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Many not making adequate provisions for the future
Nearly two thirds of family firms intend to expand in the next 12 months and nearly all are confident they can compete effectively with their sector market leaders, but nearly half still don’t have a succession plan, according to a PwC survey of 1,600 family business executives in 35 countries.
The survey also found that a vast majority with access to capital would have to borrow the money if needed.
Cypriot executives also took part for the second time and were the first to be informed of the survey findings and global family business practices during an event successfully organised by PwC last week at the firm’s offices in Nicosia.
“Family businesses in Cyprus make up 90% of the market, a fact stressing their enhanced role in the Cypriot economy. PwC supports family businesses by helping them to create the value they seek,” said George Loizou, Partner in Global Compliance Services and Markets Leader of PwC.
Family firms around the world are confident about their future prospects, but many aren’t doing enough to prepare themselves for the years ahead. Nearly half still don’t have a succession plan and of those that do, only 50% have decided who will take over the top job.
Although a surprisingly large number of family firms have seen demand for their offerings increase during the past 12 months (modest growth: 32%, significant growth: 16%), 34% have seen a reduction in demand, up from 10% in 2007 when PwC first conducted the global Family Business Survey.
But despite the impact of the recession, most family firms are confident about the future. In all, 60% intend to expand their businesses over the next 12 months, and 56% are positive about how the markets where they do business will perform over the next year. In addition, 95% of respondents are somewhat or very confident that their companies can compete effectively with the market leaders in their sector.
HANDING OVER THE REINS
One of the biggest risks facing any family-owned business is the transition from one generation to the next: 27% of survey respondents said they expect their business to change hands within the next five years, with 53% expecting the business to remain in the family. Yet 48% of all companies have no succession plan, a similar percentage to the last survey two years ago. Of those that do have a succession plan, only 50% have decided who will take over the top job.
“To ensure a smooth transition, family businesses must do some careful planning,” said Norbert Winkeljohann, member of PwC’s Network Leadership Team.
“Companies that survive a change of ownership are usually those that have developed a good plan, outlining how the succession will take place and what criteria will be used to judge when the successor is ready to take over the reins.”
Conflicts over which relative should take over control could be made worse by conflicts over money. Only 61% of respondents said they think they have enough resources to divide their assets fairly between all their heirs, including those who don’t work for the business.
Some of the other findings which suggest that many family businesses aren’t adequately preparing themselves for the future include:
— 62% haven’t prepared for the possible sickness or death of a key manager or stakeholder;
— 56% haven’t established any procedures for purchasing the shares of incapacitated or deceased shareholders;
— 50% either lack the liquidity to buy out family members who want to dispose of their stakes in the business or haven’t considered the possibility;
— 37% don’t know how much domestic capital gains tax they or their companies might be liable for, while 58% don’t know the international implications.
RESOLVING CONFLICTS
The survey also revealed that few companies are prepared for dealing with conflicts between family members. Only 29% of respondents said they have introduced procedures for resolving disputes.
“Compared to our survey findings in 2007, the percentage of family firms experiencing tension has increased significantly, particularly when it comes to the future strategy of the business and the competence of the family members managing it,” Norbert Winkeljohann added. “Yet only 29% – a mere 7.4% more companies than in 2007 – have introduced procedures for dealing with conflicts.”
“Having good conflict-resolution mechanisms in place is crucial to the success of a family business. Any conflict between family members – be it over money or future leadership – will spill over into the way the business is managed and owned. If relations within the family are healthy, the business is more likely to be healthy, too.”
SECURING CREDIT
Some firms may find it harder than they expect to secure credit. Even though two-thirds of survey respondents said they have access to additional cash, the vast majority of them would have to borrow the money if they needed it.
“Under the new Basel III Accord designed to strengthen the financial services sector, the amount of capital banks are required to hold will rise from 2% of their loans and investments to 7%. This agreement, which is due to take effect in 2013 and phased in over several years, is expected to drive up the price of credit and reduce the amount that is available,” Norbert Winkeljohann concluded.
