Keeping it in the family

Poland is on the verge of experiencing its first generation shift in business since the return of the free market in 1989. The territory is new, the stakes are high and family politics play a role. Will the next generation step up to the challenge?

A legend has been circulating around the business world in Poland. It involves a family company, a near tragedy and some quick thinking by the new guard. The mid-sized logistics company, as the story goes, was rocked when its founder and family patriarch suffered a heart attack. The reins to the business landed in the hands of his millennial son. By the time the father had made a full recovery, he nearly had another heart attack after seeing that his son had implemented a series of big changes… for the better. He had streamlined operations and future-proofed the company with the introduction of new technology. By all reports, both the company and the father’s heart are now ticking along nicely.

Welcome to the world of family business and succession in Poland. In addition, other examples of succession will be explored over the next few weeks: family businesses from varying regions and industries, from manufacturing and construction to confectionary and venture capital.

Similar to Germany’s ‘Mittelstand’ companies, these businesses have formed the bedrock of the country’s economic success story. The most conservative estimates suggest that more than a third of all private enterprises are self-declared family businesses, contributing around 18% of GDP. But it is a relatively new phenomenon since the market economy was reinstated just 30 years ago.

In fact, it could be argued that it has been 80 years since the country has seen such a generational transfer of private capital, management and know-how, let alone one arriving so acutely at such a large scale. “Succession in Poland is a huge challenge,” said Adrianna Lewandowska PhD, President of the Family Business Institute, Poland (Instytutu Biznesu Rodzinnego: IBR). “But it is worth taking it because as much as 183bn zł of Polish GDP in the next five years is dependent on its success.”

Hard act to follow

Unlike other socialist states, a small level of private enterprise was prevalent in the Polish People’s Republic through cottage industries and private landholdings called ‘kulak farms’, not to mention a thriving black market. According to the economist Prof. Aleksander Surdej, there were around 600,000 private enterprises in 1988 and after a process of rapid liberalisation, the figure had jumped above two million by the end of 1990.

These free-market pioneers navigated the economy to EU accession in 2004, persevered through the 2008 financial crisis and rode the boom of the last ten years to become a growth champion of Europe. It was a modern-day economic miracle and one propped up by a backbone of family businesses.

Mapping the exact size of this economic spine, however, has proven to be a difficult exercise. It is all a matter of definition, methodology and self-determination. A 2016 report from the Family Business Institute (IBR) looked at multiple definitions and scenarios. The first definition is based on ownership where a family business is considered as such when a family member (founder, spouse or child) possesses a majority stake in the business. On this basis, the survey found that 92% (2.1m) of the country’s private enterprises could be considered family businesses, contributing approximately 67% to total GDP.

But the plot thickens when the definition is determined by business owners themselves. In the IBR study, a mere 36% of Polish respondents perceived their enterprise as a family business, which would equate to only 18% of GDP. A 2018 survey from statistics Poland (Główny Urząd Statystyczny: GUS) recorded a similar result with 33.9% making the declaration.

Interestingly, Dr Lewandowska pointed out that 75% of business owners in Western Europe embrace the title of family business. she believes there are many reasons for Poland’s reticence in this regard. Without a long tradition like in Germany, family businesses in Poland are often perceived as unprofessionally managed and as a result, many owners prefer to distance themselves from the label.

On face value, this statistical discrepancy could be dismissed as semantics, but the IBR study cautions that the ramifications of the resulting perception gap may be manifold, especially in terms of how the segment is received by policymakers. First of all, any government would be naturally more responsive to a voting block backed by 92% of businesses than 36%. But more importantly, the report shows that companies comfortable with their family identity are more likely to implement a professional succession plan, bringing transparency and order to the process.

Whether family businesses are prepared or not, a generation shift is on its way thanks to changing demographics. Poland’s population pyramid looks no different to the hourglass figure that depicts the age distribution of other OECD countries. The retiring 60-and-over cohort (baby boomers) is growing faster than the working population (15-to-59).

A 2015 McKinsey report projects that the old-age dependency ratio between the retired and working population will grow to 30% by 2025, representing a 10% jump on 2012 figures. Like its fellow OECD members, the Polish government has begun to introduce measures to address this impending labour and skills crisis through family planning and immigration policy. For example, this year the country became the EU’s largest issuer of work permits to non-EU workers.

Less attention has perhaps gone to the fact that business owners – and family business owners, at that – are also growing older. The time has come for the country to experience its first major ownership transfer since the outbreak of WWII. “Poland is one of the biggest countries in the European Union with a majority of businesses still in the first generation of owners,” said Dr Lewandowska.

A 2009 study from the Polish Agency for Enterprise Development (Polska Agencja Rozwoju Przedsiębiorczości: PARP) found that 75% of enterprises were held by first-generation owners. The IBR’s more recent data showed that 14% of businesses had already gone through succession, 19% were in the process and 57% were planning to enter succession over the next five years. The study calculates that this last segment contributes an estimated 180bn zł in value-add to the overall economy.

The main problem is that most owners are not fully aware that succession is a long-term process

Family Businesses at a Glance

– 36% of Polish firms identify their business as a family-owned (18% of GDP).
– 5% of Polish firms are multigenerational family businesses.
– 29% of family owned businesses are at least 20 years old.
– 19% of family owned businesses are on the threshold of succession.

