The popular fabrics section of the Balogun market in Lagos is populated by businesses in their second or third generation. These businesses are not the regular market trade – they have been in the industry for decades and passed control from one generation to another. Transgenerational family businesses are not unique to the fabric merchants only. Family businesses across different sectors are one of the mainstays of the Nigerian economy, creating jobs and driving economic activity, accounting for almost two-thirds of businesses in the country.
As ubiquitous as family-owned enterprises are in Nigerian society, most do not outlive the third generation. Our research at Naspire revealed that only 33% of Nigerian family businesses surveyed were led by second generation family owners; dropping to 7% by the third generation. They struggle with innovation, leadership transitions, and even survival. Despite this, some family businesses are able to thrive. Why?
The longevity and success of a thriving transgenerational business can be attributed to a few factors: Leadership, talent development, succession planning, and accountability.
Leadership and Governance:
Leading a family business requires both the leadership skills to ensure the growth of the company and the mastery to hold the entire family together. PwC’s 2021 Family Business survey showed that 50% of family businesses in Nigeria had no governance policies compared to 21% globally.
Leaders of family-owned enterprises must define the vision and create a governance structure that outlines the business’s goals, fosters unity among family and other non-family employees, and provides set guidelines for authority, communication, managing decisions, and differentiating in the marketplace.
The business landscape in Nigeria is increasingly complex and fulfilling customer needs, adapting to new technology, complying with regulatory requirements while maintain profitability involves managing several stakeholders. Creating a clearly defined governance structure and vision for the business creates structured guidance for the family’s actions.
Establishing best practices helps minimise conflict, ensure professionalism, foster ideas exchange, and build resilience. Efficient leadership is particularly important in Nigeria’s current business environment, where incremental improvements are rarely enough, and businesses must innovate quickly to stay relevant.
· Talent Development:
While mom and pop style family businesses might get by without external employees, medium to large scale family businesses rely on these external non-family employees for daily operations. Most family businesses at this scale continue to employ or promote people because of their lineage and not based on capability or even suitability for the role. This form of overtly biased recruitment means businesses put square pegs in round holes and increase chances of significant revenue loss from mismanagement. Instead, the family business should practice a meritocracy where the best hand for the job is hired while keeping core leadership to a governing board. Family members should be introduced to the business at a level commensurate to their skills and allowed to rise through the ranks based on merit. Also, this allows the next generation of leaders to gain knowledge of all critical business areas.
In addition to the different family members involved in the company’s governance, it is essential for a family business of this size to have an independent board of directors or advisors that includes non-family members to balance missing skills, experience and provide neutral guidance during any family conflict.
One frequently fatal flaw family-owned enterprises have is the failure to plan for transition. There is a lack of preparation or process for generational change, especially the transition from the first to the second generation. For many of the family businesses surveyed, the Matriarch/Patriarch started trading as a means to take care of their family and only became a family business when they noticed how lucrative it was.
Although all 33% of family enterprises surveyed in their second generation of ownership reported experiencing more growth and expansion by the second generation, the succession planning of these businesses was accidental as many of their first-generation owners never imagined the company would succeed to its current level. This finding is consistent with PwC’s 2021 survey; only 38% of Nigerian family businesses had the next generation involved in the company compared to 55% globally. PwC’s survey further revealed that only 25% of Nigerian family businesses reported having a documented and communicated succession plan.
Only a few businesses are intentional in creating succession plans and grooming their offspring to be able to run the business in their absence. Most second-generation leaders merely developed an interest in the business and decided to take it further. These family enterprises have flourished under the influence of their better educated and technological savvy second-generation leaders.
Transition and succession planning is the inflexion point for family businesses. There is a need to outline processes to involve the next generation in the vision and operations of the company. Successful succession planning requires a multi-year implementation plan, lasting three to five years, to fully build the capabilities of the next generation and immerse the new CEO into the position. Furthermore, in addition to the CEO role, first-generation owners have to plan about the other key leadership positions that need to be filled to ensure success. The goal of any succession plan is not just to select and train people but to ensure that the right tools and assets required are handed to the next generation.
Family enterprises should seek to understand the personal goals of the next generation when planning transition and be open to hiring external leaders where their goals or interest do not align with those of the business.
Why do some family-owned enterprises succeed? Naspire summarises it as: Structure, Systems, Processes and Procedures (2S + 2P for easy recollection). They operate as an actual business instead of a family that just happens to run a business. Family business owners must treat the business as a fiduciary responsibility and continue developing their leadership skills to ensure long term success. Owners must create practical governance structures, system, processes, and procedures to unite businesses into powerful entities to ensure the transition from the first generation to future generations.