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15 April 2014

Family businesses fear breakup if generations clash

Northern Ireland family businesses need to manage succession issues if they are to avoid the risk of the business breaking the family, or the family breaking the business, a new report has warned.

Research from PwC says that the risks of getting it wrong have never been greater as founding ‘baby boomers’ prepare to hand over to the next generation of young ‘millennials’,

The PwC report, Bridging the gap – handing over the family business to the next generation, studied 200 family businesses and found that 80% of the next generation have big ideas for change and growth.

However, unlike public companies where leadership changes are frequent, family businesses can have the same chairman for decades. The PwC research says this can become a real barrier for the younger generation working in the business and hoping to inherit the management from founding family members.

Little wonder then, that 88% of family members working in the business say they have to work harder than others to ‘prove themselves’, while 59% say gaining the respect of their co-workers is their biggest challenge.

Kevin MacAllister, PwC partner and Northern Ireland private sector leader, says managing the transition from one generation to the next can make or break a family business:

“Northern Ireland has a disproportionate number of small family-owned businesses that make a vital contribution to employment and economic activity.

“Of our 66,790 VAT and PAYE-registered businesses, almost exactly 90% are micro businesses, employing fewer than 10 people and many of these are close to handing over control to a new generation who are confident they can grow and expand.

“Business founders and the current generation of management often comment that their children aren’t sufficiently entrepreneurial and aren’t prepared to put in the long hours they did to build the business.

“However, just down the hall their children are wishing
their parents would embrace the potential of new technology and be more receptive to new ideas.

“This difference can become an impasse, inhibiting decision-making and leading to the phenomenon of the “sticky baton”, where the older generation hands over management of the firm in theory, but in practice retain complete control over everything that really matters.”

Across the UK, family businesses account for over 9 million jobs, around UK £80bn in annual tax receipts and nearly a quarter of total GDP.

According to research from Barclays Business and the Centre for Economics and Business Research (CEBR), first-generation family-owned businesses will increase their level of UK Gross Value Added by 21% to around £218bn by 2018.

Barclays Business and CEBR estimate that 59,250 Northern Ireland businesses – around 88% of all local VAT and PAYE-registered undertakings, are so-called ‘first generation family SMEs’ where the founding family members remain in control.

However control will ultimately have to pass to a new generation if the business is to remain under family control and the PwC report identifies areas where a mismatch of styles, ambitions and plans could cause difficulties for an orderly transition.

PwC says the generation gap – the handover of ‘first generation’ businesses making the transition from start-up venture to family firm - is commonly the most fraught. Of family members taking over under these circumstances; 20% say they’re not looking forward to running the business, compared to 8% for respondents as a whole. 

The research also found that promotion to CEO is no longer automatic for the next generation, with a growing number of family businesses being prepared to make tough succession decisions. 

The survey revealed that, while 73% of the next generation said they were looking forward to running the business one day, only 35% thought that transition was certain and as many as 29% thought it was at best, only ‘fairly likely’.

Finally, Kevin MacAllister says the survey reveals that as many as 64% of young family members think the current generation will find it tough to let go.

“Firms that manage succession well are those that plan many years ahead - ideally, five to seven years in advance - accompanied by ‘sensible conversations’ that address roles, responsibilities, and timings.

“The longer those conversations are delayed, the greater the potential for the business breaking the family, or the family breaking the business.”

Download Next Gen Survey report

Ends.

Contact details

Email: John Compton

Tel: +44 (0)28 9041 5663