Enrique Soriano

Inside Family Business

“SUCCESS is the temporary suspension of failure”

WHAT will family businesses look like 20 years from now? One thing’s for sure: the sector won’t look the same. For a start, family businesses will be in different sectors, moving away from traditional areas like manufacturing to things like software development and social media. And their management and ownership teams will be different.

As Tracy Perman explains in her Business Week article entitled “Taking the pulse of family business,” two broad trends are visible in the realm of family business as we get comfortable in the 21st Century. First, the aging of the baby boom generation signals a coming ownership change for many family businesses within the next ten years. Second, more and more of these businesses will be taken over by women, continuing a trend that has been visible since the turn of the century.

Recent studies have shown, Perman explains, that “women-owned businesses were more likely to focus on succession planning, have a 40 percent lower rate of family-member attrition, tend to be more fiscally conservative, and carry less debt than male-owned businesses.”

According to a recent MGI study, the percentage of family businesses in manufacturing, the traditional heartland of family business, has halved from 40 percent in 2003 to 20 percent in 2013.

Some family-owned businesses are finding that it is no longer assumed that children will wish to take over a family business. Thus, if the founders of a firm wish to keep it in the family’s hands, they should be sure to take proactive measures to attract future generations to the business.

In addition, the majority of family business owners aren’t laying the groundwork for the next generation to continue running their companies. Only 45 percent of respondents in the family business survey say their children are involved in the business.

Even among those who have children involved in the business, there seems to be a lack of confidence. More than 40 percent of family business owners say non-family employees are more qualified to keep running the business than their family members are.

The concept of stages of growth (and decline) and the projection of a life cycle is common in biology, economics and business and has been translated into the Three Generation Effect. It is a well-established framework in the analysis of the histories of family firms. Globally and in the Philippines, it probably occurs often enough to be credible as a forecast and a cautionary rule-of-thumb. On the other hand, especially among Japanese artisan enterprises, there are family firms running into the centuries—surviving if not growing.

As the business environment changes over time, the trading and licensing opportunities and the rent-seeking manufacturing monopolies that characterized the founders’ businesses will give way to the information technology age with higher-technology and service (people-oriented) opportunities that the younger MBA generation with family connections and entrepreneurial ambitions could take full advantage of. The AIM Family Corporation Group’s overseas research indicated a predilection for the members of the third, and occasionally even of the second generation of overseas Chinese family firms educated in the United States to form their own start-up enterprises.

The motivations included escaping from the family hierarchy, the innovative entrepreneurial culture in American universities and high-technology enclaves from Silicon Valley to Boston’s I-128, the reward in new ventures for capability rather than seniority, and the bonding during business school among nonfamily peers.

But according to specialists, the big change is in the way family businesses are now being inherited by siblings. It’s come a long way from the tradition of primogeniture or the right of the eldest child, especially the eldest son, to inherit the entire estate of one or both parents.

This is likely to transform the sector. It could become more unstable, but much more creative and dynamic, and place family businesses in different markets.

Lucio Dana, a family business analyst, says parents are now in a completely different position from where they were years ago. “They are much more concerned about fairness and equality,” Dana says. “Also, the kids are more vocal and there have been cases where they would take the parents to court.”

But family business consultant Jon Kenfield says the trend could create new markets for family businesses in the future.

“The ones that succeed will be the ones that harness the creative juices of what will be a better educated group of people, who have a much broader range of skills than their parents and they’ll be looking for new products. He says this will create a big shift for family businesses. In 20 years’ time, the sibling teams could take them to a completely different space. It might be software development, it might be social media services, it might be hospitality that they will need to do at a higher level.”