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Family Business Services

Making a difference*
The PricewaterhouseCoopers Family Business Survey 2007/08

*connectedthinking
Acknowledgements About PricewaterhouseCoopers

We would like to thank the family business owners who PricewaterhouseCoopers (www.pwc.com) provides industry-
participated in our survey. focused assurance, tax and advisory services to build public
trust and enhance value for its clients and their stakeholders.
We would also like to thank Caitriona Allis, Rémy Barbeault, More than 146,000 people in 150 countries across our
Lucille Chartier, Axel Dorenkamp, Colette Duff, Karen Glass, network share their thinking, experience and solutions to
Paul Hennessy, Helen Kay, Jan-Olof Lindberg, develop fresh perspectives and practical advice.
Jacques Lesieur, Bob McCullagh, Roderick Reid and
Véronique Rode-Coupeau for their active participation This publication has been prepared as a guide only. In the
in this survey. interests of brevity and clarity, detailed information may be
omitted which may be directly relevant to an individual’s or
an organisation’s circumstances. Professional advice should
be taken before acting on any information contained in this
publication. Re-publication and dissemination of the contents
(other than brief quotations with appropriate attribution) is
expressly prohibited without prior written consent.
Table of contents

Foreword 4
Introduction 6
Corporate challenges and priorities 10
Ownership, succession planning and the remuneration of senior management 24
Conflict resolution 40
The economic and regulatory changes family businesses would most like to see 48
Conclusion 52
Appendix 54
Contacts 56

Making a difference November 2007


PricewaterhouseCoopers 
Foreword
Family firms are the most common has the passion, confidence and In later years, some of the decisions
form of business structure; they employ courage to put his money where his they must make – such as whether
many millions of people; and they mouth is. Entrepreneurs are typically certain family members should be
generate a considerable amount of creative over-achievers; they can see allowed to work in the business and
the world’s wealth. Indeed, they often opportunities where others might not, which roles different relatives should
deliver better returns than companies and are utterly single-minded about play – may be personally as well as
with a wider shareholder base1. Yet, pursuing them. They work incredibly commercially difficult.
until now, very few attempts have been hard, make things happen, are positive
Moreover, most entrepreneurs do not
made to gauge the opinions of the without being unrealistic and possess
have time to look at the big picture;
leaders of family businesses worldwide. the resourcefulness to overcome all
they are too busy grappling with the
sorts of hurdles. They are also socially
Our first global Family Business day-to-day demands of their own
adept, capable of communicating
Survey aims to redress this omission. businesses. And most economic
effectively and good at inspiring others.
PricewaterhouseCoopers advises commentaries are directed at large
Many of you will probably recognise
numerous family firms, many of quoted companies anyway, so getting
Philippe Bailly these traits in yourselves.
which are expanding beyond their the right information can be hard.
PricewaterhouseCoopers Yet an entrepreneur’s life is often
Family Business Survey Leader national roots. Recognising this, we Our survey aims to identify the issues
decided that we needed to learn more a lonely one – and this is true of
French Middle Market Services Leader that most concern you and your family
about your opinions, intentions and entrepreneurs everywhere, regardless
firm. We plan to produce regular follow-
expectations. We also thought that you of where they live or what kinds of
Allan Watson up surveys as part of our continuing
PricewaterhouseCoopers would be interested in finding out how companies they run. In the early
efforts to listen to you and understand
Global Middle Market Services Leader years, they have to turn their hands
your views compare with those of your your needs. We hope that you will find
to anything and everything, because
peers around the globe. the results revealing – and that they will
Norbert Winkeljohann they cannot call on the support staff
help you in running your business.
PricewaterhouseCoopers Continental The story of every successful family or systems that executives in big
European Middle Market Services Leader business starts with someone who corporations can summon to their aid.

Making a difference November 2007


PricewaterhouseCoopers 
Introduction
Family firms play a crucial role in the
global economy. One measure of
family business is arguably more
difficult than running any other kind
What is a family
their importance is the proportion of of business, precisely because business?
registered companies that are family- it involves family ties as well as
We have defined family businesses as those
controlled – a figure which ranges commercial relationships. We hope companies in which at least 51% of the
from more than 50% in the European that our latest family business survey shares are held by a family or related families,
Union (EU) to between 65% and 90% – the fourth conducted since 2002 the family members comprise the majority
in Latin America and over 95% in and the first to cover the global scene of the senior management team and the
the US. A second is their economic – will help to shed light on these owners have day-to-day responsibility for the
power. Family businesses generate issues3. management of the business.
between 35% and 65% of the gross
national product (GNP) of the EU Our survey explores the key areas of
member states, about 40-45% of the interest to family firms, including the
GNP of North America, between 50% main corporate challenges they face;
and 70% of the GNP of Latin America, ownership, succession planning and
and between 65% and 82% of the the remuneration of management;
GNP of Asia2. conflict resolution; and the economic
and regulatory changes that are
In short, the family firm is the highest on their list of priorities. (For
dominant form of business structure details of our methodology, please
worldwide. see the Appendix). It draws on the
It has produced corporate giants views of top management in 1,454
like Wal-Mart and Samsung, as well small and mid-sized family businesses
as many millions of more modest operating in a wide range of sectors in
operations. Yet this structure presents 28 countries (see Figures 1 and 2).
some unique problems. Running a

