Only 23 percent of family businesses have a robust succession plan in place, according to a new report from PricewaterhouseCoopers, with 46 percent of the family businesses polled saying they are reluctant to pass the business to the next generation.
The difficulties of succession planning in family businesses have come into stark relief with the high-profile case of Donald Trump. His decision to give control over his business empire to his sons Donald Jr. and Eric, with the possible involvement of his daughter Ivanka, has prompted concerns over whether it is enough to prevent a conflict of interest for an incoming president.
In PwC's survey, the reluctance of many family business founders to pass the company to their children shouldn’t be surprising, given how dysfunctional many families can be.
“Family businesses are different because you’ve got family dynamics in the ownership and running of the business,” said PwC partner and family business services leader Jonathan Flack. “If you’re a parent passing the business to your children, and you have more than one child, there’s the family dynamic struggle about choosing one of my children to lead the business. Am I de facto pointing out the favorite of the children? Am I being fair to my children? That’s a struggle.”
Another problem, he noted, is the business a father or mother started 30 or 40 years ago looks significantly different today. “It’s a complex business world,” said Flack. “They are probably competing in different markets, where before maybe they were competing in one or two markets. To be the leader of that family business, the next generation may not be up to snuff.”
A family business founder may struggle with whether to have an individual from the family continue to lead the business or to look outside and bring in a non-family member who has the right skill sets. That can lead to more reluctance to do succession planning, even though the need is pressing for family patriarchs and matriarchs.
“There seems to be this tendency where my clients have said, ‘If I were to die, here’s what would happen,’ but ‘if’ is not the operative term here,” said PwC partner and family business survey leader Alfred Peguero. “It’s just a matter of when. I try to make it analogous to when someone goes on vacation. They go on a two- or three-week vacation and there’s all the work and effort that goes into it to have that vacation and have peace of mind. We’re trying to say, ‘What would happen if you went on a vacation and you were permanently on that vacation, and there’s no way for anyone to communicate with you?’ I try to get them to focus a little bit around that, but succession planning seems to be one where there’s some hesitancy.”
The poll encompassed approximately 2,800 businesses this year in 50 countries, according to Peguero, including about 160 participants in the U.S. The majority of them are PwC clients, with $100 million or more in sales.
Another issue that has come to the forefront is the choice of passing along the family business to a daughter rather than a son. However, only 64 percent of family businesses surveyed by PwC said females and males in the next generation would be considered equally for leadership positions.
“We are seeing progress, which is a good thing,” said Flack. “If you look at the C suite roles in family businesses, based on who responded to us, about 10 percent of the C suite roles are with females, as compared to the Fortune 1000 and Fortune 500, where you’ve got only about 5 percent of those roles.”
He believes cultural changes within the last 10 to 20 years have been far more favorable for females in the workplace, including at his own firm, PwC. “Our firm has been in business since the 1850s, and I often look at how long it took for our firm to have this solid increase in the advancement of females not only in the workplace at PwC, but then also in our leadership positions,” said Flack. “I think we are much like those older family businesses in that it took a while to matriculate those individuals to leadership positions, but it also took a while to breed that into our culture. The older family businesses are taking more time to change culture, change their environment and points of view, as compared to some of the younger businesses.”
PwC also found that 21 percent of the family businesses polled ranked “being more innovative” as a very important business goal, although 67 percent of them prioritized “ensuring the long-term future of the business.”
“We think that family businesses do an excellent job of the day-to-day execution,” said Flack. “They’re nimble, they’re efficient, they respond to customers’ needs. The other thing we think they do really well is the long-term orientation they have on the business. They’re very vision oriented, they’re very mission oriented, they’re very involved in their communities, and they look at investment over a very long-term horizon versus something that’s more quarter-to-quarter based or just within a year or two. I think the piece where they have a blind spot is that midterm strategy, that two- to five- or seven-year period. It’s very important to really formalize a succession planning strategy.”
Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.