Family Business: How to survive third generation curse

ANALYSIS | Nebert Rugadya – URN | Uganda has severally been named among the top three enterprising societies in the world but is also a country where most locally-owned enterprises hardly last beyond their first birthday.

Almost a third of adult Ugandans either own or co-own a business according to the most recent report on the country by the Global Entrepreneurship Monitor (GEM). And in one year, at least a tenth of adult Ugandans (about 2.5 million) start an enterprise.

However, the report shows that a fifth of the adults (aged 18 to 65) closed businesses in one year. Enterprise Uganda says the high rate of enterprise formation in Uganda is because there are very few employment opportunities and the hundreds of thousands of university graduates every year, found themselves with no option by to start an income-generating activity for survival.

And the main cause of the collapse of businesses, then, is getting an immediate source of livelihood, are there is no initial plan for a long-lasting business venture.

Many Ugandans also like going it alone, according to the Private Sector Foundation, and even when the enterprise lasts several years, it dies as soon as the owner dies or retires. It is mainly in old age when most Uganda sole entrepreneurs consider the option of turning over the business to younger family members, who may not have the experience of how that particular has been run, or may even generally lack the skill or interest in the business.

Most successful entrepreneurs started a business and planned it as a family business early in their life, planning for the involvement of family members by identifying them for the different roles and helping them develop their skills in that line. A few, however, have also turned into family businesses at a later stage and succeeded in future generations.

Globally, most big family businesses do not survive through the third generation, which is largely used to define a successful family business. In Uganda, those who are well into the second generation or have gone through it are countable, most of which belong to Ugandans of Asian origin. The Mehta and Madhvani families and more recently, the younger Mukwano (Amiral Karmali) are some of the shining examples.

Ten years after the death of James Mulwana, the thriving Mulwana Group of companies and the apparent quiet in the family, is a beacon of hope for an indigenous family business that he started almost 40 years ago. This is not to say that there are no indigenous businesses that have survived decades, though many of them remain informal for various reasons, like the dread of state regulation and taxation.

This works against them because formalization helps ensure the succession structure so that when there is an imminent change of management or shareholding, the transition would be smooth.

“Though they invited me to join them in the business, there was a big fight between my parents and me on how the business would be run.

They didn’t realize that the company had to be reformed to fit in with the times,” says Stella Nakyanzi who is operating a large hardware shop near Kampala. She, however, says that they reached several common positions and that the business is now running smoothly, with the parents confident it will survive after they are gone.

Global situation 

Researches show that just about 12 percent of family businesses survive to the third generation, and only 3 percent make it to the fourth generation and beyond, therefore the “third-generation curse” is not only endemic in Uganda. Generations range between 30 and 45 years.

An analysis by the Boston Consulting Group in 2015 showed that 32 percent of public companies in the United States were likely to die in their fifth year, compared to 5 percent 50 years before. It, therefore, shows that today, family businesses are more fragile than half a century ago. The oldest recorded surviving family business was owned by the Kongo Gumi family in Japan, since 578, started by Kongō Shikō, a Korean carpenter, who had been invited into Japan to construct the first Hindu tempo, Shitennō-ji there.

The 593 still stands today, though it had undergone several changes. The family business existed for 14 centuries until its 40th generation in 2007 when it was taken over by Takamatsu Construction, which runs it as a subsidiary. This resulted from changing economic aspects that saw land and housing prices collapse in the late 1980s and early 90s, as well as the falling demand for tempo construction as Japan became a more secular society.

Failure to pay a 342-million-dollar debt was its last blow. It was succeeded by Hoshi Ryokan, another Japanese one, which has run hotels in Mount Hakusan since 718 and is in its 46th generation of family managers. France’s Château de Goulaine, which features a vineyard, a museum, and a butterfly collection is owned by the Goulaine family since 1000, hosting various functions, including weddings, and is now under its 46th generation of family ownership.

About 100 other businesses are more than 240 years as family enterprises, according to Bryant College’s Institute for Family Enterprise in Smithfield, USA. The agro-production and winemaking and brewery sector accounts for a good number of them, especially in Italy, France, and the US.

How to survive generations   

According to the UK-based Institute of Family Enterprises, communication between and amongst stakeholders is the main pillar for family business survival. Where there are differences, it encourages constructive conflict which seeks solutions, rather than destructive conflict. In setting up a family business, family values must be set and protected, to give the vision on which the business will be founded. Strategy planning should put into consideration the goals of the next generation.

George A. Isaac, a business management consultant and entrepreneur says it is important to draw and maintain a succession or transition framework, which also included training of family members in the current and future generations. In most cultures, including Uganda, the eldest son is usually expected to be the heir and successor to the business empire.

However, this should not be the case. Isaac says it does not matter the position in birth or even the gender, but the ability which is assessed over time. He also notes the importance of retirement planning and planning for a person’s estate, and to ensure the survival of the retiree. Another aspect of a successful transition is governance. Experts stress the need to separate family from business issues so that a family conflict does not become a business conflict.