Making a difference November 2007


PricewaterhouseCoopers 
Figure 1: Survey participants by position in company Figure 2: Survey participants by industry sector

Chief Executive 59% Consumer Goods 19%


Retail/Wholesale 13%
Owner/Proprietor 8%
Construction and Civil Engineering 13%
Financial Director 16%
Manufacturing 11%
Other Director 8% Automotive 8%
Transportation and Distribution 4%
Other(a) 9%
Chemicals 3%
(a)
Other includes:
Shareholder, Finance/Accounts Manager, General Manager, Consultant, Forestry, Paper and Packaging 2%
Partner, Company Secretary
Hospitality and Leisure 3%
Financial Services 5%
Source: PricewaterhouseCoopers Family Business Survey, 2007/08
Agriculture 3%
Property and Real Estate 2%
Business Services 2%
Other 12%
More than 90% of the companies have been in business longest. But
in our sample have been trading for half the firms we surveyed generate Source: PricewaterhouseCoopers Family Business Survey, 2007/08
longer than a decade. Indeed, 38% revenues of over €51m a year, so they
have been trading for at least 50 years, are clearly thriving in the hands of the
so they have already passed from one families who manage them.
generation to the next. Seventy-two
percent have fewer than 250 people on
the payroll – and, predictably perhaps,
the majority of the companies that
employ larger numbers are those that

November 2007 Making a difference


 PricewaterhouseCoopers
Corporate challenges
and priorities

Three-quarters of the family firms in our survey have expanded in the past
12 months

Many respondents are wary of growing too rapidly, but 70% are optimistic
about the immediate future and anticipate that demand for their products
or services will increase during the next 12 months

Most respondents also think that their companies are well placed to
capitalise on any new opportunities, and almost all believe that their
companies are somewhat or very competitive

However, more than two-fifths of respondents – especially those based in


North America and Europe – are keeping a close eye on market conditions

Difficulties in recruiting skilled staff are also a major source of concern.


Respondents everywhere agree that labour shortages represent the single
most important internal challenge on the horizon
The global economy has been firing Companies trading in the Figure 3:
on all cylinders, with gross domestic manufacturing and construction Three-quarters of respondents report that demand for their products or services has
product increasing by 5.4% worldwide sectors have fared especially well; grown in the past 12 months
in 2006, the highest rate of growth 41% and 44%, respectively, have
for 30 years4. Most family businesses enjoyed significant growth. Those
have prospered on the back of this based in the emerging markets Significant growth
21%
strong performance. Three-quarters are also flourishing; 47% of the (Total = 33%)
32%
of the firms in our survey report that companies operating in developing 47%
demand for their products or services economies have seen demand for 45%
has risen during the past 12 months their products and services soar, Modest growth
(Total = 42%) 42%
(see Figure 3). compared with just 32% of those 37%
operating in Europe and 21% of those
operating in North America. No change compared 17%
to previous 12 months 16%
(Total = 15%)
8%
A modest reduction
13%
compared to previous
12 months 7%
(Total = 8%) 7%
A significant reduction 4%
compared to previous
12 months 2%
(Total = 2%) 1% North America Europe Emerging Markets

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 11
A substantial number of the companies Nevertheless, the majority of Figure 4:
in our sample are cautious about over- respondents are optimistic about the Only 50% of responding companies have increased their capital expenditure and
stretching themselves. Only half the immediate future. Fifty-eight percent operating profits in the past 12 months
executives we surveyed stated that they believe that the markets in which
had increased their capital expenditure they operate will get better over the
within the last 12 months, while 41% coming year, and 70% expect to see 50%
have maintained the same level of an increase in the value of the orders Increased
investment (see Figure 4). Executives their companies secure (see Figures 57%
in North America and Europe are 5 and 6). Executives in the emerging
particularly wary of growing too fast. economies are especially positive; 41%
Only 43% and 47%, respectively, have 31% anticipate that their main markets Remained the same
boosted their capital expenditure, will grow significantly, and 84% that 24%
whereas 66% of executives trading in the value of the orders they win will
emerging countries have lifted capital rise, during the next 12 months. North 8%
Decreased
spending – a difference that reflects American and European respondents 17%
the pace at which their economies are are rather less upbeat, with the
expanding. exception of those trading in the
1%
consumer goods sector; even so, 63% Refused/Don't know
and 68%, respectively, think that their 3% Capital expenditure Operating profit
order books will grow.

