By Jaco Fraser
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Family-owned businesses play a significant role in South Africa’s economy. Alarmingly, surveys indicate that only about 30% (thirty percent) of family-owned businesses survive into the second generation, and 10% (ten percent) in respect of the third generation. These numbers reflect the failure of the seamless transfer of control and ownership to the following generation in the absence of a family constitution and succession structures.
Several factors contribute to the high failure rate of family businesses, namely:
- Lack of Succession Planning: The absence of a clear and fair succession plan can lead to conflicts and uncertainty, often resulting in a breakdown of the business. Gradual transfer of client relationships is usually an element which is neglected, and the effect thereof is only experienced once a key individual of the business ceases to be part thereof.
- Blurring of Family and Business Roles: In family businesses, personal and professional relationships often overlap, creating friction and clouding decision-making processes.
- Poor Financial Planning: Without proper corporate structuring, family businesses may experience unrestrained growth in the owners’ personal estates, leading to substantial estate taxes and complications when passing on the business.
- Conflicts of Interest: Family members may have different visions, goals, or financial needs, which, without clear governance, can jeopardise the business’s stability and future growth potential.
An effective family business structure, combined with a Family Constitution, serves as a framework to manage family dynamics, protect assets, and ensure a smooth succession. Proper corporate structuring and a tailored Family Constitution can address key challenges and set a family business up for lasting success:
- The Family Constitution: Structuring a family business often involves creating formal governance documents, such as a Family Constitution or a Shareholders’ Agreement. These documents help set out a company’s visions, set boundaries, define roles, and clarify decision-making processes, significantly reducing conflicts.
- Succession Planning: Planning for succession is critical to family business structuring. A well-designed structure outlines the succession path and prepares the next generation, ensuring continuity.
- Tax Efficiency and Estate Planning: Proper corporate structuring can limit the personal estate growth of business owners, allowing for tax-efficient estate planning. This approach helps ensure that the business can pass from generation to generation without excessive estate duties, preserving wealth within the family structure.
Effective corporate structuring includes separating family and business assets, utilising the full benefits of holding companies and trusts, and establishing clear roles and responsibilities for the family board (preferably governed by a Family Constitution or Shareholders’ Agreement).
By implementing proper business structures and focusing on succession planning, families can reduce risks, manage tax exposure, and create a stable platform for future generations.