Family-owned businesses make up a significant portion of all businesses registered and operating in South Africa. In fact, family-owned businesses are today recognised as vital participants in, and contributors to, the country’s economy.
Unlike other businesses, family-owned businesses face their own set of unique challenges. As families and family-owned businesses develop and grow, personal relationships between family members often start to become more complex, more difficult and in some cases, more fragmented.
As a result of these dynamics, fewer than half of all family-owned businesses are able to survive a generational change in ownership, and a very small percentage prove sustainable beyond the third generation.
According to Michelle Geraghty, Business Development Head at FNB Business Advisory, the majority of family-owned businesses fail by not planning for succession and other events including family conflicts, divorce and transition of leadership.
However, Geraghty argues that does not need to be the case, and that a family-owned business has the potential to go from strength to strength through generations, provided that appropriate governance frameworks to manage the family dynamic are adopted and agreed to by all the family members.
“A family business constitution is the ideal way of managing the family dynamic within a business and ensuring that relationships are protected while the best interests of the business are advanced,” says Geraghty.
She describes a family constitution as a written document that exists alongside and must be aligned with the other business governance frameworks, such as a shareholder agreement or memorandum of incorporation, as it sets out the rights, values, responsibilities and rules that apply to all family members as stakeholders of the business whether active or passive.
Geraghty explains, “that a family business constitution does not need to be complicated and can be tailored to the evolving requirements of the family-owned business as the family grows and new spouses, partners and generations are added.”
Geraghty advises family-owned businesses to introduce a family constitution as early as possible, when the family and business structure are as uncomplicated as possible, and decisions regarding the guidelines or rules to be included in the framework can be made objectively. But she points out that a constitution can be established at any point in a business’ history and doing so can avoid significant conflict down the line.
“In our experience at FNB, while some of the decisions that need to be made when setting up a constitution can be uncomfortable, especially for a long-standing business, the relatively minor pain of making those choices now pales in comparison to the potentially massive, and possibly business destroying, conflict that a family constitution can help prevent in the future,” says Geraghty.
Geraghty adds that conflict avoidance is not the only reason for, or benefit of, a family business constitution.
“In addition to setting out plans and structures to deal with situations that could arise during the course of business, the family constitution can be a highly effective recruitment, remuneration, compensation, retirement and succession planning vehicle, and it is an excellent way of maintaining certainty within the business in the event of a family event or tragedy, like the severe illness, injury, divorce or even death of a family member who is a shareholder.”
Figure 1: Some of the key issues that can be dealt with in a family business constitution
“When you partner with FNB to establish a family business constitution, the process is relatively straightforward, and begins with a comprehensive questionnaire that is completed by each family member with an interest in the business,” Geraghty explains,” after which we assist the family to pinpoint key business involvement requirements, identify potential sources of future conflict, and draw up a constitution with the maximum potential to contribute to business growth through clarity, transparency, certainty and the protection of family interests and relationships.”
While every family is different, Geraghty says that in FNB’s experience, most of the problems family-owned businesses encounter are quite similar, which means they can be planned for and the risks can be mitigated against. “
Sustainability and continuity of a family-owned business simply required clarity on how that business and its stakeholders should be governed,” she says, “and by making the rights, responsibilities, expectations, and conduct of existing and future family members 100% clear, a family business constitution helps secure generational wealth and unity, and does away with risky assumptions and uncertainty that could destroy the business and ruin relationships.”