The family business sector in 2016: Success and succession

“We were one of the earliest in our industry to give such importance to Asia, and it’s become a key competitive advantage, having moved so quickly. But that’s the advantage of being a family firm – when we decide to do something, we can move really fast.”

Peter D. Fox AM, Executive Chairman, Linfox Group, Australia

Success and succession 

This year’s results tell us that despite tough economic conditions and the accelerating pace of change, the family business sector continues to be vibrant, successful and ambitious. They tell us that family firms are vital to all economies, offering stability, a commitment for the long term, and responsibility to their communities and employees. They also tell us that family businesses can be an engine for change and innovation.

Recent research shows that almost half of entrepreneurs come from family run businesses highlighting that the spirit of entrepreneurship still lies at the heart of many family businesses. Indeed, 54% of respondents told us they want to set up new entrepreneurial ventures.

“My father has always encouraged technology - he has always been prepared to invest in it, and takes risks to be a front runner in the field of technological advancement. He had a dream to create JBM as the equivalent of ‘Intel Inside’ for the automotive industry. He wanted ‘JBM Inside’ to be as powerful a mark of quality as Intel is. I think we’ve realised that and are now aiming beyond.”

Nishant Arya Executive Director, JBM Group, India

Unshackled from the quarter-to-quarter pressures of their listed peers, family firms can invest for the long term, and allow good ideas the time they need to prove themselves. It’s a classic example of ‘patient capital’ and an invaluable counterbalance to the short-termism of many public companies. And family firms are proud of it: 77% of the respondents to this year’s survey believe they offer stability to the wider economy, 74% say they look after their staff better, and 72% believe they see success in broader terms than simply profit and growth. Likewise, 55% say they take a longer-term perspective on decision-making, and 71% say they make those decisions faster than their peers. Many survey respondents also cited the advantages of direct communication, faster decision making, and an enduring entrepreneurial spirit.

However being a family run business brings its own set of challenges: namely the family itself and how you navigate the different business and personal relationships.

“We have the infrastructure of a multinational, with the flexible organisational structure of a startup. That’s a huge advantage. We also understand how strategy works in this sector. You need to have a medium term plan, but you have to be incredibly flexible about how you implement it.”

Konstantinos Gerardos Co-CEO, Plaisio SA, Greece

All of this is extremely positive, and the fact that the big picture has remained largely the same for the best part of a decade is in itself a measure of the resilience of this sector. 

But the absence of any significant change from survey to survey in areas such as succession, globalisation, and digital and innovation is a cause for concern. Despite the extraordinary longevity of some individual family firms, the average life-span across the sector is three generations. Typically, only 12% make it that far, and the number getting past four generations falls to as low as 3%[1]. In some cases selling the business is a conscious choice and a mark of success; but equally for many, not surviving to the next generation may be a sign of a family firm not achieving their long-term ambitions.  

 

[1] A study of management practices, carried out by National Bureau of Economic Research Family Business Alliance. Retrieved October 2016:(http://www.fbagr.org/index.php?option=com_content&view=article&id=117&Itemid=75)

“This estate has been here for 300 years. We don’t just own the land, we’re part of the landscape. That’s why everything we do is driven by the need to be conscientious land-owners, and careful custodians of the family’s heritage, both now and for future generations.”

John Hoy, CEO, Blenheim Palace, UK

Succession: Failing to plan means planning to fail

The most obvious potential ‘failure factor’ for the family firm is the succession process. The transition from one generation to the next is the fault-line in this business model. There’s no point in having detailed plans for business continuity, if the single most significant risk to this is not addressed.

Every family firm has to find a way to reconcile the personal and professional, and the succession process can bring these two dimensions into direct conflict, with both the family and the firm at risk as a result. Conversely, a well-managed succession process can be a rallying point for the family firm, allowing it to reinvent itself in response to changing circumstances and find new energy for growth, diversification and professionalisation. To do this effectively, family businesses need to develop, implement, and communicate a robust succession plan, and do so as early as possible before the actual handover. This is even more important now, when many more people are having children later in life, meaning that the next generation may not yet be ready to take over when the current owners would like to retire. 

And yet only 15% of family firms have a ‘plan’ for their succession process. More worryingly, this figure has not risen significantly in recent years. In our experience adopting the thinking and terminology of ‘business continuity’ rather than ‘succession’ can itself be a useful way forward: if the current generation sees succession in these terms it can help them approach it more objectively, and avoid the emotional stresses that can otherwise arise.

As Simon Le Maistre, Partner in PwC’s Australian Family Business practice observes, “Succession planning is even more important where there are some family members working in the business and some not. In many of these cases, issues like ownership and entitlement may not have even been discussed or considered, which means different people are making different assumptions about the future. In these circumstances, we spend a lot of time sitting with family members, to work through a fair way forward. This can prevent conflict, and help the family become more unified for the future.”