What is most alarming, over 50% of owners claimed that they don’t talk about succession, while only 8% of successors conveyed an interest in taking over the family business. “The main problem is that most owners are not fully aware that succession is a long-term process,” explained Dr Lewandowska. “It is not just a transfer of company ownership but a whole preparation of the successor, market, employees, family, partners and for the owners themselves.”

It should be remembered that the transfer of private capital and management occurs every day around the world, just as it did in Poland before WWII. But due to the fact that around 1.4 million businesses were created within a two year time period (1988-1990), the transition in Poland will likely come in a surge through a narrow window.

There are many ways how this story can play out. Going by international precedent, 30% of family business will likely be transferred into the hands of the next generation, many of which may well go on to write new successful chapters, as shown by the case studies which we will feature. In other cases, the transfer may be less successful. The path of bringing in outside management and setting up a family executive board may prove to be more difficult in Poland.

This is due to particularly low levels of trust towards external parties and the legal framework in the country. “The Polish legal system is specific,” added Dr Lewandowska, “and does not allow for the establishment of family trusts, which is a popular business solution in countries like the Netherlands, Austria and Luxembourg.” Given these legal restrictions and the current trajectory of the market, the larger family companies with an international scope might be tempted to cash in their chips while at the peak of their business cycles.

Take the recent case of Delphia Yachts founded by the Kot brothers in the Masurian Lake District. After spending the last 30 years building their company into one of the region’s largest producers of watercraft, the brothers decided last November to sell an 80% stake to the legendary French yacht builder, Beneteau. Similarly, the Olszewski family, the founders of the public transport vehicle producer Solaris, sold their company to the Spain-listed Construcciones y Auxiliar de Ferrocarriles in 2018.

Succession or redirection?

There are signs that the country has woken up to the sheer power of family businesses and the significance of a seamless transition. “When I was preparing for my PhD,” said Dr Lewandowska. “[My professor] told me that I should do something more serious because family business is a silly area of research. It was over 15 years ago. Now things have changed…I think nowadays family businesses are treated with much more respect. It is because they carry the majority of Poland’s tax burden and provide employment.”

Along with the IBR’s own ‘successor Academy’, universities have begun to offer courses and workshops on management succession for owners and successors in tandem. The government has begun to offer grants and training programmes to facilitate the succession process. In other areas, the government has taken a more active role. For example, two months after the sale of solaris, the Polish Development Fund (Polski Fundusz Rozwoju) secured a 35% share in the company after deeming it a vital national asset.

There is also promise in the government’s pivot to a knowledge-based economy. It might not be a question of succession but redirection where the capital amassed by the first generation from largely the heavy industries could be transferred into ICT startups by the next tech-savvy generation. “The younger generation is completely different,” said Jadwiga Emilewicz, Minister of Entrepreneurship and Technology. “They don’t have a complex and they are open. They know their value… They are really hungry and they can run faster than their Western counterparts – and they are aware of that.”

It would appear that the business community has begun to answer the government’s call. According to the eurostat-OECD Entrepreneurship Indicator Programme, the country registered the EU’s 6th highest business birth rate in 2016, but it is ranked down the bottom when it comes to survival rates. Only 51.99% of businesses made it to their third year in 2016 and 39.31% to their fifth year, although the figures rose slightly in 2017. This has conspired to give the country the 6th highest startup churn rate (ratio between birth and dissolution rates).

Jacek Ratajczak and Maciej Halbryt, founders of the thinktank PLUGin – the Polish Innovation Diaspora, suggest that gaps in the education system might be the problem. “Why is Poland currently one of the hottest places on the planet for software development?” posited Halbryt. “Because we have great smart engineers. The level of education here is superior to many Western countries. What we lack, is educating people to be independent thinkers, challengers of the status quo, and not afraid of failure. The ‘you can do it’ mentality is not very common.”

Ratajczak sums it up eloquently. “In the startup world, there’s a saying: for a startup one needs a hacker, a hustler and a hipster. We have an overload of hackers but too few hustlers.”

There is already evidence, however, that part of this gap may be filled by a ‘reverse brain drain’. More young Poles are returning to the local market armed with international experience, knowhow and confidence. PLUGin’s 2019 survey ‘e-Migrants’ found that 48.8% of Polish expats are thinking about returning home. “The startup world is fuelled by people with international experience,” said Ratajczak. “Startup Poland’s report on Polish startups indicated that 50% of all Polish startup founders have experience of living and working abroad.”

Halbryt agreed by adding: “We also know of a few cases of entire startup teams being moved from abroad to Poland. One such case is a now London- and Warsaw-based tech startup G1ANT. The founders met in London, did some hiring at our PLUGin London meetups and decided to move the business, especially tech development, back to Poland.”

The Polish economy’s future hangs in the balance, but an old adage may provide clues: the first generation makes the money, the second spends it and the third squanders it. If there is any truth to it, the country doesn’t need to worry for at least another generation, for the current wave of businesses has just hit the investment phase.

November 19, 2019
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