By Dr. Judit Csákné Filep,

The expansion of the family firm model has long been established as a global phenomenon. The existence and, more importantly, the survival of family businesses is greatly dependent on their socio-economic and political contexts.

In many European transitional economies such as Hungary’s, the right to establish a family business has only recently been granted. After the Second World War, entrepreneurship in Hungary was largely discouraged. For decades, the country was under Communist rule with a centralised planning system. In 1968, limited aspects of market economy were introduced. Legislations permitting the establishment of quasi-private businesses were put in place in 1982, allowing mostly licensed artisans to set up their own firms. In the late 1980s, corporate Law finally gave rise to a surge of private enterprises.

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The Surge of Family Businesses

The end of the Communist Era in Hungary not only brought about the large-scale privatisation of state property, but also marked the starting point for many family businesses. The main motivation behind the establishment of these firms were the hope for better livelihood, the ability to take care of family members in need and for some entrepreneurs the realisation of an old business dream.

More than half of Hungarian family businesses were founded by more than one family member, with over 66% of female and over 57% of male entrepreneurs having co-owners from within the family. Today, the proportion of family businesses in Hungary is greater than 70% according to the Small Business Development Centre. Family-owned firms represent an important source of employment and are most notably prevalent in labour intensive industries such as agriculture, wholesale, retail, trade, and hospitality.

In micro and small enterprises, the employment of family members is typical. Research conducted in Hungary in the late 1990s shows that over half of all entrepreneurships began within the family, with only 20% not employing kin. Ownership is typically shared with immediate family members, such as spouses and children. Former co-workers are partners in the rare cases where there are non-family owners.

Including family in business in Hungary is socially influenced. Research shows that the more unreliable the environment, the more likely the involvement of family – the only concrete asset for a founder with no capital. Trust, however, is more important than social context, since both trust and stability drive growth. Entrepreneurs tend to find help and support within the family because they worry about the unreliability of strangers. The families also fear that involving strangers could lead to a lack of loyalty and that it could create competitors.

The Dread of Succession

Whatever their founding motivations, many Hungarian family businesses stand before the imminent challenge of their first generational handover, which will determine how many businesses maintain their current ownership structure. Multigenerational family businesses are forming in these days in Hungary. The greatest perceived challenge is the significant lack of experience. Hungarian family businesses do not have in place the proper processes for coordinating between business governance, succession planning and family life. They are also heterogenic in size, motivation, and social status, and will therefore face very different transitional challenges.

We recently conducted a survey with over 154 family firms regarding succession. Despite the fact that more than half of privately owned businesses intend to keep ownership within the family, over 46% of the respondents do not have a clear handover plan, raising cause for concern. If these entrepreneurs do not recognise the importance of ownership handover, there will be several family businesses with second-generation structures forming in response to crisis, such as the death of the founder. The family members involved must make essential decisions, negotiate ownership structure formation, and basically determine the futures of both the enterprise and family to fend off such perilous situations. Hungarian family businesses must consider their futures and plan ahead for the sake of continuing economic growth and securing employment. Each privately owned family business could become a multigenerational in the coming years, and needs to understand the various implications of what that could mean.

Tharawat Magazine, Issue 26, 2015