In family businesses, recognising the need for change is as difficult as it is to find the suitable successor and organisational structure. However typical the situations and even the mistakes may be, many family business leaders do not take steps in time and become trapped in their own company.

When it comes to the issue of generational change, most founding owners tend to sweep the problem under the carpet for too long. Most people seek the solution for long-term operation based on family relationships instead of their business needs. Even though they are used to asking consultants for advice in order to tackle certain business challenges, they find this to be a issue of trust, in which they should not consult outsiders, because in most cases it is clear that they will either sell the company or transfer both the ownership and the operative management within the family. Management consultant company Hammel & Hochreiter has found in the course of its projects that provide support in generational change that Hungarian family businesses can adapt to market changes much more rapidly than they can recognise problems related to succession.

Letting go of decisions is difficult

One of the typical mistakes that founders of first-generation family businesses make is that they are unable to adjust the organisational structure and processes to the growing company. They are used to making decisions on everything. Therefore, they cannot, or can only with great difficulty, delegate decisions and tasks that they have been responsible for so far. In these situations, the owner is confronted with themselves, says Rajmund Virágh, manager of Hammel & Hochreiter.

There comes a time for every successful family business when the owner cannot handle the volume or nature of the tasks anymore. Leaders grow together with their companies, but sooner or later, they reach the limits of their own competencies.

Richárd Szabados, head of Erste Bank’s corporate branchbelieves that there is no exact definition for the point in time when the organisation and decision-making mechanisms of a family business need to change. However, it is mostly related to company size, so change becomes necessary as the number of employees and the revenue increases, when operative processes and management need to be modified. For instance, a company with more than 50 employees cannot be managed in the same way as one with a dozen workers. The financial management of a company with a revenue of several billion forints also requires entirely different skills and organisational structure to one with a revenue of a few hundred million forints.

If the head of a family business is unable to let go of the routine “manual control”, then they cannot change the company’s organisational structure.

In order to carry out the transformation which can make the company profitable, they have to realise that they will need other skills than working, getting people to work and coordinating them. If they still want to instruct and hold everyone accountable themselves when they should already be coordinating the managers and making strategic decisions, then they can easily become an obstacle to the development of their own company.

Even if, after decades of hard work, the owner finally feels the need for a change and is willing to take a step back, they can still make several mistakes. These include looking for a clone of themselves rather than changing the company’s decision-making mechanisms. However, a person who is identical to them and could run the family business can rarely be found. Usually, neither successors, nor operative managers from outside or the family can replace leaders with such an attitude without a change in the company’s structure, says Rajmund Virágh.

The abilities of family members must (or should) be assessed in the cold light of day.

The expert claims that it is necessary to assess what family members can and cannot do realistically, in an objective manner. If, based on this evaluation, the owner finds that their family members are not fit to lead, then they should not work at the company. The intended successor should learn about operational management and other management tasks at other businesses or even multinational companies. If a family member, typically a child, is chosen by the founder at the end of the successor selection process, the appointed person is often forced into a role that they are not fit for or do not wish to fill. If the owner who wishes to take a step back fills their own position with an external clone, then the new leader can often become competition, which could lead to a quick breakup or even operational difficulties at the company.

Trust is often not enough

Another method of selecting a successor which often leads to failure is if the head of the family business dumps leadership upon someone based on trust. However, if the only criterion is trust, then putting a child or a close relative on the “throne” may lead to the above described risks. If they choose a trusted person that they have been working with at the company for a long time for the top management position, it often turns out that trust in itself is not enough, as the selected colleague is not fit to replace as this position is beyond their competencies.

Completely different motivations and skillsets are required for managing a company and carrying out
the manager’s will for decades.

If the leader hires a manager from the market without changing the company’s organisational and decision-making structure, the manager may soon throw in the towel due to the owner’s constant interventions.

If a bank strives to have a long-term financial relationship with a family business, then they also need to examine how sustainable the company’s operations and management are in the event of the managing family head’s potential retirement and what it is capable of in the new stage of its development, says Richárd Szabados. Since the bank approaches the issue on a rational basis and not based on emotions, they often recognise the problem more easily than the manager. It is in the interest of both the bank and the company to draw the manager’s attention to this issue and encourage the client to make the changes necessary for the company’s future and development. This, however, requires the family business to be able to consider the bank as a long-term expert partner, with which it can share its problems and whose opinion it listens to.

Managers of family businesses are often used to asking experts for advice in order to solve their business problems.

However, since they consider the issue of succession to be sensitive and a matter of trust, they do not share their problem with anyone, and instead, try to find the solution alone.

However, the fate of the company and the family fortune is at stake here, and this area has its own specialists who can protect them from repeating other people’s mistakes, which they probably will not even have the time or opportunity to fix.

The publication of this article was supported by Erste Bank, the partner to Hungarian businesses.