The missing middle

What’s becoming clear – both from the survey results, and our work with owners and executives across the world – is that the challenges with the succession process are just one example, albeit a vital one, of a much wider issue.  Family firms are proud, and rightly so, of their willingness to take the long view – to think in terms of generations, rather than years, or even months. At the other end of the scale, family firms are good at dealing with the everyday: the nuts and bolts of running a business. The challenge is in the middle: having a strategic plan that links where the business is now to the long-term vision of where it could be.  As one survey respondent from the US put it this year, there’s a need for “more transparency in longer-term thinking and a reasonable assurance that there will be consistency in the delivery of that vision.” And that vision needs to encompass the family, the owners and the firm. They are interdependent, and success for the one cannot be delivered without the other. 

But as one Australian respondent described it, “There is an absence of any strategy, beyond the annual budget.”  In other words, a plan that looks beyond the next twelve months, to a five to ten-year horizon.  This is what we’re calling the ‘missing middle’, and this is why so many family firms fail to turn early promise into sustainable success.

“Family firms need to be able to break free from ‘success syndrome’ – if they aren’t open to change it can lead to complacency, arrogance, and an excessively internal focus.”

Ireland, 2nd generation

Succession planning is a major factor in addressing the ‘missing middle’. It’s vital in its own right, to ensure business continuity, but it has a wider impact too. Succession planning is essential to ensure the aims of the owners and the family and the objectives of the firm are properly aligned over the medium to long term. In this year’s survey, as many as 69% of respondents believe their family and business strategies are completely aligned, but the anecdotal evidence and our experience suggests this perception of alignment may sit primarily with the owner.

This focus on strategic planning is key to the succession process: without clarity about what you want the future to look like – both for the business and the family – it’s impossible, for example, to choose the right leader, or know what qualities and skills they will need. In other words, strategic planning and succession planning are inextricably linked; indeed, succession planning is a subset of the strategy process. But as this year’s results prove, a limited number of  family firms are approaching the succession process in a structured manner, and those who are, see this as a one-off exercise focused on the ‘who’ rather than the ‘what’. In reality, these decisions are part of a continuum, and constantly need to be revisited and adjusted as circumstances change, and the corporate strategy evolves.

Ten steps to effective succession planning 

Dr. Dominik von Au is the Family Governance Leader for PwC Germany, with extensive experience of working with established family firms to achieve a smooth and effective transition between generations.
We asked him to summarise the secret to a successful succession:

 

 

 

Into leadership...

 

Into ownership...

 

Get experience outside the family firm

As the business landscape becomes more complex, it’s vital to bring a broad range of experience to the task of leadership. So develop a career plan that involves working outside, to allow you to acquire the specific skills the family firm needs. 

Start early

It’s vital to start the process as early as possible. Everyone needs to know what to expect, and what the timetable is, to avoid misunderstandings and unspoken tensions that could lead to outright conflict. This is especially important for family members who are going to be taking executive roles in the future. Our advice is always to transfer shares during the current generation’s lifetime.

Develop a strategic plan for the medium term

The next generation often see the succession process as an opportunity to modernise the business, and there may indeed be a need to do this. But it’s important to make changes in the context of longer term objectives, which is why it’s vital to have a strategic plan, developed jointly by both the current and incoming generation, and in consultation with all the shareholders.

Communicate, communicate, communicate

Decisions need to be made by a process of consultation and discussion, not dictated by the owner. Everyone with a stake in the future needs to have a say in it.

Broaden the decision-making process

As the business passes from one generation to the next, it’s important to create an organisational structure which isn’t dependent on one single individual. Decisions need to be made collectively, and with proper information and preparation.

Do your homework

Make sure you know the tax and legal implications of your succession plans. Depending on your circumstances and jurisdiction, some approaches may cause difficulties which may not be obvious until it’s too late.

Stengthen the role of the Board

The board has a key role to play in overseeing the succession process, and in ensuring that family members are only offered positions they are properly qualified to fill. Membership of the board is a useful way for the retiring generation to make an invaluable ongoing contribution.

Invest in education

The people who are going to be running the business need the right expertise to do that, but ownership demands specific skills too. Make sure all current and prospective shareholders are educated to become professional and competent owners.

Clarify what the retiring generation will do

The current generation needs to have a clear plan for their life after retiring. This will prevent misunderstandings, or the temptation to interfere. Taking on roles outside the family business – in the community, for example – can be both worthwhile and rewarding.

Diversify your wealth

If the retiring generation rely entirely on the firm to provide a retirement income that can put a disproportionate strain on the business. It can also make it harder for the older generation to ‘let go’, because their lifestyle is at stake. So build assets outside the family firm from an early stage. 

Explore the data

Use our data modeler to look at the findings from our Survey in greater depth. 

Explore five themes: Business performance & challenges; global considerations; The family business DNA & succession planning; digital; the people piece. 

Filter the data by territory, industry, generation or turnover.

Compare the data


Case studies

Looking good on paper: From first to second generation in Mexico

Agustín Anaya is one of Mexico’s most successful entrepreneurs. He’s set up over 15 ventures in his time across a variety of sectors including construction, but his first and greatest love has always been the paper industry. The business he founded in 1993, Papeles y Conversiones de México, or PCM, is now the third biggest producer of paper rolls in the world and the second on the American continent. It also has market-leading positions in other products such as labels.

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