As the global economy began to emerge from the recession, family business leaders were optimistic about their prospects for the future, according to a global family business survey conducted by PricewaterhouseCoopers. Though many reported being well positioned to compete economically, they also confessed to a lack of succession and conflict-resolution plans, a situation that could undermine their long-term sustainability.
The firm queried more than 1,600 family business owners and managers in 35 countries between May and August 2010. PwC also released a report on the findings from the U.S. portion of the global study, which had 89 respondents.
Many family companies prospered despite the recession. Nearly half (48%) of the global respondents saw increased demand for their products or services in the previous year (32% saw modest growth, while 16% saw significant growth). In the U.S., about 33% reported modest growth, and 11% saw significant growth.
Yet the recession took a toll on some family firms, the global study found. A third of the companies surveyed experienced reduced demand for their products or services, compared with only 10% who reported reduced demand in PwC’s previous global family business survey, conducted in 2007. Of the global companies experiencing reduced demand in 2010, 68% saw their operating profits shrink—but only 40% cut back on the amount they invest in the business.
Interestingly, many respondents agreed that being part of a family business helped them through the economic crisis. In the U.S., nearly 70% said they “agreed” or “agreed strongly”; globally, the corresponding figure was 67%. (Of the U.S. respondents, 63% have been in business for more than 50 years, and 37% have been operating for 20 to 49 years.)
“I think that living through this crisis will make these entrepreneurs much stronger and much smarter for the future,” says Alfred Peguero, a partner in PwC’s Private Company Services Practice. The survey results show that business owners who weathered the storm are developing a sense of resilience and cautiousness, like their grandparents who survived the 1929 stock market crash and subsequent Great Recession, Peguero says.
In U.S., cash is king
The family firms in the U.S. survey appear to be better capitalized than their global counterparts. More than 76% of the U.S. respondents said they have access to surplus cash, compared with two-thirds of the global respondents. Only about 16% of the U.S. survey participants said their cash flow was limited, while 21% of the global respondents reported limited cash flow. A mere 4.5% of U.S. respondents said they have no surplus cash, compared with 12% of the global respondents.
Peguero says the uncertain economy prompted American family firms to hold on to their cash. “After they made their profits, they weren’t placing their next bet yet,” he explains. “They are holding on to cash because they just don’t see a safe bet.”
The U.S. family firms are optimistic about their prospects. More than two-thirds (71%) said they were very competitive compared with market leaders—only slightly lower than the 2007 figure (74%).
The survey found that most business owners don’t anticipate changing their business models because of the financial crisis. About 60% of the U.S. firms weren’t planning changes; the figure was nearly the same (56%) globally. Of the U.S. respondents who planned changes, an impressive 91% said they had enough cash to fund the new strategies.
Peguero says he was surprised by the companies’ optimism. “With respect to everything that my clients went through in the last two years, I thought there would be more dampening of the enthusiasm,” he says.
Succession challenges
More than a quarter (27%) of the global firms planned a change in ownership within the next five years; the percentage was smaller (about 22%) in the U.S. Of those that expected to change hands, 55% of the U.S. business leaders planned to pass the enterprise on to the next generation of family. In the 2007 survey, the corresponding figure was 72%; this indicates some degree of uneasiness about future economic conditions, according to PwC. The percentage of respondents planning to pass ownership to the next generation was comparable (53%) in the global survey.
The U.S. survey was conducted before the extension of the 2001 tax cuts was signed into law, Peguero notes. He suspects that last summer’s uncertainty about the tax situation may have contributed to American respondents’ unwillingness to commit to a transfer of ownership. Because passage of the tax law in December 2010 clarified the tax picture for the next two years, Peguero says, U.S. business owners might now be less leery of planning for transition.
Although most of the U.S. respondents have a succession plan for key senior roles, 39% do not. While worrisome, this statistic is consistent with the 2007 survey findings, PwC notes. Astoundingly, nearly half (47%) of the global participants lack a succession plan for the key senior roles in their companies.
Interestingly, 36.5% of the U.S. respondents said none of the successors to key senior roles would be family members, compared with only 11% of their global peers. Of those with a succession plan, 60% of the U.S. business leaders have chosen their successors, vs. 50% of the global respondents—and just 43% of those in emerging markets.
U.S. firms appear to be in better shape than their global counterparts in developing plans to address the death or illness of key managers and shareholders. Most (73%) of the U.S. respondents said they had such plans in place, vs. only 38% of the global participants.
Red flags
The survey noted the potential for family conflict over the senior leader’s estate plan. Only 61% of the global respondents and 62% of the U.S. respondents have sufficient resources to divide their assets fairly among heirs who work in the business and those who do not—perhaps because their wealth decreased during the downturn.
When asked to name the top internal challenges that would affect their companies in the next year, nearly 52% of the U.S. participants cited “recruitment of skilled staff/labor shortages,” about 42% indicated “cash flow/controlling costs” and 37% listed “capacity/meeting orders.” By contrast, only about 8% cited “succession planning at senior management level,” and a mere 1% indicated “family politics.”
Indeed, U.S. family business owners appear to be in denial about sources of tension in their organizations. Most (81%) reported no tension regarding decisions on who can and cannot work in the business, vs. 69% of the global respondents. Even more U.S. firms (85%) said the role of in-laws wasn’t an issue (compared with 74% of their global peers). Still more U.S. respondents (87%) said lack of consultation between family members active in the business and the wider family did not pose problems (vs. 69% globally).
Similarly, 82% of the U.S. cohort said there was no tension related to remuneration levels for family members active in the business (compared with 74% of the global respondents). On the matter of family employees’ performance, 73% of the U.S. group and 64% of the global cohort said that was not a source of conflict. Regarding the decision to reinvest in the business or pay dividends, 78% of the U.S. respondents and 74% of their global counterparts denied tension.
Since so few of these business owners perceive sources of dissent within their organizations, it’s not surprising that nearly two-thirds (65%) of the U.S. respondents lack conflict-resolution procedures. Globally, that figure rises to 71%.
Peguero notes that the survey respondents were senior business leaders. In many of these companies, he speculates, “I think there are some underlying issues, but they haven’t been identified or haven’t bubbled up to the patriarch.”
The next bet
The U.S. survey report noted that the findings paint a picture of “businesses that have successfully weathered the economic storm … and are now cautiously considering where to place their next big bet.” Though there are few sure bets, it’s safe to say that an investment in transition planning and family governance would pay off for those who haven’t addressed sticky family issues.