Erika Matwij (source: Courtesy of the Institute of Family Business in Slovakia)
While family businesses in Slovakia have been around for decades, with some even dating back to before the communist regime, it was only this year that the term ‘family business’ got an official definition – and not a single one has yet been officially registered or recorded.
However, just like anywhere else, family firms face specific challenges in Slovakia because of their nature. One of the most demanding is generational exchange, the process by which ownership and management responsibilities are transferred from one generation to another.
Erika Matwij
President of the Institute of Family Business in Slovakia, strategy and management expert in family businesses in Slovakia and owner of Human Inside, which is engaged in the implementation of HR strategies in companies and for audits. Erika has been supporting family businesses in the development of human resources and strategies in succession and generational exchange processes, and in emotional and mental processes for different generations of family businesses, for more than 12 years. She is also a member of, and Slovakia’s only representative at, the International Academy for Family Business Research IFERA.
The Slovak Spectator spoke with Erika Matwij, a strategy and management expert in family businesses in Slovakia, and president of the Institute of Family Business in Slovakia. She herself is the owner of a family business, Human Inside.
How many family enterprises operate in Slovakia?
The Economy Ministry estimates that, as a share of all the companies operating in Slovakia, it may be somewhere between 60 and 70 percent, but we do not have exact data. This is because until recently there was no official definition of a family business in Slovakia. This was introduced as part of a revision to the legislation on social economy and social companies that came into effect only on July 1, 2023. Actually, this was the first time the government did something related to family businesses.
What is the official definition of a family business?
It is quite long, but the key factors defining a family enterprise are that 50 or more percent of the shares, or a share of 50 and more percent, depending whether it is a joint-stock company or a limited liability company, is owned by the family, that it is managed by the family and that at least one family member works in the enterprise. So, were two people to launch a company and declare it had a family atmosphere in it, it would not mean that it is a family enterprise by default.
What other changes has this legal revision brought about?
Family enterprises can either get themselves recorded (zaevidovať sa) or registered (zaregistrovať sa) with the Ministry of Labour, Social Affairs and Family. There is a big difference between these two, as a registered family enterprise is obliged to spend at least 12 percent of its taxed profit on strengthening its internal and external relations. This could include education, recreation, healthcare, or social assistance to family members. However, even though many family businesses already do this, we do not recommend they register as they would become regulated by the state and subject to greater supervision compared to other companies. Also, there is a lot of related administration. Nevertheless, we recommend they get recorded, as this will help the state identify how many family businesses operate in Slovakia, in which sectors, and so on.
Based on your observations and experience, in which sectors in Slovakia are family businesses most common?
They are active most often in manufacturing and commerce. This includes companies performing various crafts, for example building, carpentry, and wine production. But it is really difficult to say, as there are no statistics.
Have family businesses familiarised themselves with this legislation?
Obviously not, because as of today no family enterprise has been either recorded or registered. Another problem is that this new legislation has put family businesses into the category of social enterprises. This is a big mistake, which I have pointed out since the legislation was first drawn up. Although the Ministry of Labour, Social Affairs and Family has ‘family’ in its name, that does not mean that it should be in charge of family businesses. Putting family businesses, which are one of the backbones of the economy, into the same group as social enterprises is an insult to them. The role of social enterprises is completely different.
Which ministry should deal with family businesses?
The Economy Ministry. A section should be set up featuring experts from the ministries of finance, justice and labour to address the problems facing family businesses. For example, succession and generational exchange in family businesses and transfer of assets is being carried out in Slovakia based on legislation dating from 1964, when prenuptial agreements didn’t exist at all. We’re working against this backdrop in 2023, and it’s a shame.
Do family businesses in Slovakia differ from those abroad?
No. I can say this as I also provide assistance during generational exchange and various processes related to family enterprises abroad. They differ only in how many generations the family business is passed on to. Family businesses around the world have very similar problems and processes that they have to deal with as part of the generational change process.
Have some family businesses in Slovakia been built out of firms that once operated in Slovakia before the communist regime?
Yes, and they are very proud of it. There are a number of families which have businesses today that were built on the businesses run by their grand- or even great-grandparents. For example, the confectionery firm Wagner. It was launched by Ján Wagner in 1947, but the state nationalised it soon after. After the fall of the totalitarian regime in 1989, he got his nationalised property back and resumed his business. Today his son Rudolf and his wife Anikó run the business, which consists of confectioneries in Veľký Meder, Dunajská Streda, and Bratislava.
Was it a problem for those companies that there was sometimes a 40-year hiatus?
The biggest hindrance was the time gap, as family businesses were not allowed to operate because private entrepreneurship was not allowed under communism. For example, in Italy, grandchildren work together with parents and grandparents in family businesses and the knowledge and DNA of the company is directly passed on to them. In Slovakia, on the other hand, successor generations did not have this chance. Often, their ancestors were no longer alive when they renewed their family businesses.
What advantages and disadvantages does a family business bring in terms of business and family life?
The advantage is that they can continue to build their wealth, that they bring the wealth not only to the family but to the region and community in which they live. They perceive their responsibility in a different way to managers in non-family businesses. They create room for family members, who can take jobs in the family business if they fail to establish themselves somewhere else. But what is both an advantage and disadvantage at the same time is that the children, somewhere in their minds, will believe that if things go completely wrong on the labour market, they will always be able to get a job in the family business.