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

November 2007 Making a difference


12 PricewaterhouseCoopers
Figure 5: Figure 6:
Nearly 60% of responding companies believe that the markets in which they do Seventy percent of responding companies expect the value of the orders or contracts they
business will get better over the next 12 months secure to increase over the next 12 months

8% 63%
Get a lot better 14% Increase
(Total = 16%) 68%
31% (Total = 70%)
84%
42%
Get a little better 42% 33%
(Total = 42%) 45% Remain the same 25%
(Total = 24%)
31% 15%
Stay the same 32%
(Total = 29%) 15% 5%
Decrease 4%
15% (Total = 4%)
Get a little worse 1%
8%
(Total = 9%) 7%

3% Refused/Don't know
Get a lot worse 3%
2% (Total = 2%)
(Total = 2%)
1%
1%
Refused/Don't know
2%
(Total = 2%)
1% North America Europe Emerging Markets
North America Europe Emerging Markets

Source: PricewaterhouseCoopers Family Business Survey, 2007/08 Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 13
Moreover, most of the executives we
surveyed believe that their companies
Figure 7:
Nearly 90% of those companies that have a business plan have reviewed them within the
“I would like to leave
are in a strong position to capitalise on last 12 months behind a firm that is
any new opportunities. Seventy-five in good health”
percent of them have business plans
– although the percentage varies from French respondent
72% in small companies (those with In the last 6 months 16% 61%
250 or fewer employees) to 85% in
large ones, and from 70% in North In the last year 28%
American companies to 81% in those
based in the emerging economies. 1-2 years ago 5%

Nearly 90% of the firms that have


business plans have also updated More than 2 years ago 5%
them within the past 12 months (see
Figure 7). However, a full 25% of the Other 1%
companies in our sample have no
business plan – a weakness that could Don't know/can't
1%
ultimately constrain their ambitions, remember
since a robust commercial strategy
is essential for any organisation that
wants to secure additional funding Source: PricewaterhouseCoopers Family Business Survey, 2007/08

(through venture capital or debt


financing), key personnel or new
partners.

November 2007 Making a difference


14 PricewaterhouseCoopers
The overwhelming majority of Figure 8:
executives are likewise convinced The vast majority of responding companies are confident that they can compete
that their companies can compete effectively with the market leaders in their sector
effectively with the market leaders
in their sector (see Figure 8). They
are particularly confident about the
design and quality of their products Very competitive 54%
and their ability to retain customers
– attributes in which one-fifth of
respondents believe they lead the Somewhat competitive 40%
field (see Figure 9). And though
some respondents admire some
Not very competitive 3%
of these same features in their
main rivals, 16% think that their
competitors have no distinguishing Not competitive at all 1%
qualities at all (see Figure 10).

Refused/Don't know 2%

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 15
Figure 9: Figure 10:
The key strengths in which responding companies believe they surpass their competitors The key strengths responding companies most admire in their competitors are a strong
are product design and customer loyalty brand, product quality, size and competitive pricing

Strong brand/market awareness 11%


Product design/quality/range 20% /acceptance
Consistent/can win business Product design/quality/range 10%
/customer loyalty 19%
Strong brand/market awareness 11% Size 10%
/acceptance
Technical capability 9% Competitive pricing/lower cost 10%

6% Assertive/aggressive marketing
Flexibility /presentation 8%
Competitive pricing/lower cost 5% Financial strength/ability to raise capital 8%
/access to funds
Human resources 5% Consistent/can win business 5%
/customer loyalty
Assertive/aggressive marketing 4%
/presentation Technical capability 5%
Financial strength/ability to raise 4% Procurement 1%
capital/access to funds
3%
Size None 16%
Vision & strategy 3%
Other 9%
Procurement 2%
Refused/Don't know 7%
None 1%

Other 5%

Refused 3% Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

November 2007 Making a difference


16 PricewaterhouseCoopers
That said, there are some notable Table 1:
regional differences in perspective. There are significant regional differences in the key strengths responding companies
Seventy-one percent of respondents believe they possess
in North America and 64% of
those in the emerging markets North America Europe Emerging Markets
believe that their companies are
“very competitive”, for example, Customer relations Product design Product design
compared with just 48% of those in (19%) (22%) (20%)
Europe. North American executives Product design Customer loyalty Strong brand
also think that they are better at (14%) (13%) (15%)
winning business and keeping
their customers than their peers Flexibility Technical capability Customer loyalty
in other parts of the world do. (12%) (11%) (10%)
Conversely, executives in Europe
and the emerging markets are more
confident of their ability to design Source: PricewaterhouseCoopers Family Business Survey, 2007/08

and manufacture good products


(see Table 1).

