Succession, cash flow main issues of Cyprus family businesses

— PwC survey finds challenges and opportunities

 

PricewaterhouseCoopers Cyprus has published the results of a recent survey of 1,000 family businesses in Europe, including 40 in Cyprus, where the main issues of concern for company executives and owners are cash flow, cost efficiencies, succession and reinvestment.

The report, entitled “Family Business Report – Cyprus 2007”, aims to build greater awareness on issues faced by family businesses today and provide owners with useful peer group information in order to benchmark their own practices.

Discussing the survey, George Loizou, member of the Executive Board of PricewaterhouseCoopers, Markets Leader, said that, “family businesses, both for the Cyprus market and the developed economies, are the driving force for the development of the economy and the business environment of each country.  Especially for Cyprus, the family business activity is greatly developed with substantial contribution to the financial development of the island.”

The main issues that concern companies are restructuring of the business in preparation of ownership succession; establishing family business governance rules; and, examining the organisational structure in the light of incorporating the new generation in the family business or planning for future management succession. Another key issue is establishing clear processes for the family members working in the business in terms of their role as employees and managers vis-à-vis their role as owners, their performance monitoring and their reward    

Loizou also noted that, “this report also provides practical suggestions as to how a business can tackle successfully the challenges targeting to build up substantial competitive advantage.”

Cypriot family businesses identified the following financial and business challenges and priorities: improving cash flow – 73%, controlling costs – 68%, developing business strategy – 65%, restructuring– 58%, improving the quality of management information – 57% and succession planning – 43%.

As regards ownership and management succession, 74% had not chosen their successor, 61% believe that they have sufficient assets to allocate between active and passive family members, 58% have considered management succession, 53% would consider a non-family manager as a management succession candidate, 47% have considered sub-dividing the business or re-structuring it as part of their succession plan, 45% anticipate change in the ownership of their business, 34% anticipate a change in the ownership of their business within five years, 29% believe that their business will be sold to another company and 6% anticipate a sale of their business to their management team.

 

— Hot issues

 

From the family businesses owners/managers surveyed in Cyprus, 68% do not have a legal framework governing the operation and succession of the business, 47% have considered separating the property assets from their business, 42% have considered separating the passive income generating assets from their business and 26% have considered establishing a self administered pension scheme.

Giving rise to tension in Cypriot family businesses are discussions about the future strategy (32%), decisions on who can and cannot work in the business (26%), wages of family members employed in the business (24%), deciding between the re-investment of profits and the payment of dividends (21%), performance of family members (21%) and family members not consulting the wider family on key issues (18%).

From the family businesses surveyed in Cyprus, 47% have 5-8 people on their management team and 31% have four or fewer, 32% hold management team meetings on a weekly basis, 40% on a monthly basis and 8% on a quarterly basis, 79% provide financial and other information on a regular basis during the management meetings, 68% circulate an agenda in advance of the management meeting, 28% receive management information on a weekly basis, 43% on a monthly basis and 16% on a quarterly basis.

Of the management and human resource issues identified as critical by Cypriot family businesses, 71% wanted to be able to measure their people’s performance, 63% wanted to support their people in their development, 50% had a number of key people who are definitely talented, but were wondering how to ensure that that they are managed effectively, while 50% asked “How can I ensure that I reward my people fairly and keep them motivated?”

 

— Management succession

 

The local survey results show that Cyprus ranks fifth in the area of management succession amongst their European counterparts behind the Netherlands, Germany, Malta and Greece, with 58% of the businesses’ owners currently considering the issue.

Another source for the new leadership is a professional manager or management team. The PwC survey was noted that 53% of Cypriot family businesses would consider a non-family manager as a potential successor.

This is clearly an issue on the mind of Cypriot family business owners and managers, as over a third of respondents to the survey indicated that restructuring the business was currently a key challenge facing their management teams.

 

— Pensions and pension planning

 

Until recently the traditional pension planning of the average Cypriot consisted mainly of annual savings in the form of bank deposits or from the accumulation of a retirement gratuity through a company provident fund scheme. It is not until recently that personal pension schemes are being offered mainly by insurance companies and numerous other forms of capital wealth accumulation mainly from overseas financial institutions.

From the results of the PwC survey only 26% of the Cypriot businessmen plan for their pension. It is clear that as the pension planning becomes more complex the need for professional consultation is more evident.

 

— Property and assets

 

“We are all aware of what is termed Cyprus’ “love affair” with home ownership, and in a European context we are certainly one of the top ranking countries of that league table,” explained George Loizou.

Cypriot family businesses occupy property owned by the company directly or owned by the family shareholders in one form or another. This represents a significant opportunity for business owners to realise value that may even exceed what can be achieved from core trading operations.

Legal agreements can and should attempt to incorporate a mechanism for conflict resolution which can apply irrespective of the cause of conflict or alternatively by applying different mechanisms depending on the nature of the conflict concerned.

It is perhaps somewhat worrying, therefore, that only 32% of Cypriot family businesses surveyed had either a shareholders’ agreement or a family agreement in place to resolve any deadlock between family members. From this minority only 38% had made a provision for resolution of deadlock situations.

It is again perhaps interesting to note that, either through shareholders’ agreements or family agreements, roughly 5% of those Cypriot family businesses surveyed had any form of legal agreement in place reflecting entry and exit provisions.

 

— Managing succession

 

The succession to family businesses is a key moment in the life of any family business. However only 16% of the Cypriot respondents have made a will.

Unfortunately in Cyprus, there are too many examples of family businesses which have realised the necessity to enter into an agreement to deal with conflict situations, manage dispute resolution and deal with succession and inheritance issues, including entry and exit provisions after a serious problem.

 

— Financial priorities

 

Family businesses across Europe, irrespective of their country of operation, are facing the same three financial challenges – controlling costs, improving cash flow, and financing the business. These trends are consistent with the Cypriot position, with 72% of Cypriot family businesses citing improving the cash flow as their key financial challenge compared with only 37% European average, and 68% of the Cypriot survey participants noting controlling of cost as a financial priority compared with 51% as the European average.

 

— Ownership succession

 

Half of family businesses surveyed across Europe are already anticipating a change of ownership, with almost 30% of these expecting the change to take place over the next five years. This rate is marginally lower than in Cyprus, where 34% of family businesses anticipate a change of ownership within the next five years.

Half of European family business owners expecting to pass their businesses to the next generation of their families and just over a quarter planning to sell their businesses to other companies.

Half of the Cypriot family businessmen chose not to answer and of those who did, 58% would pass their business to next generation and 29% would sell to another company.

 

— Sibling equalisation

 

One of the most difficult aspects of passing a family business to the next generation is achieving sibling equalisation – ensuring that assets, business and personal, are allocated amongst the next generation of the family in a fair and equitable manner.

This challenge is further complicated when some members of the family are actively involved in the business on a day-to-day basis and others are not.

In the PwC survey, about 60% of the Cypriot family businesses surveyed stated that they had sufficient assets to ensure fair treatment between family members actively involved in the family business and those who are not.

 

For the PDF version of the “Family Business Report – Cyprus 2007” you can visit the PwC web site at www.pwc.com/cy or call at tel. no. 22555376 for a hard copy.