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PwC’s 11th Global Family Business SurveyFriday, 05 May 2023PwC’s Family Business Survey 2023 comes at a time of great change. The optimism of a post-covid world has been sorely tested by the geopolitical
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A guide to family business succession planningFriday, 11 February 2022Succession planning is one of the most sensitive issues, and COVID-19 appears to have concentrated minds in this area. Topics such as
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Tánaiste and Minister Donohoe launch new €90m fund for Irish start-upsThursday, 10 February 2022The Tánaiste and Minister for Enterprise, Trade and Employment, Leo Varadkar TD and the Minister for Finance, Paschal Donohoe TD launched a new
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Nearly 75 years ago a charismatic Brazilian entrepreneur named Enrique Rosset started an eponymous textile and apparel manufacturing company in São Paulo. Some 40 years later he and his oldest son decided to diversify by acquiring Valisere, an upscale but failing lingerie business. Over the decades, Enrique and his four sons transformed their operation into one of South America's leading textile and apparel manufacturers. During the 1990s Grupo Rosset expanded into swimwear, with great success. But the family knew the business faced critical strategic challenges. The rise of shopping malls was weakening the small Brazilian retailers who'd made up Rosset's primary distribution channel. Chinese imports were beginning to pose serious competition. The advent of digital fabric printing would undercut Rosset's core manufacturing strength unless the company adopted the technology itself. Enrique's sons, who'd led the firm for 20 years, had to make a crucial decision about which of the five members of the third generation should assume the leadership role.
In the United States, a familiar aphorism—"Shirtsleeves to shirtsleeves in three generations"—describes the propensity of family-owned enterprises to fail by the time the founder's grandchildren have taken charge. Variations on that phrase appear in other languages, too. The data support the saying. Some 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over. Just 10% remain active, privately held companies for the third generation to lead. In contrast to publicly owned firms, in which the average CEO tenure is six years, many family businesses have the same leaders for 20 or 25 years, and these extended tenures can increase the difficulties of coping with shifts in technology, business models, and consumer behavior. Today family firms in developing markets face new threats from globalization. In many ways, leading a family-owned business has never been harder.
The high failure rates of family businesses may seem unavoidable. They're not. In our work advising these types of companies, we see them repeatedly caught in the same traps. Recognizing and learning to avoid those traps can boost the odds of long-term survival.
Trap #1: "There's Always a Place For You Here"
To escape the trap: Insist on proper training and screening.
Even firms that already employ many family members can benefit from rigorous performance and potential assessments. At Gerdau S.A., the four brothers in the fourth generation of the Johannpeter family had run the business very profitably for more than 20 years when they began thinking about succession, in the mid-1990s—long before they planned to step aside. They hired a search firm to evaluate Gerdau's top 60 executives, including five next-generation family members, for appointment to a newly created executive committee. They used this objective assessment to encourage some family members to pursue careers outside the business. Those people left gracefully and did well in other endeavors. Four years later the family worked with another set of outside advisers to identify five candidates for CEO. Among those recommended were two fifth-generation cousins with extensive experience in the business. The company sent the two for advanced executive training at leading U.S. business schools and subsequently put them in charge of key business units for several years. In late 2006 the top-performing family member was appointed CEO, and his cousin became COO. Today four of the five CEO candidates remain with Gerdau, and the company's revenues have grown from $13 billion in 2006 to $20â¯billion in 2010.
To escape the trap: Manage family entry and scale for growth.
Mitchells, a high-end clothing retailer in Westport, Connecticut, took this approach. Jack Mitchell and his brother, Bill, inherited the store from their father, Ed, who'd founded it in 1958. A decade ago, as Jack and Bill anticipated handing leadership to their seven children (each of whom had graduated from college and obtained relevant experience before joining the store), they realized that the business would have to grow to provide enough high-level roles to go around. Mitchells' key strength is a customer relationship management system that helps salespeople bond with clients and suggest suitable products for them. In 1995 Mitchells bought a failing men's clothier in nearby Greenwich and utilized its own CRM system to turn the store around. Since then it's acquired retailers on Long Island and in northern California and has dispatched members of the next generation to run the stores in those locations. This strategy not only provided sufficient revenue to support the various family employees but also gave all of them their own operations to lead.
Trap #3: Family Members Remain in Silos According to Bloodline
To escape the trap: Appoint nonfamily mentors.
It's unrealistic to think you can create a nepotism-free family-owned business, and it's important to recognize that family enterprises will always operate by different rules. For instance, even the largest family-controlled, publicly traded firms manage dividends differently from the way non-family companies do. It's also worth recognizing that family ownership can provide a welcome counterbalance to the short-term incentives offered to most managers. To survive over the long haul, however, family firms need to adopt formal policies about whom to employ, whom to promote, and how to balance family and business interests. If more companies take these steps and survive the treacherous transitions from one generation to another, everyone will benefit.
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