PricewaterhouseCoopers LLP (PWC) has released its second global family business survey in November 2010, “Kin in the Game,” available online at www.pwc.com. In 2007, when PWC completed its first survey, there were few signs of the financial crisis that was about to occur. The deepest downturn since the Great Depression wrought carnage on numerous companies and though the worst appears to be over, significant economic fears remain. So how have family firms fared during this period of economic turbulence? According to the new PWC survey, many family businesses have not only survived, but also have prospered.

The survey covers small and mid-sized family companies in 35 countries around the world. PWC interviewed top executives at over 1600 companies operating in 15 industry sectors between May 16, 2010 and Aug. 17, 2010. Eighty-two percent of the companies in the sample have been in business for at least 20 years. In fact, 42 percent have been in business for at least 50 years. Thirty-one percent employ more than 250 people and 28 percent generated revenues of over $60 million last year.

The PWC survey defined a family business as an enterprise in which the majority of votes are held by a person who established or acquired the firm (or by his spouse, parents, children or children's direct heirs); at least one representative of the family is involved in the management or administration of the firm; and, where the company is publicly traded, the person who established or acquired the firm (or his family) possesses 25 percent of the voting rights through his share capital and at least one family member sits on the board.

The survey is broken down into the following five sections: (1) fending off challenges and investing in the future; (2) handing over the reins; (3) falling out and making up; (4) dealing with regulations and creating value for society; and (5) conclusions.

Fending Off Challenges

The survey found that the family businesses had fared very well when it came to dealing with economic challenges. Nearly half of those surveyed said that demand for their companies' products and services had grown during the past 12 months. But the recession has exacted a high price. More than a third of all respondents reported that operating profits had fallen, and more than two-thirds remained worried about market conditions — up from less than half three years ago. Even so, the majority of companies haven't retrenched significantly since the 2007 PWC survey.

The 2010 survey found that family firms are better placed to take the long view than their publicly traded counterparts because they're under less pressure to deliver quarterly results and pay dividends to shareholders and rarely burden themselves with the same levels of debt. They tend to be more careful about overstretching themselves, and they're often underpinned by the values of the founding family, rather than being managed based on purely commercial concerns. Because of this, they're able to weather storms that overturn larger and more aggressively managed operations.

This may be the reason why two-thirds of the respondents believed that being part of a family business helped them cope with the recession. It may also explain why many of them were relatively confident about the future. In fact, 60 percent of those surveyed intended to expand their businesses over the next 12 months. Similarly, 56 percent were positive about how the markets in which they do business will perform over the next year, which is in line with the results of the 2007 survey.

Most of the families surveyed believed that they're well-placed to capitalize on any new opportunities that may arise. Three-quarters said that they have business plans in place and two-thirds have access to additional cash, should they need it — although the vast majority would have to borrow the money. Only 14 percent had made major changes to their business models over the past 12 months, and only 13 percent plan to do so in the future. Nevertheless, almost everyone surveyed was confident about being able to compete effectively.

Handing Over the Reins

It's widely recognized that one of the biggest risks facing any family-owned business is the transition from one generation to the next. The Family Firm Institute, a Boston-based professional membership that provides advice to and research in the family business fields, estimates that only 30 percent of U.S. family firms survive the shift to the second generation, only 12 percent are still viable in the third generation and only 3 percent make it to the fourth generation or beyond.1 The survey bears out these statistics. Thirty-one percent of the surveyed companies are still managed by the entrepreneurs who established them. Just 36 percent have survived the passage to the second generation and that percentage declines rapidly thereafter.

So, what accounts for the high attrition rate? That depends. In some cases, the founder is simply too caught up in the day-to-day running of the company to plan for the future. But many entrepreneurs are also reluctant to cede control. The passion that drove them to set up their companies in the first place prevents them from stepping back from the helm. Selecting a successor can also be an extremely emotional issue. If more than one relative is interested in taking over the business, for example, it may be difficult to choose the best candidate without offending other family members.

Twenty-seven percent of the surveyed companies expected to change hands in the next five years. And over half of those who anticipated a change of ownership think the business will remain in the family. The older the company, the more likely this is; 66 percent of owners running firms that have been in business for more than 50 years plan to pass the control to their offspring, compared with just 35 percent of those running firms that have been in business for less than 20 years. These results are consistent with the picture in the 2007 survey. So, too, is the fact that nearly half of the companies surveyed didn't have a succession plan. The majority of family businesses surveyed also failed to assess their potential estate tax exposure.

Another problem is that many of the families surveyed have seen their wealth significantly eroded during the economic downturn. Only 61 percent of respondents said that they have sufficient resources to divide their assets fairly among all their heirs, including those who don't work for the business.

Additional evidence that some family firms may be less ready for the future than they realize stems from the fact that 62 percent hadn't made any provision for dealing with family or business issues if a key manager or shareholder gets seriously sick or dies. Similarly, 38 percent hadn't appointed a caretaker management team to run the business if the incumbent chief executive dies before any of his children are old enough to assume control.

Indeed, many family firms would face considerable difficulties if any sudden change in ownership occurred, regardless of the cause. Fifty-six percent hadn't established any procedures for purchasing the shares of an incapacitated or deceased shareholder. And, 50 percent lacked the liquidity to buy out family members who want to dispose of their shares in the business.

Falling Out and Making Up

The survey responses make clear that the ability to manage family dynamics issues in family businesses is more important now than ever. The percentage of family firms experiencing tension has increased significantly since the 2007 survey. Nearly half of the participating companies stated that their families had recently argued about the future direction of the business, and nearly 40 percent said they had argued about the performance of family members in the firm. Almost two-thirds of the businesses in the survey also hired relatives without requiring them to compete for their jobs on the open market, which may make matters worse.

Unfortunately, less than a third of all companies surveyed had introduced any procedures for dealing with disputes among family members. The smaller and younger the company, the less likely it is to have introduced dispute procedures. The relatively few businesses that had put conflict resolution measures in place tended to favor shareholders' agreements, whereas family councils were the most popular means of resolving arguments about the business in 2007.

Dealing With Regulations

The vast majority of family business managers surveyed stated that they would like to have a simpler tax regime and/or pay lower taxes. Interestingly, more than half also wanted to see a tougher corporate compliance environment. The virtual collapse of the banking system in 2008 may account for this response. Many respondents also had serious reservations about whether their governments had done enough to support the business community during the recession.

Most respondents were much more upbeat about the growing emphasis on corporate social responsibility. Nearly three-quarters of the executives surveyed said that it has had a constructive impact on their companies. Almost half have already made minor or major changes to their businesses to become more socially responsible, and half plan on doing so over the next two years.

Secret Weapons

The responses to the November 2010 survey show that a more somber mood prevails among family business owners than did in 2007. Yet most of the firms surveyed have shown great resilience. For the majority of participants, being part of a family business has been a great plus during the economic downturn. Strong family ties and a long-term business perspective are the secret weapons that have allowed family businesses to consistently outperform their publicly traded competitors over time. Although there's no reason to think that this will change any time in the near future, the survey points out once again the two Achilles heels of family businesses — poor succession planning and inadequate procedures for dealing with family conflict.

Endnote

  1. “Global Data Points,” Family Firm Institute, www.ffi.org/default.asp?id=398.

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