family business

Making up over 80 per cent of all firms and providing some 60 per cent of all jobs created in the private sector, family businesses are the backbone of the Maltese economy, thriving despite challenges of internationalised markets and increased competition.

However, the biggest challenge might be the family itself, as diverging interests and diluted ownership over generations exposes new fractures that threaten business continuity.

The challenge is particularly pronounced in the third generation, as cousins take the helm.

Cousins are more likely to have been raised apart, with different values and far less familiarity with one another than their parents had as siblings, posing new obstacles to the family business and leading to only 12 per cent of such businesses making it through to the third generation

Ryan Buttigieg, Chief Operating Officer at Finance House plc, who has conducted academic work on this issue, is sharing his insights with BusinessNow.mt readers in a bid to sustain the continued success of what is a key building block of the Maltese economy.

Drawing on interviews with 16 different stakeholders in the family business economy, from financial advisors to non-family managers to, of course, family members, Mr Buttigieg’s research concludes that prime responsibility falls to the preceding generation.

“Their role in ensuring that the organisation is ready for transition to the next generation is crucial,” he writes.

They can do this by fostering a company culture that ensures that meritocracy is given precedence over inheritance rights. The key outcome is increased professionalism, especially through the addition of non-family members to the team to bring new perspectives, new talents and new management practices.

The responsibilities of owners hoping to pass their business to the next generation go beyond the company side, however. As parents, they must also do the work to ensure their children are fit and ready to lead the organisation.

“Often, new generations are required to handle much more with less experience,” explains Mr Buttigieg, who describes the assumption that the third generation can manage a business single handed as a “grave error”.

Family businesses grow over generations, and preceding family owners manage those businesses grow within an evolving learning curve of experiences. This is obvious for the first generation, but the second generations, being children of the original owners, are often included in this process to a large degree.

For the third generation, the process is less natural. Possibly numbering dozens, the business often has no way to employ all of them, and their own distance from the day-to-day running of the enterprise means they often seek new careers elsewhere.

Trying to take the reins of a business that has been in operation for decades with little experience often leads to failure, in no small part due to changing business conditions, as markets become far more competitive and gruelling in view of greater globalisation.

It is essential, then, that succession planning is thought of as early as possible.

To ascertain continuity, family owners as parents must invest their efforts in understanding the qualities and character traits of their children and nurturing a mentality that accepts and appreciates differences in others.

“Harmony is crucial,” writes Mr Buttigieg, who suggests “pruning” of the family business through divisions, buyouts, or ownership-only options, to ensure that those working together have good chemistry – a perhaps underappreciated principle underpinning business success.

The effect of this exercise on family sentiments, which may be deeply intertwined with the family’s relationship to the business, is no small feat – highlighting again the importance that succession is planned before long before it becomes due.

Although responsibility certainly starts with the preceding generation, it extends to the new one, which, in assuming leadership, must have three main considerations, according to Mr Buttigieg.

First, the acquisition of all the necessary leadership and technical skills to do the job, without which their legitimacy to the rest of the family, to their staff, and to their business partners, risks being undermined.

Second, a strong emotional quotient is ideal, to engage with and lead all stakeholders within the business.

Finally, love for the business is essential, as the responsibility of running a third generation family business, with all the challenges and expectations that come with it, is no small feat, and one that cannot be done effectively without a deep appreciation of the organisation and family’s history.

With family businesses continuing to dominate the Maltese economic landscape, the more time passes, the more these matters will be of relevance. Mr Buttigieg meanwhile hopes that his work can serve to help those businesses grappling with these issues to move beyond them by focusing on harmony, for the good of both family and business.

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