Family Business – Shifting priorities or realisation for change?

Over the years we’ve met with and supported a number of family businesses in varying generations to realise their growth potential and advance through hurdles that often seem insurmountable. Family businesses have always been there and make up for the majority of the European business community, and in Malta more so with an estimated 75% of all businesses being family-owned[1]. They are the cornerstone and backbone of most world economies and have been increasingly a topic for discussion in academia, policy making, and consulting in recent years. This recent shift owes to a number of factors, namely that several business families, especially those in Malta, are now arriving at a crucial phase in their succession planning with a high amount of wealth being transferred between the second and third generation. Over the years, the third generation has been characterised as the ‘cursed’ generation[2] and it’s almost become a self-fulfilling prophecy of sorts given the stigma. It has been shown (and we have had the opportunity to witness directly) that should family businesses plan the transition of Management, Income, Control, and Equity (MICE) effectively, in due time the next generation have less to fear for and more to look forward to.

To raise awareness in the world, KPMG recently teamed up with STEP Project Global Consortium to tackle a number of topics that matter to business families, ranging from succession planning, good governance, the weight of legacy, and the regenerative power of family businesses. The reason for these discussions and reports is to try and paint a picture that family businesses should be at the heart of our discussions on a number of fronts. Below we have summarised the main areas requiring discussion as well as the focus points that family businesses should be privy to:

We have seen numerous families coming to us and ask for our support in planning for the succession of their business, and often time they believe it is a simple transaction whereby their shares are transferred in the most tax efficient manner and that’s the job done. However, once we begin to discuss the different avenues that a family owner can take, then the dimensions change. They begin to understand that in reality, locally the tax bill is typically no more than 5% of the consideration. The other 95% is about what the management, governance, formalization of processes and the business will look like, and a critical factor most don’t assume, what does the NextGen want? Another important consideration is that succession planning is sometimes seen as a one-time event and never discussed again until the time comes to transfer the business once more. However, succession is not a sprint, it’s a marathon. Discussions take time and listening to different perspectives is a continuous exercise that families in business together must understand in order to avoid unreconcilable disputes.

Building on the above, we often see that family owners rarely take the NextGen opinions into consideration at the beginning of the journey. However, we are seeing stronger voices and impact from the NextGen. It’s often seen that especially when business families are struggling, such as during the Pandemic the past few years, the melding of minds of the incumbent and next generations is what saw family businesses regenerate their growth and stay afloat.

In essence, the underlying theory of good corporate governance assumes the separation of control of the business and those who own it. When it comes to family business, this however can be a problem. So, what can family businesses do to improve their governance? Every member of a family in business in some way or another forms part of the family business ecosystem. Thanks to John Davis and Renato Tagiuri, we are able to dissimilate the different personas in a family business[1], and through that we are then able to identify the different types of structures and systems a family can implement beyond the corporate lens. Structures such as an Owners’ or Family Council can support communication and understanding of roles. A Family Charter is also another tool that family businesses can use to regulate the relationship between the family and the business. There are a number of solutions, but each family and each business is different, therefore the family needs to understand what works best for them and see that once selected, such measures are not just left on the shelf, but are a living testament to working together, for better.

In our conversations with the NextGen, we have observed that while they acknowledge the importance of regular financial goals for business growth, they are also placing more emphasis on the impact of their businesses on a non-financial scale. This suggests that the NextGen are not only concerned with achieving financial success but are also interested in creating positive social or environmental impact through their businesses.  Indeed, in a recent report from KPMG[1] indicated that whilst social responsibility is not something new to family businesses, the new world order following the pandemic has awakened the NextGen into action. It showed that the social impact a business has is almost if not as important as financial growth. The research found that following the pandemic, family businesses going into the NextGen are prioritising (1) delivering value, (2) creating value for its people, (3) promoting prosperity in society, and (4) striving to be accountable and transparent. Beyond the ESG compliance angle that these elements represent, family businesses now realise with the introduction of the NextGen that their strategic lens requires a view on sustainability to avoid disruption caused by their societal impact.

In conclusion, family businesses are once again in the limelight given their importance and significant contribution to the growth of many countries worldwide. However, the risk remains that to ensure that these businesses continue to thrive, there is a need for a paradigm shift in the way they think, especially as they approach the critical phase of succession planning. The NextGen, who are increasingly taking over from the incumbent generation, want to be more involved in the decision-making process, and it is vital for family owners to take their opinions into account. Good governance beyond the business is also essential for family businesses and implementing structures beyond a Board of Directors can enable enhanced communication and harmony. Finally, as the world becomes more conscious of social responsibility and sustainability, family businesses need to prioritize the social impact they have, and the NextGen is leading the way in making sure that these businesses create value beyond financial gains both for itself and the rest of society. With the right approach, family businesses can continue to thrive and contribute to the economy for many generations to come.