Challenge of a family business

What is the challenge for a family business?

Let’s start right away by looking at who family businesses are and why they’re important, so the challenge come to a different light.

These companies play a major role in a given economy of a country. They produce a significant % of GDP and employ about one-third of the total workforce. In the EU, this is about 40%. Although the largest employers in this respect are family businesses, they do not receive positive differential attention. (What’s more…)

How do we define a family business?

According to the EU, this is a company where the family has majority ownership, voting rights, and where at least one family member is active in the company.
According to another definition, a family business is one that considers itself a family business (eg 2 students set up a business in 50-50% and then start a family)

Why is a family business different from a multinational company?

While multi typically deals with short-term efficiency and can think for a maximum of 3-5 years at a time, family businesses bring family values into the firm.

What are the values in a family business?

Long-term thinking, cooperation. The common interest takes precedence over the individual interest. “We”, not “I”. A family business is deeply integrated into the community. You can’t do it like a multi that if the economy goes bad, it will move toward. That’s why they do a lot for the community where they live.
In a crisis situation, it is not the daily profit and the quarterly plan that are important, but survival, even by sacrificing reserves. Most business leaders treat their company the same way they would have their 2nd, 3rd children.
That is why most of them managed to survive in 2008, and I am confident that this is how many businesses will survive the current crisis.

Challenges in the family business

A family business thinks long term, it wants to exist even decades from now. Accordingly, their challenges are in line with this. The main question is how to reconcile the capital needs of the current situation with how long they will work.

The reserve as the first major challenge

A reserve is needed to survive a crisis. In a family business, however, you need to find the equilibrium point. At that time, the company operates normally, but also forms a corporate reserve. In addition, the owner withdraws a sufficient amount of dividends to set aside private reserves.

The question is, how can such an emergency reserve be built up? How to reconcile corporate emergency reserves with the creation of private reserves?

Dividend issue

How much dividends can be taken out is obviously not only important if you want to “beautify” your accounting or pay pocket-by-pocket. Obviously no one has heard of this before, so this procedure is unknown to us, I only saw it in a sci-fi movie.

Dividends are an important financial issue. Dividend withdrawal planning (when to be available, how much to reach, etc.) is not implemented for many due to its ad-hoc nature.
Together with our clients, we have developed a plan that provides an opportunity to safely address the above issues. In the worst case scenario the worst thing that happens is that you take out dividends later.
Since every company is a little different, it is not advisable to go into this separately. Contact us at the contact menu and ask for an appointment to discuss this.

The challenge of retaining workforce in a family business

A family business typically works with low fluctuiation. At least because of the existing family atmosphere, it is lower than even a multi of a similar size. Here the issue of social responsibility also arises.
What about employees if something happens to the company or the employee?
What will happen to the employees after they have worked with the company manager for 10-15-20-30 years and retire? Will they have enough reserves?
How do I give my young workers a vision that will make them want to stay here like the “old ones”? The latter issue will be a major challenge in family businesses once the seniors have said goodbye. You can read more about this in Tackling labor shortages in 2025.
If you are interested in these questions, please contact us here.

Challenges of generational change

Social responsibility does not end with a family business being low in fluctuation.
After many omissions in Hungary, family businesses have reappeared. These companies are both first and second generation companies. Therefore, they are living in a very risky and exciting period because the statistics clearly show that only one third of family businesses are worth the third generation. Typically, in 10% of cases, inheritance takes place “smoothly” (from father to son), in the remaining 90% a different path has to be found, unfortunately in which some companies “die”. You may have read about the difficulties of Generational Change before.

The issue of labor retention and social responsibility may also arise here: “What do I leave behind for those who have been loyal to me for many years?”

In the case of a generational change, the owner typically does not, or not only, wants to keep his own property, but also takes responsibility for his environment. He also feels responsible for his co-workers. Not to mention that the assets created (and operated) remain taxpayers to the state.

Difficulties in teaching new leadership

Obviously, heirs need to be taught or run a company, or if they don’t want to be involved in the work of the company, they need to learn how to be good owners. How much they can get into the life of a company, how much dividend they can take out, and at what pace so as not to cause trouble in continuous operation, and so on.

And now we come to the most difficult issue:

The main topics of the tax issue

A Hungarian example will follow numerically here, but the question is very similar in many places.

At that time, in 1989, it was possible to establish a Ltd. with HUF 500.000. In terms of interest tax, 10 years is the important timeframe. Taxation is an important issue if I look at how I would have done better with that amount.

I would say that if I put so much money in a bank at the time or buy so much stock and invest in someone else’s company, I get it today tax free, with interest. But in 1989, the eggshell was still on my bottom and I was learning to read and write, so I didn’t have too many opportunities to put to bank this amount.

This is how comes into the picture the exemplary John, who so decided.He can invest the amount from the originally taxed wage without interest tax. This money can be taken up tax-free, whether you have worked at a low risk for the bank or invested in another company.

Should I invest my own money in my own or in another company?

Take, for example, Joseph, who became an entrepreneur. Today, Joseph has apparently become exactly more experienced in the 30 years since then, so a generational change is imminent for him as well.
Joseph has built a successful business over the years, so if he also falls into the above 90%, the question arises as to whether to sell the company, list the company on the stock exchange, or what direction the story should take. To do this, however, he needs to evaluate the company.

That’s when it turns out his company is virtually unmarketable because he walked into some traps.

Tax “traps” in a family business.

This is when family wealth and corporate wealth are completely mixed. Separating this will cost money, which will typically not be sacrificed by a family business in order to transfer assets that are already in its own use, ownership and possession from one pocket to another.
The basic idea is that they bought their assets from the income that was already taxed, they put their private, taxed income into the business when, after many decades, they want to take out why it should be taxed again.

Closing remarks

The stories of the companies we met during our negotiations (or, if you look in your own environment, your own example) show that the important question in this rapidly changing world is not what they ask in a job interview: “Where do you imagine yourself in 5 years?”
But the important question is “Where I would like to take my children and grandchildren with my company in 50 years?”.

Questions:

What have you experienced on this topic, what challenge have you faced?
What steps can you take to ensure that, as an entrepreneur, the example of Joseph does not prevail?
Do you take out dividends? How do you plan the extent of this?

Inheritance, exit strategy, company sale is a rather complex topic, so a single blog post is not enough to discuss it. If you’re also interested in the topic of what’s going to happen to your company, even if you’re not that old, you can reach us on the Contact menu.