Feature: Old family businesses recount how they remain successful

The transfer of a business to the next generation is inextricably linked to family businesses. However, this is no easy task: only a handful of large companies have managed to stay in family hands for more than 150 years. How do they do it?

It is often thought that it was a clever move from the first generation to set up a large company and that it happens automatically in subsequent generations. It doesn’t … Keeping a business afloat is just as clever.

Nepotism
Many family businesses have fallen victim to nepotism. A family member demolishes in one generation what many generations had built before him. The statistics prove this. Seventy per cent of family businesses fail to transfer the business, or the assets, to the second generation. Only 8% succeed in transferring the business to the third generation. This is true worldwide. Almost every culture therefore has a variant of the proverb ‘From clogs to clogs is only three generations’ (said to be a Lancashire proverb).

How do you pass on success from generation to generation?
How do you ensure that a family business is successful from generation to generation? In every generation, there are a few entrepreneurial family members. It seems to be in the DNA of the family. In some families, the entrepreneurial spirit is indeed flourishing. So much so that it is bursting at the seams of the family business.

Yet, these are exceptions. Because if you’re not careful, you’ll end up in the classic cycle: the first generation neglects it, the second avoids it, and the third digests it.

No room for luxury
Every next generation has to see itself as the first generation again and to want to be innovative. This is not easy, because the longer a family has a successful business, the more matter of course it may feel.

If you’re not careful, complacency creeps into the family. In many family businesses, modesty is fortunately part of the upbringing of children. This is also part of the corporate culture. Discipline and perseverance are required. There is no room for luxury in the succession process.

Proof first
In family businesses, there is no guarantee that the next generation will automatically follow in their parents’ footsteps. Training and proven talents are certainly the proofs that must be provided by successors. They remain in charge for the first five years: only after that do they get to hold the keys.

The danger of family quarrels in a family business
The term ‘family business’ has a positive connotation, but there is also a danger in combining family and business. Family arguments can damage the business, as can a family member who sees directorship as a birthright. All families emphasise that their business has become só successful over the years and that só many people depend on it for their salaries and for their products − all of that should never fall victim to family squabbles.

Most family businesses went through a professionalisation process in the 1990s. To keep your business in the family for a few more generations, it is essential to set up a good structure. In that structure, there are three ‘circles’ that must remain as separate as possible: the company, the shareholders and the family.

Even though your family name is important, you don’t automatically get a position in the company. The first rule: five years of successful work elsewhere and also a university education. Of all the shareholding family members, a limited number work in the company. That you pass the test here is no guarantee that you will become a director. We are strict with the family, but the rules are transparent.

You should be asked to apply … and those are tough assessments. Family members have a separate application process which runs parallel to ‘normal’ job applications. Only those who perform at least as well as external applicants get through − and many family members manage to do so. In fifty years there has been a revolution on that score: grandparents’ children are looked at for positions that are useful in the company, and their education is adjusted accordingly.

Provide contradiction from outsiders
The motivation to work in the family business must come from the family members themselves. However, the choice is now much broader, as daughters can also join the family business. We emphasise the importance of a professional relationship between family and business. This means that − because the person is a director as well as a major shareholder, he or she has a strong supervisory board. Other families who are in the seat of both shareholder and supervisor − as the largest companies − also opt for a strong board.

Free the shareholders’ meeting from family sentiment
The second ‘circle’ is that of shareholders. Add all family members’ shares together in a holding company which is run by a mix of family members and outsiders and is the de facto shareholder of the family business. This ensures that the directors are judged objectively and that family sentiments do not play a role.

Individual family members were used to having voting rights on their shares themselves until they became certificate holders (that is, family members who own certificates in the company without having the right to speak up or vote but still share in the profits and losses) in the 1990s and new family holding companies took over the voting rights. Not everyone agrees with this arrangement, but it is necessary.

Two enemies: feuding in the family and taxation
Many hold their breath for the transfer of shares in the future. As a family business, you have two enemies: arguments within the family and tax issues. You can do something about the first, but the second is more complicated.

The Netherlands has a business succession arrangement (BOR), which at first glance is very generous. Under the BOR, 83% of the acquisition of a family business is exempt from inheritance and gift tax. But it is precisely old family businesses that often fall by the wayside. The tax authorities require that one family member owns more than 5% of a business. In old family businesses, ownership therefore becomes fragmented.

Many family members have everyday jobs but then have to pay 20% inheritance tax on the assets tied up in the business.

Concern about preserving the oldest family businesses
Family members also have to pay capital gains tax every year. They also have to pay inheritance tax and capital gains tax every year, even if it’s a bad year, like now.
Prominent old family businesses cannot be prevented from taking advantage of the tax scheme to preserve their businesses.

Invest in family social capital
Many family businesses have been the subject of studies worldwide. A good business structure is step one, but there is something even more important: you need to maintain good ties in a family: the family social capital. Learn to make joint decisions with family members early on. This is crucial if you have a joint asset. For example, a good way is to donate money together as a family. Young and old generations can then make decisions together.

Family associations
So, when it comes to the business, the family must be tough with each other: there is no room for an incompetent cousin, for example. But in addition to that, the family has to invest in good relations. Some companies have a family association for this purpose which organises visits to the company, provides training and gives to charities. In many families great-nephews and -nieces only see each other once every few years at a funeral A family council works in a similar way.

A family business can give meaning to a family − you derive part of your identity from it. And that is becoming more important. People see that family businesses are more important to society than other businesses.

The new generation: more sustainability
The new generation feels that responsibility very strongly. At meetings, you see big differences between the questions asked by the sixth and eighth generations. For the younger generation, eight out of ten questions are about sustainability. And because of the younger generation’s involvement, the company feels encouraged to make its CO2-emitting fleet climate neutral within one generation.

Breaking new ground is crucial
Thus, at some point, all companies strike out on a crucial new path. After the Second World War, for example, my grandfather noticed the enormous housing shortage. So he invested heavily in building houses and set up a prefab factory. The business made a tremendous leap. My great-grandfather grew willows that were used for dikes in the contracting business. And now we’re dredging. The tide has turned again. Twelve years ago, 80−90% of our turnover came from dredging and now only 40%, because we have set up a large division for offshore wind turbines.

The oldest large family-owned companies have a long tradition. They are proud of that. But their success is precisely that they don’t rest on their laurels.

Author
Fred de Boer, executive coach and business developer at PUM (Netherlands)