Making a difference November 2007


PricewaterhouseCoopers 17
Despite this mood of optimism, there
are few signs of complacency. Asked
Figure 11:
Responding companies believe the main external challenges they will face in the next
“I want to be known as
what external challenges they thought 12 months are market conditions, competition and changes in government policy the person who turned
would most affect their companies over a small family business
the coming year, 44% of respondents
cited market conditions – evidence,
Market conditions 44%
into a big institutional
perhaps, that they fear an economic Product competition 39% company”
slowdown, as interest rates in a number Government policy regulation/
legislation/public spending 33% Mexican respondent
of developed economies continue to
Currency/exchange rates 14%
climb, leaving consumers with less
disposable income. Exports/problems in foreign markets 13%

Interest rates 12%


Thirty-nine percent of respondents
International/national fiscal
also pointed to competitive pressures tax regime
9%
and 33% to government policy, Economic stability 7%
including regulation, legislation and
public spending (see Figure 11). Of Infrastructure 5%
course, government policy has a huge Other 11%
bearing on the commercial climate in
Nothing 4%
which companies operate, but such
caution is especially understandable Refused/Don't know 4%
at a time when the political leadership
of a number of countries, including
France, Turkey, Ukraine, the UK and Source: PricewaterhouseCoopers Family Business Survey, 2007/08
US, is changing or due to change quite
shortly.

November 2007 Making a difference


18 PricewaterhouseCoopers
Many of the family businesses in Figure 12:
our sample are equally concerned Responding companies believe the main internal challenges they will face in the next
by several internal challenges, by 12 months are labour shortages, corporate restructuring and cash flow management
far the most important being labour
shortages. Forty-two percent of Recruitment of skilled staff/
42%
labour shortages
respondents believe that difficulties Company re-organisation/ 28%
recruiting skilled staff will be one company-specific issues
of the biggest obstacles they face Cash flow/controlling costs 26%
over the next 12 months (see Figure Raw materials/prices/supply/quality 23%
12). Executives in the consumer Profitability/margins 20%
goods, retail, wholesale, civil
Finance/availability of funds 12%
engineering and automotive sectors
are particularly anxious about being Capacity/meeting orders 12%
able to hire the people they need, Succession planning 10%
at senior management level
whereas those in the manufacturing
Technology 9%
sector are more concerned about
raw materials, production costs and Strategy 6%
supply chain issues. Tax planning/optimisation
of tax structure 6%
Family politics 2%
Other 12%
Nothing in particular 5%
Refused/Don't know 2%

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

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PricewaterhouseCoopers 19
Figure 13: Figure 14:
The top external challenges companies identified, by region The top internal challenges companies identified, by region

59% Recruitment 57%


Market conditions of skilled labour/staff
43% shortages 37%
(Total = 44%)
42% (Total = 42%) 49%

41% Controlling cash flows 21%


Competition or costs
39% 28%
(Total = 39%) (Total = 26%)
38% 21%

Changes in
government policy, 26% Raw materials prices/ 11%
public spending 33% supply/quality issues 26%
or interest rates (Total = 23%)
37% 23%
(Total = 33%)

Reorganisation 18%
North America Europe Emerging Markets
or company-
specific issues 29%
Source: PricewaterhouseCoopers Family Business Survey, 2007/08 (Total = 28%) 30%

North America Europe Emerging Markets

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

November 2007 Making a difference


20 PricewaterhouseCoopers
However, the weight respondents This almost certainly explains why Figure 15:
place on some of these problems also human resources heads the list of The top investment priorities of responding companies over the next 12 months are
varies from one region to another. areas in which family companies human resources, sales, marketing and IT
North American and European plan to invest over the coming year.
executives are more concerned Although respondents intend to invest
Human Resources/training 73%
about market conditions than any in a wide range of activities, including
other external risk, for example, sales, marketing and the development Sales activities 69%
while those running companies in of their electronic infrastructure, a Marketing 64%
the emerging economies see the hefty 73% say that their first priority is IT Infrastructure 62%
prospect of changes in government to hire and train good new employees
Management/Governance structures 48%
policy as a bigger threat. Similarly, – and the percentage is even higher,
executives based in North America at 78%, in companies with an annual Supply chain/CRM 44%
and the emerging economies are turnover of more than €50m (see Web-enablement 42%
more worried about the shortage of Figure 15). Research & development 42%
labour than their European peers, Manufacturing 42%
although all agree that it is the single
Procurement 39%
most important internal challenge on
the immediate horizon (see Figures 13 Developing business overseas 39%
and 14). Transport & logistics 35%
Finance 34%
Other 5%

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 21
More than 70% of respondents say that their
top investment priority is human resources

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22 PricewaterhouseCoopers
Ownership, succession
planning and the
remuneration of senior
management
One-quarter of the family firms in our sample are due to change hands within
the next five years

Half of these companies are expected to remain in the family

Yet almost half of all responding companies have no succession plan, and
the percentage is even higher in small firms or those that have been in
business for fewer than 20 years

Conversely, more than two-thirds of companies have plans for dealing with
both business and family issues, should a key manager or shareholder fall
sick or die