On the other hand, the emotional links and inability to separate business issues from family life, private from work-related, can be a big problem. There is often no celebration, Christmas or even Sunday lunch without someone mentioning the company or its problems or somebody checking to see if something has been done. This is emotionally very demanding. Another disadvantage is that we see family members and ordinary employees in a different light. This brings problems, when, for example, parents give preferred treatment to the children working in the company and refuse to see that they lack managerial skills or that they are not yet mature enough to take over the management of the company. Or they do not trust their children enough and undermine their authority in front of employees. A big problem during generational exchange is when parents do not allocate enough time to pass on their knowledge and experience to the emerging generation. Also, boys are often preferred over girls. Unfortunately, I have to say, companies don’t break up because of family problems, but families break up because of family businesses. These are the big issues that family businesses face. At the same time, I must say that the cohesion of family businesses, the kindness to family members, the willingness to help, is tremendous.
What problems do family businesses face when dealing with succession and generational change?
The most common problem is the emotional and procedural unpreparedness of the founding generation to hand over the company. The founders, usually over 60, think that this can be done at the drop of a hat, because the child has been active in the company since he or she was 15. But to manage a company and to take over responsibility is something completely different to working in the company as a student for a few hours during the school holidays.
But the successor generation is equally unprepared. It is impatient, very ambitious and also labours under a lot of assumptions – I’ve been working here since I was 15 and I know everything. Another common issue we help family businesses with is communication. They don’t listen to each other, act presumptuously, and so on. They need to work on these things
Is the younger generation interested in taking over family businesses?
Yes, it is. But when they do not get a specific work position or responsibility in the family business, and are not told what is expected of them, are constantly criticised, or fail to persuade the founding generation to, for example, implement an innovation or make a change in marketing, they lose interest and leave. Based on long-term statistics, only 30 percent of family businesses survive into the second generation with the key reason being that both the founders and the successors are not willing to listen to each other.
What should an ideal succession plan look like?
At the very outset the family should carry out an analysis of where they and their company is, and its potential. The second step is to set expectations and decide how long the transition process should last. To do so, they need to set up a family council, which consists of only primary family members, i.e. father, mother and children, without the spouses of the children. Even when a family member is not active in the family business, he or she is part of this council. They are passive members of the family business and they must not be left out of discussions about the family business and its future. At sessions of the family council, they present basic questions like what the vision for the future operation of the family business is, as generational exchange is only one possibility and there are four others: the entry of an investor, handing the company’s management to someone else from the broader family, hiring an external manager, and sale of the company. It helps greatly if there is family constitution.
Could you explain what a family constitution is?
It is also called a family codex, and usually bound into a book. I always recommend that a family which has decided that their family business will be multi-generational should write a family constitution. It is a set of rules and agreements for the founders, setting out what they want the following generations to pursue in order to reduce and eliminate conflicts between siblings and family members after they have passed away. For example, how dividends will be paid out, how to cope with conflict when it occurs, how a family member can become a director of the family company, and whether the company should support the local community. A very sensitive issue is excluding shared ownership of property. This means that when a child marries, the spouse will have no entitlement to any share in the company. There are about a hundred questions we ask at sessions of family councils and they are gradually answered. After they agree upon everything, I put all the rules into a book which they then ceremonially sign.
The family constitution is a very strong document accepted all over the world. So, if you say, for example in the USA, that you have a family constitution, nobody will question anything. It is so strong that everybody knows that you have clarified relationships and that all the structures and processes you use to organise and guide your relationship with the enterprise are well set.
What steps should families follow?
The family should agree on how long the transition process should last, and its concrete phases. They should also inform employees, suppliers and banks about this change. The company should be prepared for this step in terms of organisation and processes. Generational exchange is a huge change for key employees who have been with the owners for 20 years and may be perceived as an existential threat to them. We help companies discuss all these issues so that the process is a controlled and coordinated one.
Could you give some examples of successful, and failed, generational exchanges?
There are plenty of successful generational exchanges reported in family businesses’ histories. Some examples are the frozen bakery products manufacturer and seller Minit, and the bicycle manufacturer Kellys.
Of course, we have also seen instances of failed generational exchanges in cases where we did not recommend such an exchange. I remember one case when relations within the family went so wrong that we advised them to postpone the exchange and first work on their communication and relationships. We spent two years trying to find ways to carry out generational exchange in their family business, but none of these worked for them. Always, after a while, one of the generations started to boycott the process, find faults, and blamed the other generation. Now, the child is leaving the company and starting their own firm, but will receive shares in the family business. The father, who is now in his 60s, will continue to manage the company for a number of years and then they may hire an external manager. What is sad is that our institute is very often approached by companies where conflicts are already very heated.
When did the institute launch the Academy of Successors?
The academy is not our product: we launched it following the example of similar academies run by institutes for family business in Switzerland, Germany and Poland some years ago. In Germany and Poland such an academy has been running for many years. In general, they are five-seven years ahead of us. The Academy of Successors is a nine-month managerial programme aimed exclusively at successors in family businesses. During the course the successors acquire the latest know-how to operate a business, as well as how to run family councils.
We have also launched the Academy of Nestors. This is a two-day programme during which the owners of family businesses learn, among other things, what is the role of the owner after a generational exchange and after they withdraw from the company. These people, who are mostly over 60, do not know what it means to be just an owner without managerial powers. They also learn about intergenerational communication and leading a family council.
