October 08, 2013
TheSrpskaTimes

According to the European Union definition, family businesses are those companies where the majority of decision-making rights is in the possession of the natural person(s) who established the firm, or in the possession of the natural person(s) who has/have acquired the share capital of the firm, or in the possession of the closest family members, and where at least one representative of the family or kin is formally involved in the governance of the firm, and where, in case of a joint stock company, the person who established or acquired the firm or their families or descendants possess 25 per cent of the decision-making rights. By their legal form, family businesses can be joint-stock companies or family holding companies. Still, the term ‘family business’ most often represents a company where the majority of votes lies in the hands of a family that manages the company, including the founder who intends to transfer the company to their descendants. As far as Bosnia and Herzegovina goes, we can say that the majority of companies founded since 1996 are de facto family businesses.

 by: Jelena Stanišljević

First generation owners run family businesses in 74.4% of cases, while only 23.6% of firms are in the hands of the second generation owners, and only the negligible 1% of firms are run by the third generation owners. This alarming data comes from a survey conducted in late 2012 and early 2013 by the Centre for Education Pro Educa from Banjaluka on a sample of 208 family businesses from the Republika Srpska, which sheds some light on the post-war business environment. Around 80% of firms covered by the survey have been founded in the past 20 years and by current owners at that (89.9%).

The crystal clear illustration of the first stumbling block when it comes to family businesses in the RepublikaSrpska is the problem of generational transfer which the majority of companies are yet to carry out. The process of generational transfer itself is time-consuming and complicated. It requires many adjustments by the owners, management structures and successors, while at the same time it is necessary to maintain the existing level of business activity and meet the business plan objectives. In that respect, education of family business owners and their successors is of great importance for the future of a family business. It is crucial that family business owners invest in their knowledge, but also be able to assess the situation rationally and hire external managers when among their successors they cannot find talent that will ensure further growth and development of the family business.

‘That is a quite mature phase where you have to be brutally honest with yourself and understand that hiring a non-family manager is actually beneficial for you and your company,’ says Professor NatalijaPekić of the School of Economics in Osijek, Croatia, who used to own a family business herself. According to the family business survey data, only 35.1% of firms hire external managers for managerial positions. ‘There’s another major problem: the failure to value practical knowledge and experience of the people who have already gone through certain stages in doing business through restructuring and running some other enterprises, and that is the so-called knowhow, which is hardly applicable in these parts. In my opinion, the crucial point is to be fully aware that we can’t solve all problems on our own and that it is very important to reward a job done successfully,’ believes Srđan Praštalo, Director General of the consulting company ConsultIn from Banjaluka. For this we can blame the absence of tradition of private entrepreneurship, but definitely and most often, the lack of expert, educated managers.

Economic parameters indicate that family businesses, by their structure and nature, are probably the most successful elements of economy, and exceptionally resistant to crisis, even though they are not spared the general problems in economy and the effects of the global financial crisis.

Businessmen demonstrated their interest in this important topic on 15 May, during the Business Forum on Family Businesses in the Republika Srpska. More than 200 participants attended the first business forum on family business, where some of the most prominent advisors in corporate management gave lectures, such as Leonardo Peklar, Robert Ličen, Andrej Grubišić, Natalija Pekić, and executive director of the regionally most successful family business in Serbia, BojanRadun of Nektar company. How family businesses in the Republika Srpska are treated was best illustrated by the failure of the Republika Srpska ministers to appear at possibly the most significant business gathering of the year.

Economic parameters indicate that family businesses, by their structure and nature, are probably the most successful elements of economy, and exceptionally resistant to crisis, even though they are not spared the general problems in economy and the effects of the global financial crisis. What makes family businesses such a stable basis of the global economy is their structure in which family and business are in tight synergy. Family business owners often opt for the company’s long-term success instead of profit, while family businesses are ready for sacrifice and compromise, that is for flexibility, which is almost unimaginable in big corporations not owned by families. Nonetheless, family businesses greatly depend on assistance, or better yet, the commitment of the government when it comes to its attitude to economy. In Bosnia and Herzegovina, there is no tradition of private – family entrepreneurship, given the economic system of the past 20 or 30 years, which was characterised by socially-owned business giants at the centre of economy. Entrepreneurial spirit is not nurtured in BiH and entrepreneurs are often victims of prejudice, described as dishonest, insincere, and having a questionable attitude to the law. ‘We want the government to give us everything – social security, health insurance, free education, but the government cannot provide that unless we have family businesses and people who are ambitious by nature, who want to have a better car, a better house, etc. By wanting all that, if they meet their obligations, they allow us all to exercise healthcare, education and other social rights, says Darko Lakić, head of the Management Company of the Pension Reserve Fund of the RepublikaSrpska.