A surprisingly high percentage of family business owners have also failed to


gauge their potential tax exposure, and are unaware of the domestic capital
gains tax or inheritance tax liabilities they may have accrued

However, more than four-fifths use some sort of incentive scheme to


remunerate senior management, the most popular option being the annual
bonus
While many entrepreneurs happily
devote their time and energies to
main reason why so many family
businesses expire after just one
“I would like to hand
building a business, they pay less generation is lack of planning. over the company to the
attention to what will happen when next generation in better
they are no longer running the show. A good succession plan outlines how
They find it difficult to address issues the succession will occur and what shape than I got it”
like illness, incapacity, retirement and criteria will be used to judge when Finnish respondent
death, and therefore postpone dealing the successor is ready to take on the
with such problems. task. It eases the founder’s concerns
about transferring the firm to someone
Passing the family business on to the else and provides time in which to
next generation is difficult. Indeed, prepare for a major change in lifestyle.
most family firms fail to make the It encourages the heirs to work in
leap. According to the Cox Family the business, rather than embarking
Enterprise Center at Kennesaw State on alternative careers, because
University, Georgia, only one-third of they can see what roles they will be
family businesses, worldwide, manage able to play. And it endeavours to
the transition from one generation to provide what is best for the business;
the next5. The majority of family firms in other words, it recognises that
are either sold or wound up after the managerial ability is more important
founder’s death. This is sometimes than birthright, and that appointing an
because the business itself is not outside candidate may be wiser than
viable, the founder does not want entrusting the company to a relative
to let go of the reins or the offspring who has no aptitude for the work.
are reluctant to join the firm. But the

Making a difference November 2007


PricewaterhouseCoopers 25
Twenty-five percent of the companies
in our sample are expected to change
Figure 16:
Twenty-five percent of the companies in our sample are expected to change hands within
“We are the third
hands within the next five years (see the next five years generation, so we want
Figure 16). This is probably a reflection to be as good as the
of the fact that many family firms were
created in the two decades following first and second”
the Second World War. In a recent Yes - in 1 to 2 years 12% Swiss respondent
analysis of more than 20m business
owners trading in the US in 2002, for Yes - in 3 to 5 years 13%
example, 31% were 55 or older, and
11% were at least 65 years of age6. Yes - in more 5%
So the shift to second-generation than 5 years
ownership is growing steadily.
No 66%

Don't know 4%

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

November 2007 Making a difference


26 PricewaterhouseCoopers
Fifty-one percent of those
respondents who foresee changes
Figure 17:
Half the respondents who anticipate that their companies will change hands over the next
“It’s very important to
in the ownership of their business five years expect the business to remain in the family leave an organisation with
anticipate that the business will the right management
remain in the family (see Figure 17).
And the older the company, the
Pass to the next generation
of the family
84% and structures in place”
48%
more likely this is. Sixty-two percent (Total = 51%) 38% Canadian respondent
of proprietors running firms that Sale to private equity investor 22%
14%
have been trading for more than 50 (Total = 20%) 6%
years plan to hand the reins to their Trade sale to another 15%
offspring, compared with just 35% company 22%
(Total = 15%) 20%
of those running firms that have 9%
Sale to management team
been trading for less than 20 years. (Total = 14%)
19%
7%
Flotation/IPO 4%
North American respondents are (Total = 11%) 9%
19%
particularly keen to keep their families
in the picture. Eighty-four percent Merger or acquisition
2%
(Total = 2%)
aim to pass their companies on to 6%
their descendants, whereas only Management changes
1%
48% of those based in Europe and (Total = 2%) 6%
38% of those based in the emerging Other 7%
2%
economies intend to do so. (Total = 5%) 7%
Refused/ Don't know
(Total = 4%) 5%
1% North America Europe Emerging Markets

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 27
Yet nearly half the companies we
surveyed have no succession plan
Figure 18:
Nearly half of all responding companies do not have a succession plan
“My aim is to establish
in place, and the percentage is even a proper succession for
higher in small firms or those that are this business.
relatively young (see Figure 18). Fifty-
six percent of all companies with a Yes, for all senior executive roles 16%
That does not mean
turnover of less than €50m a year family-owned”
and 60% of those that were founded
Swiss respondent
within the last 20 years have not made Yes, for the most senior executive role 16%
any preparations for transferring key
management positions to another Yes, for a small number of
generation. This is a grave oversight, senior executive roles 16%
given that creating a suitable new
holding structure typically takes
No 49%
between three and five years and
that uncertainty about the future can
seriously impair a company’s earnings Don't know 3%
or, worse still, jeopardise its entire
existence.
Source: PricewaterhouseCoopers Family Business Survey, 2007/08

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28 PricewaterhouseCoopers
Moreover, even in many of those Figure 19:
companies that have drawn up Seventy percent of respondents expect that family members will assume at least one of
a succession plan, some of the the key senior roles within the business
most important details have not
been worked out. Seventy percent Number of family members
of respondents expect that family in the business
members will assume one or more
of the most senior management 10+ 1%
positions in the business, although
17% – predominantly those running
large companies – intend to bypass 6-10 2%
their families altogether (see Figure
19). But only 48% have actually
1-5 67%
chosen a successor.

