Strategy - not the economy - most likely to constrain family businesses

Nov 22, 2016

According to the early data from the PwC Global Family Business Survey, a lack of strategic planning rather than economic or other external factors, is most likely to prevent family businesses from achieving their growth and expansion plans.

What’s also apparent from the survey is that, despite the prevailing economic uncertainty, almost two thirds (64%) of family businesses have grown over the past year. What’s more, the sector has ambitious plans to drive growth over the next five years with only one in five family businesses reporting a drop in sales in the last financial year.

But it would be a mistake to assume that family firms are also micro businesses. In Northern Ireland, the main driver of growth is the family-owned and owner-managed business sector, employing 50-plus workers. This group comprises less than 1% of all local businesses, but accounts for 40% of all regional employment, 48% of business turnover and 87% of manufacturing exports. So, driving sustained growth in this sector is vital to the Executive’s plans to rebalance the economy.

However, despite their disproportionate impact on the economy and local employment, the family-owned and owner-managed sector has its vulnerabilities. And at the recent launch of the 2016 Family Business Survey it was found that 43% of family owned business have no succession plan in place. The authors found that, while some family firms are managing strategic planning well, many are caught between the deluge of every day issues and the weight of inter-generational expectations. That means areas such as succession planning, diversification, digital transformation, cyber security, and innovation, are taking a backseat.

But there is some evidence that the message about strategy and succession planning are getting through and we are seeing a growing number of these firms moving strategic planning up the business agenda. That, in turn, is the preparatory stage to preparing a formal business plan and focusing on the objectives of the business which will be in some shape or form an exit strategy and which includes handing the business over to the next generation.

In three successive Global Family Business Survey PwC has undertaken over the past six years, family businesses have made on average, around a quarter of their sales outside their own territory but in this year’s report stated an ambition to raise that to a third. Yet in each survey, international sales have remained at around 25%. One in three family firms is still operating in only one sector and in their own home market, yet 80% plan to export/sell goods outside of their home market within five years.

That suggests that aspiration continues to run ahead of capability and that a properly researched and adequately supported strategic plan will provide the business with buy in from all stakeholders and gives the business measurable objectives to work to. A business with a plan and an eye on an exit is a business that is pro-active, flexible, more amenable to change and a pleasure to run.

However, it’s not unusual to see profitable and well-run businesses being approached by other businesses or private equity houses to sell but, because of insufficient corporate governance, lack of succession, business or tax plans, these businesses are either not ready for sale or not able to maximise value.

One of the outputs of the 2016 Global Family Business Survey was nine key challenges respondents from over 2,800 businesses in 50 countries identified related to their strategic planning:

 

  • Succession: Only 16% of family firms have a plan for their succession process for all senior executives: 43% have none at all.
  • Innovation: 64% identify innovation as a key challenge to keep ahead in the next five years.
  • Digital: 47% say keeping pace with digital and new technologies is one of their key challenges, yet only a quarter think their business is vulnerable to digital disruption.
  • Professionalisation: Three out of five respondents say they will bring in non-family professionals to help run the business.
  • Skills: 58% say their ability to attract and retain the right talent is a key challenge over the next five years. Almost half believe that they need to work harder than non-family businesses to recruit/retain top talent (48%).
  • Finance: A third say that they find it harder to access capital (32%) than their non – family business counterparts. Three quarters (76%) say they will use their own capital to fund growth.
  • Cyber security: Less than half (45%) believe their business is prepared for dealing with a data breach or cyber-attack.
  • Geopolitical concerns: The majority of family businesses identify political and economic stability as more important than growth potential when considering new export markets.
  • Working life: Next generation family members are more certain they have to work harder to prove themselves than current generations (88% vs 66%). Nearly two thirds say they are properly appraised (65% vs 59% in current generations).

 

Even with the uncertainties of an impending Brexit we are finding our clients seeking out advice and assistance in shaping their plans and strategic vision with a view to passing on businesses that are robust and sustainable. Fewer than half of family businesses plan to pass both ownership and management of business fully to the next generation (39% will pass on management; 34% will pass on ownership). First generation business owners are now almost twice as likely to be planning to sell or float their business and, for family business leaders planning that as an option, it is never too early to start maximising value and planning an exit strategy.

For further information on the 2016 Family Business Survey and how PwC can assist with your strategic planning or how to maximise value within your business, contact Noel Culbert PwC NI head of corporate finance.
 

Contact us

Noel Culbert
Associate Partner
Tel: +44 (0) 28 9041 5828
Email

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