Local family businesses

The Republika Srpska Tax Administration data shows that 81.6% of legal persons in the RepublikaSrpska make up one-man limited liability companies (ownership of one person) and are most often run by a family. When it comes to entrepreneurs, 99% of them have up to three employees usually coming from the same family. The Government of the Republika Srpska says supporting the real sector is one of the priorities of the Government and the relevant ministries. In the course of 2013, the Government launched the business registration reform with the view to reducing the time, procedures and costs required to found a business entity, and forming a one-stop-shop registration system. In July this year, the National Assembly of the Republika Srpska adopted a set of 13 laws that constitute the legislative basis for the reform implementation.

As a result of amending this set of laws, as of 1 September, minimum share capital has been reduced from BAM 2,000 to BAM 1.00, and instead of having to have the founding documents processed by a notary public prior to company registration, only the founder’s signature is now certified by the notary public, which has significantly reduced the notarisation costs. Thanks to the amendments to the Court Tariff Act, business entities are exempt from the payment of court tariffs as well as the costs of publication in the official gazette on the first registration. The Srpska Government says that through this reform it is trying to ensure simplified procedures for company registration in the way that a party addresses a one-stop-shop institution, i.e. the Intermediary, IT and Financial Services Agency, instead of several other institutions contacted in the previous arrangement (Commercial Court, Statistics Bureau, Tax Administration) and receives the registration decision from the same institution.

The RepublikaSrpska is also conducting the regional procedure of certifying the municipalities with favourable business environment. That way, the local communities that go through the certification process, confirm the standards of efficient and transparent local administration, which provides the quality of services and information supplied by the municipalities to investors and businessmen. The pilot phase includes the municipality of Prijedor, which has already received the regional certificate, and the City of Banjaluka, which is undergoing the certification procedure.

A new law on the development of small and medium enterprises has also been passed this year. It defines the SME development principles which are aligned with the EU principles on small and medium enterprises.

Family businesses in the RepublikaSrpska also have available the credit lines of the Investment and Development Bank (IRB). However, it is not the concept of family business that is crucial, but the valid documentation that has to meet the criteria of the existing credit lines, which businessmen usually say is too extensive, and requires much time and money. Despite all this, there are no guarantees that the IRB Loan Committee will grant the loan. According to the data of the Republika Srpska Finance Ministry, IRB offers credit lines for initial business activities, as well as credit lines for microbusiness in agriculture. Since 2008, the Bank has approved 101 loan applications for initial business activities in the amount of BAM 3,255,787, as well as 1,420 applications for microbusiness in agriculture in the amount of BAM 26,655,000.

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Are these measures several years overdue?

Judging by the Family Business Survey, the answer is yes, because 47.3% of entrepreneurs in the Republika Srpska are not happy with the Government’s performance, while 77.4% of entrepreneurs think that the entity government is not taking enough measures to improve the business conditions.

Half of the interviewed, namely 55.6%, say that the biggest challenge in doing business are high amounts to be paid to the government. The same argument is cited by the Republika Srpska Chamber of Commerce, which is one of the biggest advocates of amending the Income Tax Act, suggesting the restoration of the non-taxable income, and improvement of the economy’s general liquidity, abolishment of income tax accrued from the sale of agricultural land in cases where the sale is made for the purpose of agricultural estate amalgamation. ‘Unfortunately, some of the measures offered by the business community concerning fiscal reliefs, such as cutting taxes and contributions and restoring non-taxable part of salary, were not accepted and didn’t enter the Economic Policy, and represent a significant burden on the economy,’ says Vladimir Blagojević of the Srpska Chamber of Commerce. Speaker of the National Assembly Igor Radojičić disagrees. He claims that there are no grounds for businessmen in Srpska to complain about the heavy fiscal burden, because, as he says, it is the lowest in the region. ‘If we compare the RepublikaSrpska with the region and the EU, our tax rates are the lowest. In relation to Serbia and Croatia, our rates are the lowest. Only Montenegro is comparative with us, but they too have increased their tax rates. It may be a burden on the enterprises, along with the crisis we are experiencing as well, but if you compare us to the other countries where tax rates are extremely high, you’ll see that it’s not,’ says Radojičić.

In July this year, the National Assembly of the Republika Srpska adopted a set of 13 laws that constitute the legislative basis for the reform implementation.

As far as the implementation of the measures set out in the Economic Policy of Srpska, all interviewees agree that they could be implemented more consistently. ‘One of the examples is the passing of the new labour law. Namely, even though the 2013 Economic Policy stipulates that certain activities concerning the drafting of the new labour law would be carried out in the first quarter of 2013, nothing has been done until the present day,’ says the Chamber of Commerce. The Union of Employer Associations too, which is the Government’s partner in the tri-partite dialogue, says that the social dialogue is not at the desired level, given the difficult economic environment in Srpska. According to the Union, we need some radical moves in order to lift the burden from the economy, re-introduce non-taxable part of salary, pass a new labour law, and reform the public administration in line with the demands made by the business entities.

