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Passing down a family business is a delicate process, says economist

Read the interview with Pavla Marciánová from MU Faculty of Economics and Administration about passing down a family business to the children.

Pavla Marciánová.

Family businesses make up around 80 per cent of companies in the Czech Republic. Many of them were started in the 1990s and are now being passed to the children of the original founders. Can this be done successfully? How delicate is this for the families?

Pavla Marciánová, an economist from the Department of Corporate Economy at the MU Faculty of Economics and Administration who has long specialised in the study of family businesses, answers these questions and more.

Family businesses make up a majority of companies in the Czech Republic. Could you give us a number, perhaps a percentage?
Unfortunately, we do not have exact figures. Moreover, the definition of a family business is constantly being refined and clarified. The first one from 2014 has recently been amended. However, it is estimated that 70 to 80 per cent of companies in the country are family businesses. The new legislation also defines a ‘family trade’, where the sole trader is assisted in running the business by a spouse. And if you look around, you will find that family businesses make up a significant majority of companies.

Many entrepreneurs started family businesses in the 1990s, right after the Velvet Revolution. Now, thirty years later, they have reached a point where they want to pass the business on to their children, who are usually in their thirties or forties. What problems do they encounter in passing down the family business and what advice would you give them?
Founders of family businesses often realise that their children don’t want to take over the business because they know full well how hard it is to run, having seen it first-hand since they were little, like me. Usually what is being passed down is not some great treasure, some kind of family silver. You pass on the worries, the responsibility for your employees and their families and livelihoods. It’s often an unwanted gift. You should always be careful to find an offspring or other relative who is actually interested in running the business because otherwise, the handover is not likely to succeed. It is quite frustrating to run a family business when you simply don’t have what it takes.

There are also problems of authority, for example when your father who founded the business does not want to step down completely. Sometimes he only leaves the management formally, but he doesn’t hand over the day-to-day running of the business in practice and is constantly meddling and telling you what to do and how. Czech family businesses often struggle to pass on management from parents to children. Austria and Germany, countries with a long continuity of business, have fewer issues with that because people know how their grandfather or great-grandfather did it. In Czechia, we lack this experience and are only now learning how to pass on the family business.

You should also be aware that handing over a business is a time-consuming process, it can’t be done in a month. When children have been in business from a young age, it is more natural for them to take it over fully. But there were also cases where, for example, an electrical disconnector business was inherited by a woman after the sudden death of her father, and she was able to handle it. A lot depends on how the person approaches it.

Some family business owners don’t have anyone to pass the business on to because their children don’t want it. Is there a way out of this conundrum? How should entrepreneurs deal with this situation? Do you think hiring an experienced manager is a good solution? Or is it better to sell the company and retire?
A lot depends on the type of company. There are companies that are trying to survive in the long term. Sometimes you are passing on a valuable company that is well-positioned on the market. Handing the management over to a professional or selling it for a fairly substantial sum are both viable options, but that is a decision for the family to make.

However, if you have a sustainability-oriented business where your primary concern is ensuring safe employment and you pay much less attention to increasing the value of the business, there is usually not that much to sell. You can sell off buildings, for example, but it certainly won’t produce a staggering amount of wealth. In this case, the way to go is to sell your share in the company or hire a manager.

Another option is to hire a consulting company to handle everything for you, including passing the company on to the next generation. However, this is only an option for the big market players as it is very expensive. For small companies, the founder either closes the business down or someone else buys it. Sometimes none of the offspring wants to take on the family business and the founder is aware that the children want to go their own way, so they sell the business to have peace of mind.

Do you have any personal experience with advising family business owners on how best to pass the business on to their children?
I have experience with selling such a company. We have had two businesses in the family. The first one has already been sold – it was a lignite boiler engineering company. As a woman, I don’t understand lignite boilers at all and I knew I couldn’t successfully manage a team of 20 men in a workshop. So in this case, my father decided to sell the business himself and it was a good choice. My sister and I are both teachers, so it was not realistic for us to handle running an industrial workshop. The other business is my mum’s small corner shop where I sometimes help out. It’s exactly the kind of activity where you only just manage to stay in business – we keep it so that my mum has a job to do.

