- Insights by Ajith Fernando, industry expert and CEO of Capital Alliance Group
In Sri Lanka, as in many parts of the world, family-run businesses contribute substantially to the country’s economic growth and diverse business landscape. Whether it’s smaller enterprises or dynamic corporate leaders such as MAS Holdings, Hemas Group or Brandix, family-run businesses have risen to the very top of their respective industries, spearheading innovation and growth. Highlighting the many complexities and challenges that family businesses face, especially when it comes to transitioning from one generation to the next, Capital Alliance Group (CAL) CEO Ajith Fernando shares his insights.
From shirt sleeves to shirt sleeves in three generations
Commenting on a popular trend that is often seen in family businesses, Fernando said: “Family firms combine all the tensions of family life with all the strains of business life, and at no moment do both types of stress combine so forcefully as at that of generational change. Less than one third of family businesses survive the transition from first to second-generation ownership. Another 50% do not survive the transition from second to third generation and only 5% continue to create shareholder value beyond the third generation. Generally, they say that company owners go from “shirt sleeves to shirt sleeves” in three generations. The founder of a company usually starts off at the bottom and builds his/her way up in shirt sleeves, the second generation then takes over, usually benefitting from the wealth and foundation that has been set and is able to wear suits. However, by the time the company gets to the third generation a successful transition may be very difficult to navigate, and the business tends to plummet, forcing the third generation to return to shirt sleeves.”
of planning ahead
Commenting on why succession planning is so important, Fernando said: “A founder is usually a person with immense vision, character and passion. Being a founder is not easy; it takes an enormous personality and a strong individual, to create an entity out of nothing. However, there comes a time due to either old age or sickness, when they have to pass on their company to the next generation, so that the company is not sold or wound up after the founder’s death. Considering a succession plan and way forward will give a founder time, to ensure that the company thrives and that future generations enjoy returns for years to come. Giving family members the opportunity to enjoy the same quality of life that they have had under the founder’s leadership, for that reason, many founders can opt to professionalise their companies either fully or partially.”
A new way to pass the baton
Fernando added: “Cross-generational transition of leadership is not the only way to take a family business forward. Families can proactively manage how their business evolves and grow, in order to ensure that it will continue to deliver healthy financial returns and benefits for many generations to come.”
A graceful transition
Transition in a family business is not an event but a process. It is very rare to see a founder sit with his lawyer and hand over the company at the stroke of a pen. Instead, there is typically a two-stage process. It involves the transfer of both management and ownership.
Fernando further explained: “Sometimes in a family-owned company, the entire family is expected to be involved and given a role. The harsh truth is it’s unlikely that every single member of an extended family will have the capabilities required to steer a business forward. In these cases, you can transition from a family-owned and family-run company, to a family controlled company, making it a more professionalised operation. In this situation, the crème de la crème of talent can be recruited to run different aspects of the business, whilst the family sits on the board, governing key decisions and giving their input when needed. MAS Holdings and Hemas are two of the best examples of family-owned and controlled professionalised operations. ‘Corporatizing’ a company does have many benefits; the family retains control but positions themselves to reap the benefits of dividends.”
the three-circle model
of family businesses
Highlighting the intricate relationships that come into play in a family business, Fernando said: “Whilst considering the evolution and next action steps for a family business, it’s important to understand the role that different parties play and respect the level of power that they have to impact decisions. Usually family businesses apply a three-circle model, where the family, shareholders and employees all work together, each group independent but performing roles that both impact and overlap with each other. People move differently within these circles and if one forum does not have a voice or is suppressed by another forum, it usually leads to trouble. We also have to realise the important role that other key influencers play. A founder’s wife may have no shares at all, but she will still be able to exert a lot of power over an organisation and will be able to impact the decisions that the founder makes. Similarly, a father or mother of a founder may not own a single share, but may influence a business’s core operations with their direction and input. You can’t ignore these influencers and you have to take their role into account when structuring a business’s secure transition.”
A trusted source
On how CAL could help founders and families, Fernando had the following to say: “Many families need some guidance and a trusted person to talk them through the options that are available and the processes that they entail. That is where CAL steps in. We work closely with respective founders, to navigate the many intricacies involved in managing this issue, in an effort to do what is best for their business and the family. We provide the founder with a trusted team, who he/she can bounce, ideas off of and rationally discuss the pros and cons of their options. Often, there is a level of compromise involved, but it is all about going forward with an option that you are comfortable with. CAL will also work with the founder and the family on an on-going basis to guide them through the process of implementation.”
that works for you
Fernando concluded, “By carefully planning out the future of your company and how it will operate when you are no longer at the forefront of it, you can ensure that it will generate growth and returns for many years to come. A solid succession plan will ensure that the company is prepared for the day that you decide to step-aside. It is imperative that your business remains a top-performing entity for your family members and future generations to enjoy the financial security and quality of life that you worked hard to provide for them. There is no one-size-fits-all solution; we simply have to figure out what is best for you, your business and your family. Over the years, CAL has helped many high-profile family businesses carefully navigate their transitions, in a manner that has served the interests of both the founders and other relevant stakeholders. CAL’s specialised team has extensive experience in succession planning and wealth management, making us well equipped to provide all the input, research support and advice a family business requires to make a sound and confident transition into the next phase.”
CAL offers a range of investment banking services covering Listed Equities, Government and Corporate Debt, Asset Management, Origination, Advisory and Private Equity, making it a fully integrated investment bank.