Family Businesses

We provide sound and cost-efficient financial solutions and solid investment opportunities

Family Businesses

Many people , particularly family members who work in large family owned business think that family owned businesses are different.

 

In reality, they are not different from any other businesses and face similar commercial and strategic challenges but where they do differ greatly is in their decision making structures. So often successful businesses which are family owned are held back from growing or become unsuccessful  because of poor decision making . These businesses often do not reach their full or true potential because of decisions  being taken by persons who might not be properly equipped, experienced or educated to make them or because some decisions are made for emotional reasons rather than sound commercial and business reasons.

 

We understand family businesses, We understand entrepreneurs.

We can assist with a business or company valuation for sale purposes, management buy-in purpose, estate planning or for deceased estate purposes.

 

We can also advise on structuring your business operations to prepare your family business for sale. This could include reducing or removing unnecessary or non-essential expenses from the business, formalising business documentation, appointing professional manger/s and implementing sound governance structures.

Problems or challenges facing family businesses which we can assist you deal with include:

Problem: When should the main family member retire or step aside from the business or from the CEO role ?

 

Solution: Often the main family member of founder of the family business doesn’t know when to step aside and hand the reins to either another family member or to a professional manager, mostly because they do not believe anyone else will be able to understand or run the business better. Whilst they might be good at running the business they can’t understand that someone else might conceivably be able to do it better. Often the business can be stifled technologically because of them  or miss out on opportunities because they are not as open minded as they could or should be.

 

Their continued dominance of the business and holding on to the CEO role until they finally sell the business can be detrimental to the business and the value they achieve on selling it. Usually on sale the new owners will appoint a new CEO within a year or two  and the main family member then has to hand over to someone who might not be whom he/she would have chosen for the position or whom he/she believes is the best person for the role.

Problem:  What should be done to prepare a family business for sale ?

 

Solution : In many instances, family businesses need to be “prepared for sale” in order to maximise the value  the sellers obtain for them. It could take up to 2 or 3 years to do this depending on the business and how it has been managed but this is however not always the case. The main areas which should be addressed include:

 

Valuing the various independent businesses comprise the family business, if there are more than one, separately and   valuing the land and buildings owned by the business separately. If the value of the separate portions is more than the value of all of them together as a whole, then separate them from a sale perspective.

Identify all assets owned by the entity conducting the business which are not to be included in the sale e.g. properties, motor vehicles, art etc and depending on coat and tax implications, transfer ownership to another family entity.

Identify loss making divisions or departments and close or restructure them as soon as possible.

Cut all excessive expenditure including above-market remuneration  and perks for family members and manage the business as leanly as possible without compromising its future.

Ensure proper and market-related supply and rental agreements  are in place for business conducted with other family owned entities.

Where possible and if sensible ensure supply and purchase agreements are in place with as many customers and suppliers as possible.

Ensure all employees and managers have employment contracts in place.

Identify any environmental issues and establish the cost of remedying any damage.

Obtain a tax clearance certificate to ensure no long-standing issues with SARS.

Have a legal audit conducted to ensure the business is in compliance of all laws and regulations it requires to be.

Ensure adequate financial reporting systems are in place and appropriate monthly reporting packs are produced.

Ensure minute books are up to date, proper records are kept of board meetings and decisions and where appropriate or required proper meetings are held and records kept of statutory sub-committee meetings.

Ensure systems, procedures and controls are properly documented and up to date.

Ensure a documented strategic plan and business plan is in place.

Problem: How should family members working in the business be remunerated ?

 

Solution: Often family members are either paid too much or too little for what they do. The simple solution is to ensure  that salaries and perks paid to family members are commensurate with market related remuneration packages for the position they hold.

Problem: How should family members or professional mangers working in the business be incentivised in addition to their salary?

 

Solution: In a family business it is often difficult to incentivise family managers and professional managers when it is not possible or appropriate to issue shares or share options to them. As a result of this often no incentive is put in place. Not to have a market related incentive scheme in place for senior managers will either cause them to leave for better opportunities or the business will not be able to attract the best professional managers. In the case of family members working as senior managers, resentment can result when they see siblings or other family members who are shareholders in the family business working in other businesses and earning incentives in addition to their salaries.

 

In order to position the business to attract and retain the best managers, including family members, it requires to have an incentive scheme in place that is designed to pay senior managers meaningful financial incentives when they make the business succeed and achieve goals set by the Board.

Problem: What do family businesses need to do in regard to succession planning?

 

Solution: In many family businesses, particularly when the business founder is also the CEO, succession planning is poor, often because the founder believes he/she is the only person who can manage the business properly. It can also result from the CEO not wanting to be challenged by independent senior managers or where the CEO is waiting for a son or daughter to get to the age/stage when they are able to take over the running of the business.

It is important at all times that there is a proper succession plan in place. If the business has a Remuneration and Nominations committee, this will be one of their responsibilities but, if not, then it is the responsibility of the Board and the CEO. There has to be a plan in place for who will replace all senior managers in the business, including the CEO in the event of a death or incapacitation.

CEG Head Office – Corporate Finance, Advisory and Insurance

Suite 002, Ground Floor,
81 Richefond Circle,
Ridgeside Office Park,

Umhlanga 4319,
Durban,
South Africa

 

Phone: +27 (0) 31 536 8213

 

Asset Tree (Pty) Ltd – Financial Planning & Investments

5 La Lucia Park,
64 Armstong Avenue,
La Lucia 4051,
Durban,
South Africa

 

Phone: +27 (0) 86 027 7388

 

Email

 

General:
info@capef.co.za
Corporate Finance & Private Equity:
corpfin@capef.co.za
Accounting and Trust Services:
accounting@capef.co.za
Financial Planning:
finplan@capef.co.za
Investments:
investments@capef.co.za