OPINION Keeping up with family businesses
THIS may be a familiar scene for those of you who work in financial advisory or in similar capacities: You get together with friends or family to catch up over a meal and drinks. The conversation inevitably turns to work and careers, and because you are with people who know what you do for a living, you are asked for the obligatory pro bono advice on the smart business move for the particular problem they are facing.
The successes and struggles within family businesses are particularly interesting. From friends and family who either own a business or know people who do, we have heard laments about weak financial reporting, the way business is conducted so informally, reluctance especially among the older generation to keep pace with technological advances, and the absence of succession plans.
Most of them shared that their businesses’ financial records include personal bank accounts, with official business expenses being recorded alongside personal expenses. Some even mentioned instances when only a certain employee who took note of the expenses could decipher the records.
This type of financial reporting practice generates unreliable information that will likely not pass the scrutiny of potential investors or, worse, put into question the reliability of the business’ entire financial and operational reporting and its compliance with tax laws. The sensible thing to do would be to formalize the business’ financial reporting as soon as possible, so that the business can benefit operationally and financially.
Unfortunately, many family businesses are run informally because of their management structure. These enterprises rely on family members to handle the different aspects of the business even though they may not have the requisite skills to do so capably. There is no shortage of family businesses with unsubstantiated expenses, missing legal contracts, or a workforce stacked with unqualified employees. Throw in the occasional sibling rivalry, squabbles, and conflicts of interest among family members, and it is no surprise that some owners choose to dispose of their businesses.
Another issue family business struggle with is technology — how to keep pace with the advances, how much of it to adopt for the business, whether the business should even invest in it. Although there is high digital awareness among millennials, who are potentially the next generation of leaders in their family enterprises, several of them, especially those with businesses that rely heavily on the opinions of senior family members, are still reluctant to adopt new technology due to perceived high costs, lack of capable staff, and the older generation’s preference for doing things the old-fashioned way.
Our millennial peers complain that their senior family members are often unaware of the benefits of adopting digital technologies and prefer the legacy systems they have grown accustomed to, such as recording business disbursements in loose sheets of paper or spiral notebooks, even as these senior family members recognize that the old, uncustomized systems are prone to inefficiencies.
Many of these senior family members running the businesses are baby boomers who are nearing retirement age and are starting to transition managerial and operational responsibilities to the next generation. Unfortunately, the success rate for transitions in family businesses is low.
A study conducted by Deloitte in 2016 showed that only one in three family businesses make a successful transition, as businesses become vulnerable during a leadership change. This rate might be even lower here in the Philippines since the next generation, the millennials in particular, are not keen to run family businesses but want to forge their own careers.
To improve the chances of successfully installing the next generation of leaders, a succession plan that details how responsibilities will pass on to which future leaders should be formalized and established.
Having worked with family business owners and counseled not a few of our own friends and family on how to handle some of their business issues, we’ve come to realize the importance of the business owner’s vision for the company. Having a vision is instrumental to hurdling the obstacles faced by a family business and can help inform one of the most important decisions a business owner may have to make: to maintain or to sell the business. Choosing the latter opens up a whole other can of issues, starting with the readiness of the business to take advantage of the opportunities presented by the changing business landscape.