None 17%

Refused/Don't know 13%

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 29
Nevertheless, the majority of Figure 20:
respondents with succession plans in More than two-thirds of respondents with succession plans in place think it is unlikely that
place are confident that their families these will create minorities or disenfranchised factions within the family in the future
will welcome the arrangements they
have made. Only 17% think it is quite,
or very, likely that the plans they have Very unlikely 48%
made may create dissent within the
family, although another 7% say that Quite unlikely 21%
they do not know what will transpire
(see Figure 20).
Neither likely nor unlikely 7%

Quite likely 10%

Very likely 7%

Don't know 7%

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

November 2007 Making a difference


30 PricewaterhouseCoopers
This is possibly because more than
two-thirds of all respondents have
Figure 21:
Most proprietors have sufficient resources to divide their assets fairly between family
“I want to ensure that
sufficient resources to treat their members who are involved in the business and those who are not the family business is
heirs fairly, whether or not they are divided fairly between the
involved in the business (see Figure Do not have
21). North American entrepreneurs sufficient resources
family members and that
are particularly well placed; more 15% everyone is content…
than four-fifths of those surveyed
claim that they are wealthy enough
before I retire”
to redress any inequalities in the South African respondent
division of the shares by giving the Have sufficient
Don't know/have not
resources 69% 16%
remaining members of their families considered equitable
other assets. allocation issues

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 31
Figure 22: Ironically, while many of the family of incapacitated or deceased
Most responding companies have plans for dealing with business and family issues, businesses in our survey have not shareholders. And only 45% have
should a key manager or shareholder become incapacitated or die developed a succession plan or agreed the basis on which the
appointed someone to take over the company should be valued, should
reins when the current head of the something happen that requires the
company retires, they may be better sale or transfer of any shares.
33% Don't have prepared for other – less predictable
plans – contingencies. More than two-thirds North American companies are more
of all respondents say that they have ready for the unexpected than their
made provision for dealing with both peers in the rest of the world. The vast
business and family issues, should a majority have already put contingency
key manager or shareholder become measures in place. Three-quarters
incapacitated or die (see Figure 22). have likewise established procedures
Have plans 67% for purchasing the shares of any
However, the quality of some of these shareholders who fall sick or die, and
plans is open to question. Only 43% nearly two-thirds have agreed the
of the companies we surveyed have basis on which the shares should be
appointed a caretaker management valued, whereas fewer than half of
Source: PricewaterhouseCoopers Family Business Survey, 2007/08
team to run the business, should those companies based in Europe
the incumbent chief executive die or the emerging markets have taken
before any of his or her children similar precautions.
are old enough to assume control.
Only 48% have put procedures in
place for purchasing the shares

November 2007 Making a difference


32 PricewaterhouseCoopers
A surprisingly high percentage of
family business owners (particularly
Figure 23:
More than half of responding companies have not been valued domestically, and more
“I would like to give my
those in the retail and automotive than four-fifths have not been valued internationally, within the last 12 months children as good an
sectors) have also failed to gauge opportunity as I inherited”
their potential tax exposure, even
though tax planning is essential UK respondent
to realise any opportunities for
mitigating the financial burden. 44%
The first step is to get the business Been valued
professionally valued, in order to 16%
assess the likely tax liability if the
business were to be transferred to
the next generation or sold to the 56%
management team or an external Not been valued
party. But more than half of all 84%
respondents have not had their
companies valued domestically,
and more than four-fifths of those Domestically Internationally
with a cross-border presence have
not had their companies valued
internationally, within the last 12
Source: PricewaterhouseCoopers Family Business Survey, 2007/08
months (see Figure 23).

Making a difference November 2007


PricewaterhouseCoopers 33
As a result, 35% of the family business Conversely, the vast majority of Figure 24:
owners in our survey have no idea of proprietors are fully aware of the More than one-third of family business owners are unaware of their potential domestic
the domestic capital gains tax for which importance of remunerating senior exposure, and more than two-thirds are unaware of their potential international
exposure, to capital gains tax
they or their companies might be liable, management properly – further
while 71% do not know about the evidence, if any were needed, that they
international implications (see Figure are generally better at focusing on the
24). Similar numbers are unaware of the immediate demands of the business
domestic and international inheritance than preparing for a future in which 65%
taxes to which their heirs might be they have no part. More than four- Aware
exposed (see Figures 25 and 26). fifths of the companies in our sample 29%
employ between one and 10 people as
Lack of knowledge about the level of senior executives, although large firms
inheritance tax that could be levied sometimes have bigger management 35%
on their personal estates is especially teams. Seventeen percent of those with Unaware
marked amongst those who have been revenues of over €50m a year employ 71%
in business for less than 20 years; between 11 and 20 people in positions of
44% do not know the extent of their senior management.
domestic liabilities, while 67% do not Domestically Internationally
know the extent of their international Expanding the management roster to
liabilities. It is also more pronounced in include external directors often pays
emerging countries than it is in North dividends. Numerous studies suggest Source: PricewaterhouseCoopers Family Business Survey, 2007/08

America, where 66% of respondents that there is a positive correlation


claim that they are aware of the domestic between good corporate governance
inheritance tax they will have to pay, even and financial performance – and that the
though only 38% have arranged for their composition of the board is one of the
companies to be professionally valued most important factors in this equation7.
within the past 12 months.

