What’s the Rhythm of the Family Business in Latin America?

Exaudi Research (www.exaudionline.com), together with distinguished academic institutions, business associations and consultant firms from different Latin American countries, headed a study of 750 family businesses in Argentina, Colombia, Costa Rica, Mexico, Peru, Uruguay and Venezuela. The main objective of the study was to determine the demographic traits and the impact of the environment in the managerial and strategic decision making of the family businesses in the region.

As a result of this study, we found that 85.20% of the privately owned companies in Latin America are defined as a family business. On average, these are companies which were founded during the last two decades. They have between 11 and 50 employees, with gross annual sales of approximately US$ 3,000,000.00. Only 12.38% of the companies generate over US$ 23,000,000.00 in annual sales.

Succession Plan

In Latin America, 47.28% of the companies are managed by the first generation founders, 28.82% are run by the second generation (mostly societies formed by siblings), and in 14.17% of the cases, the management is jointly handled by both generations. Only 9.73% of the companies are led by the third or fourth generations (consortiums made up by cousins). 72.73% admit that they don´t have a succession plan for a family member; whilst a mere 8.93% claim to already have it functioning. The remaining 18.34% are in the process of creating the succession plan or have it, but it doesn´t work. In general, the companies evaluated lack a defined policy under which the knowledge and required skills, necessary for the continuity of the organization into the next generation, may be handed down to an appointed successor.

Family council and Family Shareholder Agreement

The Family Council is the organism which regulates the relations between the family group and the company. In Latin America, 70.70% of the family businesses declare they do not have it constituted. However, the Family Protocol (a document which registers the rules pertaining to the relationship of the family with its companies and patrimony) is a common practice in Latin American family businesses, due to the high level of unfulfilment of verbal agreements, which must therefore be made in writing. 74.01% of the surveyed companies have not formally established a Family Protocol, to which we may add those cases which declare to have it (7.24%), but does not function properly.

Study of the environment and Country Situation

Based on the study of the social, political and economic factors which have an impact on the companies and families of each country, we have classified each one of the countries in order to enable a better understanding of the conditions under which these companies operate and how their internal strategies and decision making regarding family topics are affected:

“Mambo”

The countries classified as “Mambo” (Costa Rica, Peru and Uruguay), are defined by a constant energy and work economy, with more order and better established economic rules than the rest of the countries. The companies are mainly concerned with the economic policies of the local governments (16.29%), the lack of qualified labor (10.64%) and taxes (10.30%). The companies are younger and smaller with a more professional administration. The people surveyed in these countries have a higher level of satisfaction with regards to the performance of the directors of their companies (31.70% claim to agree with the way their companies are managed).

“Salsa”

The family businesses in Venezuela and northern Mexico live in an environment which we could classify as “salsa rhythm”: a mix in which apparently there are no rules, a rhythm in which “anything goes”. These are companies which are highly concerned with personal safety, specially kidnappings (16.20%), legal insecurity of the country (15.60%) and the frequent changes in the economic policies of the local government (15.28%). The families which own these companies are the most interested in creating a Succession Plan (35.34%), a Family Protocol (29.95%), or a Family Council (25.9%). However, the constant worries they are faced with prevents them from dedicating time to matters concerning the internal organization of their companies and families. Despite this situation, a high percentage of the people surveyed (59.00%) manifested their unwillingness to sell their company.

“Tango”

In this classification, the “Tango” countries (two combined in one dance), are Argentina and Colombia. In these countries, the family businesses are more concerned with internal family conflicts (15.68%), the economic policies of the local government (12.65%), the lack of qualified labor (9.63%) and the unexpected death of one of the company´s owners (9.31%). These companies perform in highly competitive local markets. It is in these countries that we observe the highest percentage of family owned businesses (92.60%) and the highest percentage of these in second generation (36.90%). These countries have a long tradition of companies managed by private owners, with families very dedicated to their duties from an organizational point of view (24.60% of those surveyed claim to be currently working on the creation of their Family Council).

Conclusions

Latin America cannot be viewed as one homogeneous block. The situation of each country has an impact on the decisions the families make regarding their business strategies and it affects them structurally and competitively.

The investigation concluded that in Latin America, in general, the predominant founder of the family business exercises multiple roles within his organization. The majority of companies are run by a father figure who executes many roles in decision making and in the maintenance of control and power. The figure of the founding leader takes care of solving any conflicts that arise which involve business and family.

Most of these companies have not defined a succession plan nor do they have governmental organs such as Family Protocol and Family Council which contribute to solving the disputes which arise in the interrelation between business and family. Given this fact, we can deduce that in the coming years, a considerable number of companies may shut down due to the lack of such good management practices in family business.

Project Colaborators

Argentina: ADEN Business School, Niethardt & Asociados and Instituto de la Empresa Familiar.
Colombia: Suárez & Asociados and Universidad Javeriana.
Costa Rica: Universidad Latinoamericana de Ciencia y Tecnología, Cámara Costarricense de Empresas Familiares and Consultoría de Empresas Familiares.
Peru: Peru Top Publications and FG Consulting.
México: Universidad de Monterrey, Coparmex and Álvarez, Carmona & Asociados.
Uruguay: Escuela de Negocios de la Universidad de Montevideo and Delucchi, Labandera, Cianciarulo, Rachetti & Asociados.
Venezuela: Universidad del Zulia, Universidad Metropolitana, Universidad de Carabobo, Ceproca and The Family Business Wiki.org.

Originally published in Tharawat Magazine, January 2012.