PwC has conducted a family business survey on a number of occasions in recent years.  I recently read the PwC Family Business Survey 2012/2013, which deals with the top challenges faced by family businesses at the present time.  Those challenges include dealing with the general economic situation, price competition (at home and abroad), the need for ongoing innovation, and attracting skills/talent to satisfy overall growth needs.

Survey Participant Overview

The PwC survey reflects the results of telephone interviews with more than one hundred owners, leaders and top executives of domestic family businesses doing business in a broad variety of industries.  Unlike many surveys that focus on large numbers of smaller businesses, some 60% of the respondents were with businesses with more than $100 million in sales.  About 60% of the companies represented had been in business for 50 or more years.

Half of the companies have first or second generation family ownership, and the other half have family owners to the third and fourth generations.  About 42% of the companies were represented by owners or leaders in the 45-54 age bracket.  Some 44% of the respondents were 55 years of age or older.

While these are “family businesses,” 47% of the survey respondents were non-family members.  And 93% of the businesses are owned and managed by family members.  Only 7% of the companies are owned by families but managed by outsiders.

Expected Growth

In the last year, which would have been 2011 or trailing twelve months ending on or after June 2012, 17% of the companies experienced negative growth and 10%, no growth.  The survey was conducted primarily in the third quarter of 2012.  Some 44% of the Some 44% of the  companies had “grown a little,” and the remaining 20% of  companies had “grown a lot.”  But almost three-quarters of companies reported growth in the last year.

One critical key to business valuation is the expectation for growth.  Some 82% of the respondents are planning “steady growth” over the next five years, and only 11% are planning “aggressive” growth.  These terms were not defined, but provide an idea of intent or expectations for the sample of companies.

One respondent was quoted as saying:

The biggest challenge for us is to match growth capital, so we need to grow the business in order to use up the capital being generated by the company.

I would observe that there can be other uses for capital generated by closely held and family businesses.  If your business does not have sufficient internal growth opportunities that will generate a reasonable return (your cost of capital, which we will talk about in future posts), then capital generated in excess of growth can be distributed for liquidity and diversification purposes of the owners.

Keeping the Business in the Family

There were an interesting series of survey questions regarding the “lifecycle of a family business.”  In the 2007 survey, some 72% of the respondents had plans to pass the reigns of management and ownership to the next generation.  The mood changed following the recession.  The 2010 survey found that only 55% of businesses had such plans.  And now, with improving growth in the sample, that figure is back to 76% with “passing along” plans.

Of these respondents, 52% said that the plan was to pass the business to the next generation for ownership and management.  Interestingly, 24% said they planned to pass the business ownership to the next generation, but that management would be passed to outsiders.  Only 12% of the respondents said they planned to sell to another company, and a very small 4% said that would likely sell to a private equity investor.

So it seems that there is a dichotomy between what many business owners “plan to do” and what they are actually doing.  Recall that the survey involved 93% of businesses that are owned and managed by family members, and only 7% are owned by families and have outside management.  Perhaps there will be a trend.  Historically, it appears, family businesses have, for the most part, retained their businesses in the family until there is some liquidity event or change of control that shifts ownership away from the families.

And Now, Succession Planning

While we noted that 76% of businesses plan to keep the business in the family one way or another, only 38% of the family businesses indicated that succession planning would pose significant challenges over the next five years.  The implication of future issues with succession planning may be that there is no succession plan currently.

Succession planning is difficult for many business owners.  It forces us to think about the future, retirement, potential disability, death and other unpleasant things.  So many of us avoid it.

A recent post compared the apparent succession planning of Warren Buffet and Berkshire Hathaway with that of Steve Ballmer and Microsoft.  Echoing the announced planning at Berkshire Hathaway, the PwC survey notes:

Lack of a formally documented and routinely updated succession plan signals uncertainty in a still-uncertain economy.  That, in thru, can adversely affect not lnly the company’s longevity, but also its near-term health.  A clearly communicated plan, on the other hand, signals that the company is here to stay.

The earlier a business owner puts a well-considered plan in writing , the better he or she can prepare for an orderly transfer of the business, which should help the family maximize the business’s value and reduce risk when the current leader steps down.

It is important to talk about succession if you are the leader.  Rest assured, if you don’t talk about it, the rest of your family and other owners will be thinking about it and worrying about it – albeit ineffectively – on your behalf!  They know you won’t live forever, even if you don’t.  After all, you might be the first!

And employees are concerned, too.  Oe non-family executive of a second generation family business was quoted as saying:

In a family business, it makes a big difference if there is someone to take over.  If not, the future is always very gray as to whether the business is going to be around.

So succession planning is identified in the PwC survey as a top-of-the-list priority for closely held and family businesses.

Wrapup

Ownership and management transitions are quite important for every closely held and family business.  You will sell your business, one way or another, if only kicking and screaming at death.

As always, please feel free to give me a call (901-685-2120) or email if would like to talk about ownership or management succession matters or other valuation-related matters in complete confidence.

And, as always, if you have a story to share, please do so in the comments below.

Until next time,

Chris