November 2007 Making a difference


34 PricewaterhouseCoopers
Figure 25: Figure 26:
One-third of family business owners are unaware of the domestic inheritance tax for More than two-thirds of family business owners are unaware of the international
which their heirs might be liable inheritance tax for which their heirs might be liable

71% 38%
Aware 68% Aware 29%
(Total = 67%) (Total = 28%)
60% 21%

29% 62%
Unaware Unaware
32% 71%
(Total = 33%) (Total = 72%)
40% 79%

North America Europe Emerging Markets North America Europe Emerging Markets

Source: PricewaterhouseCoopers Family Business Survey, 2007/08 Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 35
Almost four-fifths of all respondents also Figure 27:
use some sort of incentive scheme to The most popular means of rewarding senior management is the annual bonus
reward their most senior personnel, the
most popular option being the annual
bonus (see Figure 27). And most of these
incentive schemes have been in place Annual bonus 67%
for longer than two years (see Figure
28). Again, large companies – and those Deferred bonus 13%
based in North America – are more likely
than smaller companies to have bonus Options 4%
schemes, and to have operated them
Other share plans 7%
for a longer period of time. However,
respondents from companies of all sizes
None of these 22%
believe that they have a positive effect
(see Figure 29). Other 7%

Refused/Don't know 1%

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

November 2007 Making a difference


36 PricewaterhouseCoopers
Figure 28: Figure 29:
Most of the incentive schemes responding companies use have been in place for more Most respondents believe that incentive plans have a positive effect on senior
than two years management

10%
Positive effect 82%
Annual bonus 9%
79%
2%
No effect 12%

17%
Deferred bonus
8% Negative effect 2%
72%
3%
Don't know 5%
19%
Options 14%
62%
Source: PricewaterhouseCoopers Family Business Survey, 2007/08
5%

14%
10% Less than 12 months
Other share plans
60% 1-2 years
16% Over 2 years
Don't know
5%
Other 0%
84%
11%
Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 37
Twenty-five percent of responding companies
are expected to change hands within the next
five years

November 2007 Making a difference


38 PricewaterhouseCoopers
Conflict resolution

More than one-third of the family firms in our survey have quarrelled about
future strategy, while more than one-quarter have quarrelled about the
competence of family members actively involved in the business or about
who should be allowed to work for the company

Two-thirds of family businesses have no defined criteria for choosing which


family members who want to take an active role in the organisation should
be allowed to do so

More than half also employ relatives without requiring them to compete for
their jobs on the open market

More than two-thirds of the companies in our sample do not have any
procedures for dealing with disputes between family members
Family firms combine all the Fortunately, most of the family Figure 30:
tensions of family life with those of businesses in our survey experience Although most family businesses experience relatively few conflicts, a core group of
business life, so it is hardly surprising comparatively few conflicts but, when issues are likely to cause tension
that conflicts sometimes erupt. they do, there are several issues
This is especially likely when the that generate heat. At least 20% of Discussions about the future strategy
66 25 9
management of the business is about respondents report that decisions of the business
to change hands or where ownership about who can and cannot work Performance of family members actively
73 19 8
involved in the business
has already passed to the second or in the family business, failure to
third generation. Most entrepreneurs consult with the wider family on key Decisions about who can and cannot work
74 19 7
in the business
are strong characters and enjoy a issues and the role of “in-laws” have Failure of family members actively involved in
greater degree of control than their sometimes caused strains. But it is the business to consult the wider family 77 16 7
descendants by virtue of the fact discussions about the future strategy on key issues
Decisions about the reinvestment of profits
that they set up the business in the of the business and the competence in the business versus the payment of dividends 78 15 7
first place. Moreover, as a company of family members actively involved
The setting of remuneration levels for family
matures, it is increasingly probable in the business that are most likely to members actively involved in the business 79 14 7
that some of the shareholders will not trigger a dispute. Thirty-four percent
The role “in-laws” should or should not play 79 14 7
be involved in the day-to-day running of respondents say that they have in the business
of the business – and that they may quarrelled about the future direction of Decisions about who can and cannot hold
81 13 6
periodically disagree with the way in the business, and 27% that they have shares in the business
which their relatives are managing it. quarrelled about the performance of Discussions about the basis on which shares
83 12 5
family members employed within the in the business should be valued
firm (see Figure 30). Rejection of chosen successor by other
85 10 5
family members

