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“Once you leave the office, you disconnect so you don’t bring business to home. We’ve learned to separate between work and family life when we sit together as family every week,” says Mohamed El Nasharty, export manager of Al Manar Group, a well-endowed family-run business that has worked in the manufacturing and bottling of automotive fluids in the Egyptian market since 1975. Family love and running a successful business are not destined to contradict, according to El Nasharty.
In a family that works on a common business, the values of the family and the business of the family are equally present and essential. Interwoven, they give you an interesting mix; in fact, they give you the backbone of world economies, and that is family businesses.
The fluidity of car motors isn’t the only concern of the successive generations of the family-run Al Manar group. El Nasharty, a member of the third generation of the family, understands that joining a family business comes with sunny days, and also many, many rainy days.
To comprehend how exactly world economies operate, it’s of vital importance to get a clear understanding of how family businesses, the shapers of economies, are managed. Family-owned businesses account for nearly 70-90 percent of the world’s gross domestic product (GDP). These companies make up over 70 percent of the overall businesses in a large number of countries. Spain is a good example where 75 percent of the businesses are family-owned. In the UAE, family businesses contribute 40 percent to GDP. These patterns make it imperative to take a closer look at the challenges family businesses deal with throughout the years, and shed light on how some of them manage to overcome these challenges and stick around, while others slowly wither.
The International Finance Corporation (IFC) defines family businesses as ‘a company where the voting majority is in the hands of the controlling family; including the founder(s) who intend to pass the business on to their descendants.’
Family businesses range from small and medium-sized companies to large conglomerates that operate in multiple industries and countries. As per IFC’s handbook on family business governance, some of the well-known family businesses include: Salvatore Ferragamo, Benetton, and Fiat Group in Italy; L’Oréal, Carrefour Group, LVMH, and Michelin in France;
Samsung, Hyundai Motor, and LG Group in South Korea; BMW and Siemens in Germany; Kikkoman, and Ito-Yokado in Japan; and finally Ford Motors Co and Wal-Mart Stores in the United States.
As flexible as a rubber band
One interesting thing about family businesses is that they are known (and have proven to be) more likely to survive in the long term, as opposed to their non-family-owned peers. Moreover, last year, a study by the Deutsche Bank showed that not only are family businesses ‘sustainable’, but they are also extremely flexible in the face of challenges. This resilience gives them an excellent chance of a quick recovery from pitfalls, hence, an existence that can extend for decades. “Our research shows that family businesses are better able to cope with complex crises. While the share prices of family-owned businesses slumped by 23.7 percent during the first phase of Covid, companies without a family shareholder saw their share prices drop even more – by 30.7 percent,” Deutsche Bank reported. In the case of family-owned businesses, the slump is smaller in a crisis, and the recovery usually comes much faster.
Ernst & Young Global Limited, a multinational professional services partnership headquartered in London, England, supports the opinion that family businesses can show more flexibility, not only against hardships, but also internally, with their own managers and employees. The reason for that is that family businesses are aware that whatever hard work they do today will pay off years and years later when the next generation takes over. “That long-term approach translates into more sustainable relationships with their customers, suppliers and employees. For too long, family businesses have had a reputation of failing to include corporate governance and for not being transparent enough, but this no longer corresponds to today’s reality. It is evident that in recent years, many family businesses have become much more accepting of external management,” EY reported.
The short decision-making channels in family businesses might be the reason for their resilience, making them act fast when fast action is needed, suggests Deutsche Bank. Additionally, family businesses often have a more conservative capital base, which gives them more financial stability.
The emotional aspect plays a role too. Families or founders of family businesses are often “more emotionally attached to the company than other major investors.” They keep their eyes on the long-term success of their business. This can be especially helpful in difficult times, and contributes to more flexibility, according to Deutsche Bank.
Generation after another?
A well-known fact about family businesses is that they don’t make it past the third generation; however, this is one rule that doesn’t have to apply to all. Ahmed Nawara, CEO of Al Manar Group, says there’s a good reason for that. “Around 93 percent of family businesses disappear after the third generation because the third generation and moving forward are cousins; with different backgrounds and education. So, unless the second generation defines clear policies in management and business, problems could arise,” he said.
Looking at that from a different angle, Harvard Business Review article on succession planning argues that family businesses tend to fall into some common traps that makes them less likely to stay past the third generation. For example, “Some proprietors of family-owned firms make their children feel obligated to join the company, which can backfire by creating a crop of managers who aren’t interested in being there,” the author of the article pointed out. This attitude can lead children to treat the business as a fallback option.
Moreover, many businesses simply don’t have enough positions or work to hire every family member, because families often grow quicker than their businesses do.
Also, in a family business, children often grow up prepared to do the same role their parents did. The next generation then winds up doing the same thing, and so on. This puts limitations on the abilities of each unique individual and takes away their chance to explore other roles that they could be better suited for within the company.
This lack of proper planning within many family businesses is a breeding ground for a bumpy journey and surfacing challenges throughout the years. It’s a recipe for an inevitable end of the company.
In its handbook, the IFC recommends that a formal succession plan is made to ensure business continuity and increase the chances of survival of a family business as it is handed over from one generation to the next. This is especially important for the role of the CEO. “The purpose of this plan is to ensure the skills and leadership necessary to replace any outgoing senior manager are available when needed. An effective CEO succession plan should allow for the selection of the most competent person (whether it is a family member or not) as the next CEO,” it said.
Bullets to dodge
For a family business trying to pull through in an unstable, sometimes-rickety business ecosystem, some challenges could easily be life-threatening. Evading them means better chances of survival. So, what are these challenges that family businesses spend years struggling with?
In Egypt, more than half of the companies are family-owned, according to PwC’s 2021 Egypt’s Family Business Survey. The survey’s results indicate that Egypt’s family businesses have some gaps which could be a cause for concern. It recommended that these businesses work harder to introduce digital technologies across their companies, from supply chain management to customer sales and relations; however, the top priority is to professionalize their operations and culture. “45 percent of respondents have no formal board of directors,” the survey revealed.
Worldwide, family businesses have a few other issues and/or challenges that need to be addressed if they would like to continue. Forbes says that among those issues that cannot be ignored is siblings’ rivalry affecting the succession of management, the conflict about whether or not spouses should be employed in a family and the risks that come with that, and an exerted sense of control by older generations over the new ones.
In the end, just like any type of business, a family business comes with baggage that requires resolving.
If you own or are part of a family business, do you relate to these challenges? Powered by PwC Middle East, Business Forward’s campaign on family business wants to dig deeper into understanding the dynamics and success factors for family businesses in Egypt and create room for a back-and-forth discussion about their successes and hardships. Join our campaign #IMovedMyBusinessForward to get a chance to tell your story. Click here.