U.S. family business owners were less concerned about market conditions in 2012 than they were in 2010, and more optimistic about growth prospects than their global peers were, according to PwC’s latest global family business survey.
For the U.S. edition of its survey, the professional-services firm interviewed 100 owners, leaders and top executives of family businesses via telephone between June and September 2012. Of this cohort, 93% said they were confident about growth in the next five years, compared with 81% of respondents in the global survey, in which representatives from nearly 2,000 companies in 28 countries were queried.
More than two-thirds (68%) of the U.S. respondents cited market conditions as a main issue they will face over the next year. In 2010, by contrast, 88% said market conditions would be a major challenge.
Perhaps because of optimism about the economy, 76% of the U.S. executives who responded to the survey said they plan to pass the business to the next generation rather than sell it. This is the highest percentage since the first PwC family business survey in 2007, and a significant increase over the 2010 figure (55%).
Yet not all of these U.S. heirs will run the companies they inherit. Of the 76% who planned to keep their businesses in the family, 52% expected that the heirs would both own and manage the business, while 24% said they intended for the next generation to own but not run the company. This indicates that family business leaders are objectively evaluating the next generation’s leadership skills.
In the global survey, 41% of the respondents said they planned to pass management on to the next generation, and 25% said they intended to pass on ownership but bring in professional management.
Alfred Peguero, PwC’s U.S. Family Offices Services leader, foresees an increase in demand for non-family talent in closely held businesses as a growing number of retiring leaders seek outside executives to lead their companies. More than half (52%) of the U.S. executives cited “attracting the right skills/talent” as a top challenge in the next five years.
Need for innovation
While 46% of the U.S. executives said family businesses reinvent themselves with each new generation, 31% said that having family members in key positions makes a company less open to new ideas. And half the U.S. respondents voiced concern that next-generation members might not have the drive and aptitude to lead the business into the future.
More than two-thirds (69%) of the U.S. survey participants said family businesses are more entrepreneurial than other companies. But 58% of the U.S. executives said the need to continually innovate was a major challenge. In fact, the only challenges cited more frequently were the “general economic situation” (66%) and price competition (61%).
A board of directors that includes outside members can help a family firm address its internal and external issues. Nearly two-thirds (64%) of the global respondents said they have non-family board members; among those with revenues of more than $100 million, the figure was 75%. Yet PwC noted wide global variations; in the U.K. and North America, the percentage of companies with outside directors was as low as 49%.
Nearly three-quarters of the global respondents said family businesses contribute to economic stability, and 53% said family firms take a long-term approach to decision making. Because of their emphasis on legacy, family firms have a reputation for conservatism. Yet 42% of respondents to PwC’s U.S. survey said they tend to take on more risk than other types of businesses.
“The [family firms] that are successful are really grasping new technologies and new innovations,” says PwC’s Peguero. “They’re making these investments.”
Family business leaders consider their personal connections with customers to be a competitive advantage and an important part of their business model. Most (78%) of the global survey participants said family businesses stand out because of the strength of their culture and values. Among third-generation firms in the global study, the figure rose to 85%.
Facing the challenges
Although tax issues were hotly debated in the U.S. election campaign of 2012, only 9% of the American respondents to PwC’s 2012 study cited taxes in their top three external challenges for the next year, a 10-point drop from the 2010 survey. Yet the survey report authors note that participants “voiced a strong desire to see the inheritance tax go away and for the tax code overall to be simplified.” About a third (34%) of U.S. executives ranked government policy among the top external issues that would affect them in the next year.
When family business leaders were asked about external challenges, “Their big concern was market conditions,” rather than taxes, Peguero notes. “The economy, and finding talent, is what keeps them up at night.”
More than a third (38%) of the U.S. respondents said succession planning would pose a challenge in five years. Among global respondents, 32% said they were apprehensive about transfer of the business to the next generation, and 9% said there might be family conflict as a result.
A recurring theme in conversations with survey respondents, according to Peguero, was, “I have this family business, and I love my children, but who do I hand over the wealth, as well as the power, to?” Many leaders recognize that a non-family member may be the best choice for the next CEO—though they realize their relatives may not agree with that decision when it’s first announced.
“It’s that part that is the holy grail —obtaining a quality succession plan that at least a majority of the family agree to,” Peguero says.
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