Thousands of Hungarian companies may go out of business because owner retires

English2021. márc. 16.Növekedé

Two-thirds of family businesses in Hungary do not have a succession plan, despite the fact that thousands of company executives are expected to retire in the next few years, and the lack of a generational change could lead to the closure of the companies. Family businesses are also lagging behind the international average in their willingness to innovate, although innovation can be the key to survival during the coronavirus crisis, it was revealed in the latest research by Budapest LAB, the Business Development Centre of the Budapest Business School (BGE), which was the first in Hungary to study the characteristics of family businesses.

In the course of the research, a representative sample of the roughly 50,000 small and medium-sized enterprises with an annual turnover between 50 million and 16 billion forints was examined; and family businesses were surveyed in a separate group within the sample.

In 2017, Budapest LAB, the Business Development Centre of the Budapest Business School (BGE) was the first to start studying the characteristics of family businesses. Within the framework of a long-term research program, the survey conducted in 2020 confirmed their previous estimate, i.e.

a little more than half (58 percent) of Hungarian small and medium-sized enterprises (SMEs) can be considered family businesses, which means around 29,000 companies.

László Radácsi, leader of the Family Businesses Research Program told növekedé that the three years between the two surveys is not long enough to determine major trends, but minor changes can be seen already.

There’s something that hasn’t changed, but that’s bad news 

It’s bad news, but companies are not more prepared for generational change today than they were three years ago. 

66 percent of family businesses admit that they don’t have any succession strategy, either in a written or a spoken form. 

Although the proportion of companies that have a written strategy to ensure generational change has increased slightly since 2017, it is still only around 11 percent. According to László Radácsi, most Hungarian SMEs belong to the small rather than the medium category, so formal and strategic planning is less typical of them in general, but this only partly explains this low willingness to make a succession plan. 

The transfer of company ownership is an important and topical issue in Hungary because the founders of many companies established at the time of the change of regime have already retired or will certainly do so in the next few years. László Radácsi emphasized that because of that tens of thousands of companies can end up without a leader.

And this means that many companies will disappear, as a developed secondary market for businesses does not exist in Hungary the same way as in Germany, where businesses can be transferred on online platforms and marketplaces.

He also drew attention to the fact that there are many entrepreneurs who are preparing to transfer the management but not the ownership of the company, and on top of that, emotional separation from the business is also a big problem in Hungary.

According to the research by BGE, family businesses only consider giving over both the management and the ownership of the company within the family, and this trend proved even stronger now than in 2017.

89 percent of family businesses in which the generational change is either due in the next 10 years or was due in the last 5 years are willing to transfer ownership and management of the company to a family member. 

This can cause serious problems, as previous research has shown that taking over a family business is 

not always an attractive alternative for the younger members of the family, even if the owner has offspring of the right age to run the company.

An important condition for the successful generational change of family businesses is that the founders accept a new external owner or manager if necessary, and, at the same time, get the company ready for that, too. 

According to László Radácsi, the main point of a good generational change strategy is that the company manager properly trains his successor so that he will be ready to take over responsibility for the management and ownership of all the assets of the company.

International research shows that this training already starts in childhood and even career choices are influenced by adults. 

The process of transfer is hard even if there is a successor who is willing to take over the company, as it has been built up and tailored for several decades to the head of the family who planned and arranged everything. Thus, it is emotionally very difficult for them to say that “from tomorrow I will stay away from the office and I will only watch what is happening to my company as an outsider”, László Radácsi explained.

A good generational change is strategically planned, and the plan should include both the professional aspect, i.e. the future of the company, and the legal, financial and proprietary aspect, that is, what happens to the assets or the profit of the company. Besides these, the emotional aspect is no less important.  The successor must be supported so they can achieve their own goals, but at the same time it must be avoided that because of a desire for change, or overconfidence, they jeopardize the decade-long achievements of the company. 

As far as the founder of the company is concerned, they must prepare for a peaceful and dignified retirement. 

The preparation for this can take several years; and there is no need to be afraid to use external help. In Hungary, however, there is traditionally no trust in external advisors. 

In Radácsi’s view, for example, the practice of hiring external experts is not typical in the SME segment; there is considerable distrust of an outsider giving advice about what should be done.

How about innovation? 

The leader of BGE's research also pointed out that there has been no change in the willingness to innovate since 2017. Innovation in the broad sense has always been important for the competitiveness of companies, but perhaps the coronavirus epidemic has made it more important than ever; in many cases it has become the key to survival.

Internationally, the innovation activity of family businesses is high; but unfortunately Hungarian family companies are not like their international counterparts, they are rather like other Hungarian SMEs in this respect. 

36 percent of them have not implemented any innovation in the last two years, i.e. they have not developed their products or services, searched for new markets or new suppliers for raw materials, implemented any major internal process improvements, or have not even bothered to try and make the company more efficient. 

Even though this is a definition of innovation in the broad sense, Hungarian family businesses have not made much progress related to this.

The willingness of well-established family companies that have been in operation for at least 3.5 years to innovate is also lower internationally, which Radácsi puts down to the fact that for these businesses 

it is vital to keep the company assets safe and they are not willing to expose their fortune to the risks associated with innovation.

This type of security-seeking operation is generally typical of family businesses, as in their case one of the main goals the founder wanted to achieve was to create a secure income. However, this approach sometimes contradicts the entrepreneurial approach based on risk-taking and growth even at the price of endangering short-term security

László Radácsi explained. 

Innovation was not boosted by the coronavirus crisis either: the majority of family businesses made changes regarding only health and safety rules (46 percent). The second most frequently mentioned change was the development of online sales, but even that was only addressed by 9 percent. 

In total, the proportion of companies innovating in the last two years was between 25 and 35 percent; only 20 percent explored new markets (in 2017 it was still 30 percent), and only one third was engaged in organizational innovation (e.g. creating new positions).

The pandemic did not have a significant effect on half of family businesses

The research shows that companies are not pessimistic. Although there are sectors which have been obviously hit hard by the coronavirus, there are also industries, such as e-commerce, logistics or shipping, where 2020 brought quite a remarkable boom. 

51 percent, i.e. more than half of family businesses claimed that the epidemic did not have a significant impact on their business, and another 5.2 percent said that it even had a stimulating effect. 

Family businesses that said that the first wave of COVID-19 did have an impact on their business expected a 25 percent decrease on average by the end of 2020, compared to what they had planned at the beginning of the year. 

During the first wave, family businesses, just like other SMEs, tried to retain their workforce.  About 60 percent of companies were forced to take some steps regarding employment, but employers mostly opted for giving out paid holidays and introducing reduced working hours. Lay-offs affecting permanent employees or temporary ones occurred in 13 percent of the companies. 

Not surprisingly, businesses that had been in a favourable position before the pandemic were less likely to face negative effects. 66.7 percent of family businesses that had been growing dynamically still expect a gradual growth, while 25 percent expect to continue growing dynamically in the next five years. 

Talking about the next few years, many companies stated that they expect a positive change toward a business-friendly regulatory environment and confirmed that they will take advantage of the business opportunities offered by digitalisation. Any development in this respect would be favourable, according to László Radácsi.