Anyway, in a family business you see all those years of work and toil people have put into it and when you are to close it down, I know from my own experience how difficult and painful it can be. It would be a shame if the shop closed down because it has been around since I was eight years old. I can see that my mother has built relationships with her customers. These are people who shop there every day, you know their concerns, you talk to them. That relationship can get quite deep. So when you suddenly say “OK, we’re out of business!”, you’re basically closing a long chapter in your life. I can see it in my dad, who still keeps in touch with his old customers, even when the business has been sold and there is no going back. What’s done is done.

You definitely don’t want to push too much, though. Your children must want it themselves because otherwise it is not going to end well and it will only tear the family apart. Sometimes passing down the business to your children is also complicated by the fact there are too many of them, for example, if the original founders were siblings. I know of a company that was owned by two brothers and they had ten children between them. Interestingly, it was the tenth child who finally decided to take over the company, even though no one was betting on him because he was the youngest of them all.

Have you ever advised one of your students on whether to take over their parents’ business?
Students often ask me about this, whether or not to take over the family business. And I always tell them, it’s all about what you want, how you feel about it. If you feel like you want to do it, then you should follow your parents closely, look for problems in the company and ask them to actively involve you in the company’s business on all levels. It is not like you would suddenly be the big boss, sitting in a cushy manager’s chair. Go work there as a temp, work your way up and start from the lowest positions, try working all the jobs there are in the company and only then make the final decision on whether you want it or not.

It’s not just about assuming managerial responsibility. You have to put your heart into it as well because building a company from the ground up is like having a baby. The person who takes it over should have the same kind of attitude.

Otherwise, it’s no use putting a professional manager in charge who will just go by the numbers. And if you still decide to hire such a professional, you have to accept that he will behave just like any corporate manager would. He will treat employees and customers differently than you would in his place and the relationships will no longer be like those in a family business, even if the company still bears your name.

After all, if you start your own business and put in all your hard work to make something out of it, you feel very differently about it than a hired manager ever will…
Yes, that’s true. For instance, because you’ve known your regular customers for, say, twenty or thirty years, and you experience their ups and downs with them. In a family corner shop, people will often talk with you about their personal problems. The place becomes a part of the community. It serves local people, it doesn’t have any room to grow substantially and everyone considers it a local fixture. When it’s in danger of closing down, all these people come to you and say: You’re not going to close it down, are you? What would we do here without you? And that is exactly what keeps people in the family business, even if there is no big money in it. It is more about the personal relationships you have built. You care about the community and what you’ve created and you don’t want to lose touch with the people around you.

Do you think drawing up a succession agreement is necessary? Can it help to pass down family business?
It is definitely a good thing, but you need to draft the contract very carefully and you need professional assistance from lawyers and sometimes even psychologists and physicians. The family has to come to an agreement and everyone needs to approve the succession agreement. If there is but one person who isn’t on board and challenges the agreement, then there is going to be trouble. Moreover, the situation can change due to people becoming ill, the economic environment changing or unexpected events such as the recent Covid-19 pandemic, which has literally brought a number of promising companies to their knees.

Speaking of Covid, how much has the pandemic affected family businesses?
The pandemic has had a profound impact on their performance. Except for the e-commerce segment, the pandemic has hit many family-owned shops pretty hard. On the other hand, in a crisis like this, it is much easier to explain to family members that you just can’t afford their paycheck right now and that you will try to make it up to them later. They are more likely to accept this than an ordinary employee would. The relationship there is simply different.

Generally, family businesses are better at surviving. One of their advantages – which can sometimes turn into a disadvantage – is that when the going gets tough, people put their own family savings into the business to keep it afloat. I’ve seen it happen in my family, too: if there is a downturn, family money is poured into the business so that it survives. The family pulls together and makes it through. But it leaves a mark on everyone.