Why family businesses should embrace change from one generation to next

When a business loses money, generations can think differently about the solution

2018-09-04T15:03:00+05:00 Alaa Oumansour

The Family Business is one of the most defining and enduring forms of economic activity in Pakistan. By some estimates, as much as 80 percent of Pakistan’s industrial base are family businesses .

In many ways, this makes a good deal of sense. Family businesses are by their nature strong and resilient. They have typically been built by driven entrepreneurs with a clear vision and mission. They have been creative and innovative, facing down and overcoming new problems and challenges every day. Family leaders tend to take quick decisions and execute fast.

Family businesses are also generally quite patient with the capital they invest and put to use. They are willing to put off short term returns in favor of long term growth, and they – in general – keep fairly close control of operating costs.

But the Family Business model has its limits, and as families move from the first generation – the founders – to the current generation – the sons, daughters, nieces and nephews – strain can appear and the model can be put to the test.  

Strain typically appears when financials become complicated. When a business loses money, generations can think differently about the solution. The founder generation may prefer to return to shareholders and look for fresh capital. The new generation may prefer to go the banks to increase debt. Improving the performance of the business is left to the current management, who have typically been hired and trained by the founder. Management can be ‘set in its ways’ and be reluctant to change. In this situation, the financial problems then get worse, as does the tension in the family.

This situation, which we have witnessed many times in Pakistan, highlights some of the drawbacks with the Family Business model. Governance – how the business is run and how decisions are taken – can be unclear and confusing. Boundaries between family ties and loyalties and business decisions are blurred and poorly-defined, leaving owners with urgent choices but few decisions. Emotions also play a role: rather than take tough decisions about exiting a loss-making business, a founder may be tempted to hang on and hope for the business to improve. The new generation looks on, hopeless, knowing the right decision is to close, but worried about the impact on the founder.

These are cases in which outside involvement can play a critical role. Outsiders see situations in a new light, they ask the tough questions which the family doesn’t want to ask, and they can make decisions which are unpopular, but necessary. We have played this ‘outsider’ role many times in Pakistan and across the region, and we have come to see a few factors which can change a family business facing headwinds:

Firstly, don’t carry the burden alone: find new sources of capital and funding to help shoulder the burden and reignite growth and profitability.

Second, give new capital a hand in running the business; let new capital bring in fresh ideas and approaches, focusing on real value, cutting back waste.

And third, put in a governance model which moves the pressure away from the family; let the governance model provide an unemotional view of the business and its prospects, using wider views to see through to new situations

Pakistan is coming face to face with this situation, and there are specialized businesses like, Cassini Partners, which can help. We have been active in the market, and we have seen the impact that external capital and informed management support can bring. And we are starting to see the results in a strong industrial base with more agile, more powerful competitors.

We know that moving a Family Business from one generation to another can be tough and challenging. Fortunately, help is at hand.

 

 

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