Money Matters: The state of family businesses worldwide

Kristin S. Coffey, The Daily Record Newswire

PricewaterhouseCoopers recently published its PwC Family Business Survey 2012, October 2012 (the survey), which concluded that family businesses are “thriving” worldwide. The survey covered nearly 2,000 firms across the world, from both developed and emerging markets, varying in size, location and industry. The respondents, however, were similar in their approach to business and what they considered to be distinctive characteristic of businesses like theirs.

The survey’s authors note that the results show that there is a great deal that the wider corporate sector could learn from family firms and that there is much more the family business sector can do to take greater control of its destiny.

Family firms across the world are feeling the strain of the current economic environment, government regulation and bureaucratic barriers to growth. The survey identified distinctive challenges for this sector which are the direct result of the unique strengths and potential weaknesses of the family business model, all of which are discussed below.

Family businesses are distinctly different from today’s publicly traded companies. So, what exactly are these unique qualities?

• Longer-term thinking and a broader perspective: The survey found that family firms are willing to invest for the long term and do not suffer from the constraints imposed on their publicly traded competitors by the quarterly reporting cycles and the need for quick returns.

• Quicker and more flexible decision-making: Family businesses often believe that they are more flexible and agile than their multinational competitors, making them better able to move quickly to exploit gaps in the market. Many respondents see the current economic downturn as a business opportunity and they have been able to move quickly to acquire businesses or competitors at historically low valuations.

• A greater commitment to jobs and the community: Of those surveyed, 77 percent believe family firms feel a stronger sense of responsibility to create jobs and will make more of an effort than other companies to keep their employees during difficult times. This translates into greater loyalty and commitment from those they employ. In addition, 70 percent agree that community initiatives are important to family firms.

• A more personal approach to business based on trust: Many firms believe that they win business because they are close with their customer and have a more personal relationship with them. Of the respondents, 75 percent consider that the family firm is notable for the strength of culture and values and this belief grows stronger with time, rising to 85 percent for third generation firms.

The family firms in the survey consider these qualities to be a source of real competitive advantage and integral to their business model. Interestingly, this sentiment was just as strong among employees brought in from outside to manage the firms as it was among family members.

So what were the results of the survey? What is the current state of sentiment in the family business sector according to the survey? Key findings include:

• Family businesses are thriving globally: Of the family businesses surveyed, 65 percent have grown in the past year compared to less than half in 2010. Growth was particularly strong in Eastern Europe, Latin America and Middle East. Close to 20 percent of the respondents saw reduction in their sales in the last year compared to 34 percent in 2010.

• The economic environment remains the key external challenge: This is true for all businesses and, according to the survey, there was little change from the 2010 survey. The three issues identified by most firms were market conditions (54 percent), competition (27 percent) and government policy and regulation (27 percent). Of course the latter category varied on a market-by-market basis. Respondents cited these issues as likely to continue and/or emerge as future issues as well.

• Internally, the main issue is the recruitment and retention of skilled staff: These issues, according to respondents, have become more acute challenges since 2010. Attracting appropriately skilled staff and retaining them were also major concerns for the future. Many firms noted that it was difficult to attract skilled and talented employees because the brightest candidates tend to prefer to work with the listed multinationals, where the career path is clearer and there is the possibility of equity at some stage.

So, what are the future concerns of family businesses? According to the survey, some emerging issues for 2017 that family businesses will need to address for continued success include:

• Globalization: According to the survey, this issue emerges more strongly for 2017 and beyond. Many businesses remain confident that local knowledge, agility and the ability to exploit profitable niches will keep the business alive; others are concerned about the impact of an increasing international approach to business and the growing power of global megabrands.

• Innovation: A key emerging issue for internal management was innovation. More than 60 percent of the respondents cited the need to continue to innovate to secure a competitive advantage, while 37 percent anticipated the need to invest in new technology. Companies in Italy, Turkey and South Korea were particularly concerned about innovation as were firms planning to grow aggressively.

• Business Succession Planning: 32 percent of respondents were already apprehensive about the transfer of the business to the next generation and 9 percent saw the possibility of family conflict as a result. Some firms are planning to manage the transition process by bringing in external management. Overall, 64 percent of family businesses have non-family members on the board.

However, there are considerable differences across the world. In Denmark, approximately 90 percent of board participants were non-family members and over 95 percent were non-family members in India where a very high proportion of family businesses in the region are listed.

In contrast, the numbers are as low as 49 percent for non-family board members for UK and North America family businesses.

Some of the world’s largest corporations began as family businesses. The survey notes that family businesses and other companies have much to learn from one another and that the lines between them are starting to blur. Family businesses are a vital part of the global economy and can make an even more substantial contribution to economic growth and recovery given the right support and direction.

As professional service providers, it is our responsibility to assist our clients in finding the appropriate advisors to provide support and direction as they address these current and future challenges.

—————

Kristin S. Coffey is the senior manager of Business Valuation Services with Mengel, Metzger, Barr & Co. LLP. She can be reached at kcoffey@mmb-co.com.

Comments

  1. No comments
Sign in to post a comment »