In his more than 20 years of experience in management, Enrique Maldonado has seen many children of entrepreneurs take the reins of the business that their parents created. But not so many grandchildren. The leader of the human resources and leadership consultancy DDI recalls the case of a pharmaceutical company in the country. The founder opened the first branch in 1991 and his two sons entered the business after graduating from Tecnológico de Monterrey.
“They didn’t know anything about drugs, but they did know about business administration. With the support of their father, they adopted a franchise model that allowed them to grow nationally. Today, the founder of the pharmacy chain is part of the board of directors, the children are in charge of the company, while the grandchildren do not appear in the direct operation of the business”, he points out. And it is that the third generations lose more and more interest in participating in the family business and decide to pursue their personal goals.
According to the firm Asesores de Consejo y Alta Dirección (ACAD), three out of every 10 family businesses in Mexico survive the change of the first generation; but only one manages to reach the third line of direct descent.
For Alberto Alesi, General Director of Manpower Group for Central America, the phenomenon is interesting. “Many young people of the third generation created their own business or went to the geek economy scheme,” he also indicates about the rise of digital platforms that connect supply with demand. “These are talents who understand programming languages, some are millennials, but most are from Gen Z, a group that entered the workforce a little over a year and a half ago. We see that they are working remotely for large corporations in the United States, Asia and Europe,” he adds.
The end of a legacy?
Ricardo Aparicio, director of the Research Center for BBVA Entrepreneur Families of the Pan-American Institute of Senior Business Management (IPADE), considers it vital to define a generational transition strategy in companies. Not having it, he says, increases the risk of losing business, because assimilating change without being prepared causes companies to lose focus.
Aparicio adds that 47% of the companies do not carry out any action to prepare the leadership succession, of which 20% of the founders acknowledged that they have only made informal comments about their retirement, while the other 27% assured that it will not go out of business.
Share the data from an investigation in which just over half of family businesses said they were prepared for when this generational change happens; but only two out of 10 are doing it right. 21% of the owners have defined when their retirement will occur and what plan the company will follow, and 32% are exploring alternatives to define the succession plan that best suits them.
Óscar Fonseca, director of the Business School of the Tec de Monterrey campus in Mexico City, points out that in the country, eight out of 10 companies do not seek external consulting to change their CEO until they want to rescue their organization. “A leader with a vision for the future knows that in order to continue growing, he has to let go of the rudder just when his company is at its best.”
The experts consulted agree that family businesses are more likely to create a patriarchal organizational culture and therefore tend to be little focused on optimal management of processes. “To ensure their permanence for more than one or two generations, family businesses must be institutionalized and incorporate best practices in their management and operation. It is common for this type of company to fail due to internal conflicts in the family or because the functions of the members in the organization are not made clear,” says Guillermo Cruz, president and founder of ACAD.
The institutionalization of a family business refers to strategic planning so that the organization does not depend on the central people, but on the processes. In this transition, short, medium and long-term business objectives are put on the table, in order to guarantee the continuity of the company.
Alesi, from Manpower, says that although family businesses are more agile in decision-making than a corporate one, “they have more challenges in their cash flow, a greater deficit in human capital and a greater problem in training their workforce.”
According to the leader of ACAD, for family businesses to have greater legal and economic security, it is essential that they incorporate elements of corporate governance. This implies establishing procedures, rules and principles that apply to the business structure. “Companies with best corporate governance practices have a 30% higher growth than those that do not incorporate them,” he says.
