Running a successful family business
The popular fabrics section of the Balogun Market in Lagos is populated by second or third generation companies. These companies are not the regular trade of the market – they have been in the industry for decades and passed from generation to generation. Transgenerational family businesses are not just for fabric merchants. Family businesses across different sectors are one of the pillars of the Nigerian economy, creating jobs and boosting economic activity, accounting for almost two-thirds of businesses in the country.
As pervasive as family businesses are in Nigerian society, most do not survive the third generation. Our research in Naspire found that only 33% of Nigerian family businesses surveyed were run by second generation family owners; drops to 7% in the third generation. They struggle with innovation, leadership transitions, and even survival. Despite this, some family businesses manage to thrive. Why?
The longevity and success of a successful transgenerational business can be attributed to several factors: leadership, talent development, succession planning and accountability.
Leadership and governance:
Running a family business requires both leadership skills to ensure the growth of the business and mastery to keep the whole family together. PwC’s 2021 Family Business Survey showed that 50% of family businesses in Nigeria had no governance policy, compared to 21% globally.
Family business leaders should set the vision and create a governance structure that outlines the goals of the business, fosters unity between family and other employees, and provides guidelines for authority, communication, decision management and market differentiation.
The business landscape in Nigeria is increasingly complex and meeting customer needs, adapting to new technologies, complying with regulatory requirements while maintaining profitability involves the management of multiple stakeholders. Creating a clearly defined governance structure and vision for the business creates a structured direction for the actions of the family.
Establishing best practices helps minimize conflict, ensure professionalism, foster the exchange of ideas and build resilience. Effective leadership is especially important in Nigeria’s current business environment, where incremental improvements are rarely enough, and companies must innovate quickly to stay relevant.
The development of talent:
While mom and pop style family businesses may do without outside employees, medium to large scale family businesses rely on these non-family outside employees for their day-to-day operations. Most family businesses on this scale continue to employ or promote people because of their lineage and not on the basis of their ability or even their suitability for the job. This blatantly biased form of recruiting means companies are putting square pegs in round holes and increasing the chances of significant revenue loss due to mismanagement. Instead, the family business should practice a meritocracy where the best hand for the job is hired while retaining core leadership on a board of directors. Family members should be introduced to the business at a level commensurate with their skills and allowed to move up through the ranks on the basis of their merit. In addition, it enables the next generation of leaders to acquire knowledge in all critical business areas.
In addition to the different family members involved in the governance of the business, it is essential for a family business of this size to have a board of directors or independent advisers including members outside the family to balance skills. missing, experience and provide neutral advice in any family conflict.
An often fatal flaw in family businesses is the inability to plan for the transition. There is a lack of preparation or process for generational change, especially the transition from the first to the second generation. For many family businesses interviewed, the matriarch / patriarch started trading to take care of her family and only became a family business when she noticed how lucrative it was.
Although the 33% of family businesses surveyed in their second generation of owners said they experienced more growth and expansion in the second generation, succession planning for these businesses was accidental as many of their owners first generation had never imagined that the company would succeed its current one. level. This result is consistent with the 2021 PwC survey; only 38% of Nigerian family businesses had the next generation involved in the business, compared to 55% globally. PwC’s survey further found that only 25% of Nigerian family businesses reported having a documented and communicated succession plan.
Only a few companies intend to create succession plans and prepare their offspring to run the business in their absence. Most of the second generation leaders simply developed an interest in the company and decided to take it further. These family businesses thrived under the influence of their more educated and tech savvy second generation leaders.
Transition and succession planning is the inflection point for family businesses. It is necessary to define processes to involve the next generation in the vision and operations of the company. Successful succession planning requires a multi-year implementation plan, lasting three to five years, to fully develop the capabilities of the next generation and immerse the new CEO in the role. Additionally, in addition to the role of CEO, first generation owners must plan for other key leadership positions that need to be filled to ensure success. The goal of any succession plan is not only to select and train people, but to ensure that the right tools and required assets are passed on to the next generation.
Family businesses should seek to understand the personal goals of the next generation when planning for the transition and be open to hiring outside leaders when their goals or interests do not match those of the business.
Why are some family businesses successful? Naspire sums it up as follows: Structure, Systems, Processes and Procedures (2S + 2P for easy memorization). They operate like a real business instead of a family running a business. Family business owners must treat the business as a fiduciary responsibility and continue to develop their leadership skills to ensure long-term success. Owners must create governance structures, a system, processes and practical procedures to unite businesses into powerful entities to ensure the transition from the first generation to future generations.