At the height of their success, it is hard to imagine that profitable family businesses – run by the likes of the Rupert, Oppenheimer, Ackerman and Hirsch families – might crash and burn or be sold off. But you only need think back to John Orr’s, Greenacres, Beares, Payne Brothers… or the 1995 collapse of Barings Bank, London’s oldest merchant bank, to realise that current success is not an automatic guarantee of future success.
Statistics support the notion that third-generation business heirs, if they get there, are likely to be in for a tough ride. According to the Family Business Unit (FBU) at the Nelson Mandela Metropolitan University in Port Elizabeth, worldwide only 30-33% of family businesses survive past the first generation, and less than half of those (10-16%) survive to the third generation. Only 3% of US family businesses pass over to the fourth generation.
The long-term success rate of family businesses in South Africa is lower than the global average, with only 4% surviving the third generation, according to the Family Business Association of South Africa. This lower rate ties in with South Africa’s lower-than-global-average survival of start-up businesses.
Given that the average lifespan of family-owned businesses is 24 years, what are the challenges they face and where do they go wrong?
Mixing one’s nearest and dearest with business means that family-owned businesses, unlike other companies, have to deal with interfamilial relations – including sibling rivalry, family conflict and feuds, personal agendas, intergenerational issues, and complex or reluctant family succession. They often need to deal with autocratic, paternalistic cultures and nepotism, says the FBU’s co-director, Elmarie Venter. This can make the running of a successful family business more complicated, especially as the family grows over time.
According to the annual Family Business Survey conducted by PricewaterhouseCoopers (PwC), the long-term success of family-owned businesses depends on the effective negotiation of three tipping points: scale, skills and succession.
The increasing need to scale up in line with internationalisation and globalisation is expected to place a strain on family finances and limit the potential of some family businesses.
Finding and filling skills gaps can be more complex in a family business. According to PwC: “It can be a huge challenge to recognise and address a lack of skills among family members themselves.” In addition, “highly qualified people have not traditionally opted to work for family firms, because they believe that their progress will be artificially constrained by the shareholding structure and they will achieve greater financial rewards and career fulfilment elsewhere.”
But succession is probably the main reason most family businesses flounder. Business owners often fail to plan for it adequately, and only one-third – or fewer – hand over the reins to the next generation. “This particular ‘tipping point’ is rarely completely straightforward, and it is often the most likely source of family conflict – and business breakdown,” says PwC’s Family Business Survey.
With family-owned CEOs often ruling for 20 years or more, by the time the third generation comes around there is often a lack of interest, a lack of business aptitude or appetite for hard work, or more family members than the business can provide high-level jobs for. For others, a point arrives where it simply makes financial sense to sell up and move on.
The Oppenheimer family would be a case in point. German-born Sir Ernest Oppenheimer founded Anglo American and took over control of De Beers, dominating the early diamond mining industry in South Africa. He was succeeded by his son, Harry, a diamond magnate, who headed up Anglo American and De Beers. Harry was succeeded by his son, Nicky, who later sold the family’s 40% stake in De Beers to Anglo American for US$5.1 billion. The move has not, however, put a damper on the Oppenheimer fortunes. Nicky Oppenheimer is the second-richest person in Africa, worth US$6.5 billion, according to the 2013 Forbes Billionaires List.
But the decision to hand over, list or sell a family business is often more complicated than this. There can be disagreement about whether to sell the business or hand it down, and who to hand it to. Some founders can also be reluctant to step down for fear of loss of purpose and identity, or over concerns of mismanagement once they retire. There are also numerous examples of children returning from an overseas MBAor work experience with new ideas that are at odds with their parents’ views.
Is there a fatal flaw in the family business model that sets them up for failure in future generations?
Will Raymond Ackerman’s retail giant, Pick n Pay, fail under second-generation Gareth Ackerman – some would suggest there are already signs of it floundering – and will mega home appliance store Hirsch’s inevitably decline once founders Alan and Margaret hand over the reins?
Statistically, there is a high probability that a typical family-owned business will be sold or cease operation for one reason or another when the next generation takes over (if they have the interest to do so). Even if it doesn’t fail, it is likely to cease to operate as a family-owned business.
There are steps family businesses can take to mitigate this. Business specialists believe that involving offspring in the business from an early age and getting them to work from the bottom up (which often doesn’t happen with third-generation children), in addition to proper planning for growth and succession, reduces the risk.
Bloemfontein-based discount retailers Kloppers, started by Willem Klopper in 1967, has survived (somewhat circuitously, with a sale by founder and subsequent repurchase by his sons) to the second generation. Like many successful owners of a family-run business, the six Klopper brothers do not regard Kloppers as a business, but as a way of life.
However, to remain successful as a family business, Kloppers will need to revise how it views seniority, which is currently based on age, and ensure that third-generation siblings with an interest in and aptitude for business are exposed to the business from an early age, says Rudolph van Buuren, associate professor at the University of the Free State’s Faculty of Economic and Management Sciences. And they are not the only ones.