Article: How Frontier Market family businesses can embrace change across generations

The Family Business is one of the defining and enduring forms of business in many Emerging Markets. By some estimates, as much as 80% of a typical EM's industrial base are family businesses.

This makes sense.

Family businesses are strong and resilient. They’ve usually been built by entrepreneurs with vision and mission. They’re creative and innovative, facing down new challenges every day. Family leaders tend to take quick decisions and execute fast.

Family businesses are also patient with their capital. They’re willing to forgo short term returns for long term growth, and – in general – they keep control of operating costs.

But the Family Business model has its limits. And as families move from the founder generation to the current generation, strain can appear.

Strain appears when financials become complicated. When a business loses money, generations think differently about the solution. The founder generation looks for fresh capital from shareholders. The new generation is happy to go the banks for debt. Improving the performance of the business is left to the current management, who have been hired and trained by the founder.

But management can be reluctant to change and thus the financial problems get worse. Tension in the family rises.

We’ve seen this many times in Emerging Markets, and it highlights the drawbacks with the model.

Governance can be unclear and confusing. Boundaries between family ties and loyalties and business decisions are blurred, leaving owners with urgent problems but few solutions. Emotions play a role: rather than exiting a loss-making business, a founder may hang on and hope for the best. The new generation looks on in despair.

Outsider involvement can play a critical role here. Outsiders see situations in a new light, they ask the tough questions, and they make the tough decisions. We’ve played this ‘outsider’ role many times and we see factors again and again which can change a family business facing headwinds:

• Firstly, don’t carry the burden alone: find new sources of capital to help reignite growth and profitability.

• Second, let new capital bring in fresh ideas and approaches, focusing on value, cutting back waste.

• And third, let new governance be unemotional about the business and push towards new opportunities.

Many Emerging Markets are coming face to face with this situation, and there are specialized businesses like ours – Cassini Partners – which can help. We see the impact that external capital and informed management support can bring. And we are starting to see the results in a strong industrial base with more agile, more powerful competitors.

Of course moving a Family Business from one generation to another can be tough and challenging. Fortunately, help is at hand.

I co-wrote this post with Alaa Oumansour, my Partner in Cassini Partners. Cassini Partners was an investment company operating in Emerging Markets.