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Innovation credit within family businesses is much stronger

March 21, 2018

In the area of mergers and acquisitions, family businesses provide many interesting cases. Just as many other business issues can be traced back to the family characteristic. Fambizz spoke with expert Ronald van Rijn, managing partner at JBR Strategy, Corporate Finance & Restructuring, about succession within family businesses and which factors all play a role.

Dutch society is aging, as the baby boomers (born between '46 and '55) retire en masse in the coming years. This also has far-reaching consequences for the business world, and in particular for family businesses. "Many family businesses currently face a succession issue," acknowledges Ronald van Rijn. As managing partner at JBR Strategy, Corporate Finance & Restructuring, he visits many family businesses to advise and assist them. This results in interesting business cases. "In the area of succession, you see that the older generation finds it difficult to distance themselves from the business in order to make room for the next, younger generations." But that space is necessary, to give the next leader a chance to do his job.

This is not a remarkable observation, but it is in sharp contrast with the long-term vision that is often present. Family businesses do in fact focus on the long term, more so than companies that are not looking for a successor within their own family. "Family businesses will not readily go for the quick win," Van Rijn says, outlining a key advantage of this type of business. "The consequences of the wrong choices that a short-term vision often results in carry over to family businesses. Because your family actually has to deal with the consequences, while executives in non-family businesses 'only' get fired or ultimately keep the honor to themselves." Personally, the adverse consequences for this executive remain relatively limited.

The fact that they are and remain focused on the future makes family businesses much more innovative. Van Rijn: "The innovative power of family businesses is much stronger, because a development doesn't have to generate money immediately." This stretches the payback period of an innovation a lot further. Van Rijn: "This is in contrast to when private equity is involved, for example. These companies have to sell their businesses for a profit after a few years in order to continue their own operations." This short payback period often weakens the autonomous power of innovation.

Logic

It's all very well being innovative and having a long-term vision, but Van Rijn acknowledges that the family nature can also have a negative effect. Van Rijn: "People sometimes lose sight of the logic when making choices. Then sentiments and the family system suddenly take over. This can involve retaining a loyal employee who is not performing well, but also providing backup for family members who are not doing what they should be doing." Within family businesses, these kinds of issues are not always handled well by a long shot.

Or the family member who is not active in the family business, but whose (future) capital is in the business. Van Rijn: "What do you do with investments? They cost money and entail a risk that will not benefit the family member in the short term, but which could cause him or her to lose some of their assets. That person needs to have sufficient trust in the family members who are involved in the company. And that's not a given. This family member can be obstructive, straining relations both inside and outside the company.

Not that someone who seeks his fortune outside the family business necessarily creates conflict. In fact, in Van Rijn's view it is crucial for future leaders of family businesses to look elsewhere. "Otherwise, you will remain purely within the framework of the family business and you will not learn to look at things from a different perspective. If you have always seen your father work in a certain way, it is difficult not to adopt that way of working." But what if someone doesn't want to return to the family business from which they came? Van Rijn: "A great pity, of course, but then it wasn't meant to be.

External copper

To avoid disappointments and conflict situations, many family businesses end up choosing an outside buyer when the succession issue arises. "Then you eventually get rid of that conflict of interest and outsiders can start making the decisions without risking the family wealth."

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