An ode to family business

Source: Mr. G M Mangion¸ PKF Malta

As published in the Business Weekly on Thursday the 6th of June 2013

Considering the fact that the ‘think small first’ concept has never quite taken off in Malta¸ one wonders about the relevance of the recent initiative by economic affairs minister Dr Chris Cardona to launch the concept of the Family Business Act ostensibly to  help assure a secure and trouble free succession in family owed businesses. The minister explained that the law would facilitate the transfer of businesses between family members as these constitute a high proportion of local companies (about 75% or 31¸000 entities) and as a general rule tend to  ignore succession plans with the result that as an average only 30% are transferred to a second generation¸ while a mere 10% make it to the third generation. The minister feels this is an important albeit disadvantaged sector employing more than 38¸000 persons¸ with some firms employing up to 500 persons that contribute so much to society and to the economy. They are the backbone of SME’s and due to their family ownership structure tend to work harder contributing to higher social stability¸ commerce¸ jobs and economic growth.

It is a discerning initiative of the newly elected government now in its 100 day in power which desires to accelerate the rhythm of growth and consolidation within such an important sub – group. By over sight¸ the issue of succession planning among family businesses has been left out in the legislation promulgated by the PN government when the minister Dr Jason Azzopardi piloted the Small Business Act in 2011.

Dr Cardona stated that the government is studying what incentives should be implemented to ensure that the transition path during the transfer of family business from one generation to the next is smooth as a lot needs to be done to ensure that succession of family is not hampered by ambiguity in laws. Some of the most common mistakes made by family businesses at the point of succession lead to a break up contrary to misconception that  family ties tend  to be strong and some argue  this bond acts as the best guarantee that the parties never fall out. Studies show that disagreements are common and some tend to be acrimonious leading to breaking – up of the business relationship. Again the common fallacy is to assume that when the parents retire the children will automatically take over but children may have different ambitions or may simply not possess the required skills so the business will founder.

Another pitfall for the continuity of family business is that there is often a temptation for a parent to stay involved beyond the stage when a handover to siblings had occurred. This can lead to problems where – particularly if there are changes in the customer or supply chain – businesses can fall behind competitors because the children eager not to upset their parents refrain from adopting new technologies or change age – old market practices. One practical solution to facilitate a smooth handover from one generation to another is the drafting of a comprehensive agreement. One anticipates that the proposed Family Business Act will act as a catalyst for the promotion of such agreements and to inculcate the notion that these  should be seen as a safety net¸ preventing the business from falling off a cliff. One may argue that if every