Relative issues for family businesses

Identifying a successor for a family firm is something that keeps many proprietors awake

Family firms face unique challenges as time moves on
Family firms face unique challenges as time moves on

Scotland’s oldest family business, Fife engineering firm John White & Son, celebrated its 300th anniversary in 2015. Edwin White, the eighth generation of Whites running the business, explained the secret of his family’s success at their tercentenary gala dinner, citing a mix innovation and tradition.

“We will carry on developing products and looking for new markets, and over time we have had to balance tradition with innovation and embrace new technologies,” he said.

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According to the Scottish Family Business Association (SFBA), 69 per cent of small to medium-sized businesses (SMEs) in Scotland are family owned, and these firms are responsible from almost a half of the country’s private sector gross domestic product.

Some of Scotland’s best known brands, including haggis maker Macsween of Edinburgh and Irn-Bru creator AG Barr, are products of successful family firms.

And, interestingly, women are more likely to head a family firm, compared with other businesses.

When it comes to building a successful business, keeping it in the family is clearly the way to go.

But while family dynamics can help create profitable and sustainable enterprises, they also present unique challenges.

According to Martin Stepek, chief executive of the SFBA, one of the key things that keeps the senior generation of any family business awake at night is who to pass the business on to at retirement.

He says: “Succession planning presents a whole of range of issues: who gets the top job, and who do you pass your shares on to.

“It is the culture of family businesses for the owner to want one of their children to take over the firm, and a business can usually benefit from that continuity, but choosing the next leader can be tricky.”

Stepek has some sage advice for helping the next generation develop essential leadership qualities.

He suggests giving children a broad experience as they grow up. “Encourage them to travel and work abroad and to do mundane jobs to help them understand how many people earn a living,” he says.

“Educate them in the most up-to-date and best-regarded leadership courses and programmes, especially those that focus on emotional intelligence, inclusivity and diversity at the top, as these are what’s needed for good future leadership.”

Mike Kane, head of family business and a partner at legal firm Turcan Connell, agrees that there are a number of important issues that a family business needs to consider when the next generation is ready to join the firm.

“I have heard it said that owners of family businesses spend the first 25 years building up a business, then the next 25 wondering what to do with it,” he says.

“There are a number of dynamics at play after that, whether there is a family to succeed, or whether it is best to sell outright to a third party. Equally there is the option of employee, or management buy-outs.

“The real stress in taking in family members is around the family dynamics. You need to treat everyone fairly and manage that process where a sibling is left out, or feels hard done by.”

Another challenge to family businesses comes from overseas, as Kane explains: “We see a lot of overseas companies preying on good quality family businesses, particularly as we have a weak pound, and so Scotland has become a cheap option for American and Chinese purchasers. The

majority of work I have been doing over the last 18 months is the disposal of good quality family businesses to overseas purchasers.”

And like Stepek, Kane sets great store by leadership development. Turcan Connell has developed a programme which he hopes will support family businesses to flourish into the next generation and beyond.

“We have established a Next Generation Skills programme for young family members taking over the reins of a family business,” says Kane.

“We have been around family businesses for so long, we have learned from a lot of the mistakes people have made.

“The programme focuses on the legal pitfalls of running a family business, including the risk and cost of litigation and contracts.

“It also covers dealing with banks, warning people of the basic mistakes people make when dealing with banks, such as agreeing to give a shares pledge with a power of attorney clause.

“It is a mix of legal and commercial insight we have gained from years of being around family businesses.”