The Ministry of Finance says that the Economic Policy has been incorporated in the Government’s 2013 work programme and that the plan is being implemented. The Agency for the Development of Small and Medium Enterprises claims that small and medium enterprises are feeling burdened to a great extent. ‘What bothers them the most is the reduction in the volume of their business operations and the threatened solvency as the result of reduced sale,’ explains Slobodan Marković, head of the Agency for the Development of Small and Medium Enterprises. ‘The Government could not and will not be able to make much influence in this case, but in the coming period it should consider some measures that would help SME solvency, not on a grant basis, but different ‘revolving loan’ measures or other loans under ‘more lenient’ conditions. This could, in particular, include a more determined collection of debts owed to the Tax Administration by the majority of business entities, because the debts forcibly collected from small enterprises could cause chain closures or bankruptcy of the enterprises that are already experiencing market vulnerability,’ says Marković.

Generational transfer –opportunity or threat

The biggest challenge to a family business is how to succesffuly keep it alive until the fourth generation of descendants, says Leonardo Peklar, and only 5% of them succeed in doing it, while 95% of family businesses do not make it to the third generation. ‘Underestimating the succession, too informal rules, lack of a clear-cut framework in the decision-making process, as well as the lack of discipline are some of the most common reasons associated with the failure of family businesses. But family businesses can significantly increase their chances of survival if they establish a corporate structure by putting the right people on the right positions, as well as by timely educating and preparing the future generations,’ says Peklar. With respect to the family businesses in the Republika Srpska, the Union of Employer Associations too has said that managing the company at the moment the next generation is taking over the leading positions is possibly the biggest problem. The process requires a great deal of caution but also the utilisation of the knowledge of those who have already gone through it.

In the highly developed countries, family businesses make up 50% of GDP, create more than 60% of jobs and create 75% of new jobs. As much as 70% of such firms are in the hands of families, and 70% do not survive the transfer from the first to the second generation of owners, while 95% do not live long enough to see the transfer from the second to the third generation of owners.

Family business in the Republika Srpska

Nikola Tolimir, the owner and founder of Exclusive Lingerie from Banjaluka, is one of a few family business owners in the RepublikaSrpska who has started the process of generational transfer. ‘My sons normally do most of the administration and management work, and I try to help them, if necessary. Apart from my wife, my sons and myself, our company Exclusive Lingerie employs my two daughters-in-law,’ says Tolimir.  The company founded in 1998 today employs 60 workers and exports to six countries (Serbia, Croatia, Macedonia, Sweden, Italy, and Germany). The annual output of the women’s underwear and swimsuit factory is approximately 600,000 items. Tolimir says the most valuable resource of his company is its personnel. ‘I see Exclusive Lingerie as a very successful company in the future. I believe we possess all the qualities necessary for growth and further development of textile production demanded by the global market,’ Tolimir notes optimistically, even though he admits that business conditions in the Republika Srpska and in Bosnia and Herzegovina are currently very complicated.

Vukoje Cellars is probably one of the most famous family businesses in the RepublikaSrpska. It has succeeded in promoting its brand in the region, Europe and beyond. The company which is comprised of three sectors, namely wine-growing, wine production, and tourism and hospitality management, chiefly employs the members of the extended Vukoje family. Twenty work full-time and 20 to 40 others are seasonal workers six months in the year. Vukoje Cellars say they are one of the rare family businesses in Srpska that is particularly proud of successfully transferring the management from the first generation to the second. One-third of management activities are performed by the second generation. In the process, the family business was transferred from a small family micro-producer of wine for the purposes of a family restaurant into a winery that has 30 hectares of vineyards in Carskivinogradi at Ušće and Zasadpolje vineyards, where native Herzegovina grape species are grown. It was declared the best winery in Southeast Europe in 2013. ‘We currently export to the countries of the region, 10 countries of the European Union, China, and since this year to the United States as well, which means that we are active on three continents. Vukoje Cellars is a proud owner of more than 100 gold medals from the whole Europe (Brussels, Paris, Geneva, Prague, Bergamo, Milan) and the region (Belgrade, Split, Zagreb, Novi Sad). We are the only winery among more than 1,000 of them in Bosnia and Herzegovina, that has won gold medals in all countries. We consider our rewards a success for the industry as well, because they are an encouragement to small producers to develop wine-growing,’ says Radovan Vukoje.

Family businesses are the foundation of the global economy and in the future they will be the subject of numerous research efforts, as one, if not the only, model of self-sustainable business activity. In the highly developed countries, family businesses make up 50% of GDP, create more than 60% of jobs and create 75% of new jobs. As much as 70% of such firms are in the hands of families, and 70% do not survive the transfer from the first to the second generation of owners, while 95% do not live long enough to see the transfer from the second to the third generation of owners. Raising awareness of the importance of family businesses is a common task of not only the owners and their descendants, but also of experts, government representatives and the media. However, the future of family businesses mostly lies in the hands of the owners and their descendants. Success does not exclude the need for education. On the contrary, it grows, as does the pressure of the market race in which only the most capable survive. Crisis has always been an opportunity for something new and something better, but also a warning, because, at any given moment, opportunity without new skills or knowledge can turn into a big crisis.