a key role in the employees' acceptance of the successor. My father was resolute: 'My daughter decides. You have to do what she says'. He must make a strong signal. He must make sure the successor is respected and must set an example to the others. Otherwise, the successor will always be considered as a fils à papa. The transferor also must allow the successor to put the stamp of their own personality on the business. The successor must build up a knowledge of every part of the business, possibly by a short internship in different departments."

A third business-related cause of a rupture is when the business is focused on activities with no future. The business should try to remain unique in its marketplace, and focus the business away from its competitors activities. A second generation family business applied this rule and changed its endeavours several times. The first time was 15 years after the business was founded. The eldest son changed the business focus again when he started working in the family business. The youngest son explored the market and detected the business was bleeding to death, so he looked for new activities with more of a future. The family business now does the work it used to contract out, with more attention for technical aspects and quality: the company evolved from an industrial company to a service business.

Problems can also occur when business growth cannot keep up with the family growth. This is both a business- and family-related issue. To prevent this rupture, the business family can decide to leave the daily management and the ownership of the business to a limited number of family members.
 
In one second generation family business, the daily management of the company was in the hands of one family member but the ownership of the business was spread among several family members. After a while, the growth of the business was too small to generate enough revenue for all the family. On top of this, the active and the passive shareholders did not share the same vision for the business. The active family member wanted the business to grow, which meant the profits would be reinvested in the business, rather than distributed. The passive shareholders wanted to make as much money as possible out of the business. The only solution was to sell the business. This meant the passive shareholders were paid their share of the business and the active shareholder was happy because the sale made the future growth of the business possible.

Another family- and business-related cause of ruptures is when active and passive shareholders have conflicting interests. This can be avoided by not allowing passive family members (family members that are not working in the business) to become shareholders. A family member of a fifth generation family business explains: "There were a lot of children in each generation. The ownership and daily management of the family business were always transferred to one person. This transfer went naturally and it was always crystal clear who would take over. The transferor played a key role in this process and had always explained his choice to the other children. One of the children received the business and the others were compensated in other ways, for example, by means of real estate. There were never any passive shareholders and there have never been any family conflicts. The transferor must take the responsibility for choosing and educating the successor in advance and then gradually passing on his knowledge and experience. They are like communicating vessels".
 
Finally, the family should try not to let the pressure of work disturb the family harmony. It is worth making a clear distinction between work and home life to prevent this type of ­rupture from happening.

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