No tension Some tension A lot of tension Percentage of respondents

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 41
In fact, two-thirds of family businesses
have no defined criteria for choosing
But the prevalence of such behaviour
in the capitalist heartlands of the New
“I believe that in any
which family members who want to World seems rather more noteworthy. family business today
take an active role in the organisation Sixty-four percent of North American you need a balance
should be allowed to do so. However, companies award family members a
companies based in the emerging role in the business without measuring and blood from outside
markets are more rigorous than those them against external candidates, the family. You need
based in Europe and North America whereas only 46% of those based in
in this regard. Only 32% of European the emerging economies do the same.
an outside outlook on
firms and 28% of North American how you are running the
firms have established guidelines for Given the absence of formal hiring business”
deciding who can work in the business, procedures in many family firms, then,
compared with 44% of those located in it is probably inevitable that conflicts US respondent
other parts of the world. about which relatives can work for the
business and how well they perform
More than half the family businesses should sometimes emerge. It is also
in our sample also employ relatives vital for the health of the business and
without requiring them to compete family alike that such disagreements be
for their jobs on the open market. effectively managed. However, barely a
It comes as no surprise, perhaps, quarter of the companies we surveyed
that preferential treatment of family have introduced any procedures for
members is quite common in small dealing with disputes between family
firms, particularly small firms working in members (see Figure 31).
the retail and wholesale sector.

November 2007 Making a difference


42 PricewaterhouseCoopers
Figure 31:
More than two-thirds of responding companies have not adopted any procedures for
“I’d like to ensure peace
resolving conflicts between family members and continuity in the
family business”
South African respondent

Don't have 70%


procedures
3% N/A

27% Have procedures

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 43
Thirty-one percent of these companies Figure 32:
rely on family councils, which provide Family councils, shareholder agreements, constitutions and mediation are the most
a useful forum for discussing issues common measures family businesses use for resolving conflicts
outside the boardroom and giving
“passive” owners who are not
engaged in managing the business Family council 31%
an opportunity to air their opinions Shareholder agreement 30%
(see Figure 32). Another 30% have
drawn up shareholder agreements, Family constitution 28%
and 28% have created family Third-party mediator 27%
constitutions – a formal set of rules Measuring and appraising
for the alignment of corporate and performance 14%
family governance. Formal rules for Incapacity and death arrangements 14%
the management of a family business
have several advantages; they clarify Entry and exit provision 11%
the assumptions and expectations External council 2%
of the different family members,
depersonalise sensitive issues and Meetings 2%
avert many disagreements before they Other 1%
emerge.
Refused/Don’t know 4%

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

November 2007 Making a difference


44 PricewaterhouseCoopers
More than a quarter of the companies However, third-party mediation is Table 2:
with conflict resolution procedures in a predominantly Western practice. There are regional variations in the conflict resolution procedures family businesses most
place also use third-party mediation, North American and European prefer to use
where appropriate. This can take respondents regard it as one of their North America Europe Emerging Markets
many forms. It might, for example, main options for resolving disputes,
entail calling in an independent whereas respondents in the emerging Third-party mediation Shareholder agreements Family constitutions
consultant to provide a completely economies typically prefer family (44%) (32%) (42%)
objective perspective and develop constitutions or councils (see Table 2).
the best solution for the business. Shareholder agreements Family councils Family councils
Alternatively, it might involve (36%) (31%) (28%)
delegating a decision to the non- Family councils Third-party mediation Shareholder agreements
family members of the management (36%) (29%) (23%)
team or even nominating a specific
individual to act as a “tie breaker”
– although it is clearly essential that Source: PricewaterhouseCoopers Family Business Survey, 2007/08

any non-family executives should be


genuinely free to express their views,
if such unofficial arrangements are to
work.

Making a difference November 2007


PricewaterhouseCoopers 45
More than one-third of family businesses
experience tension when considering
their future business strategy

November 2007 Making a difference


46 PricewaterhouseCoopers
The economic and
regulatory changes
family businesses
would most like to see
The vast majority of family business owners would like to have a simpler tax
regime and/or pay lower taxes

They would also welcome help in creating closer links with academia for
the purposes of product development, a stronger corporate compliance
environment and the provision of more state support for staff training

Their motives for running a family business – and the achievements for which
they wish to be remembered – vary hugely. Some respondents want to build
companies that will last a long time or bequeath strong businesses to their
offspring. Others love their work so much that they cannot imagine doing
anything else

A number of entrepreneurs are also firm believers in the importance of


corporate social responsibility. One in 12 stressed the importance of
trading in an honest, ethical fashion or improving the existing social and
environmental order in some way
We have focused on the key issues Half the companies in our sample Figure 33:
family firms face, and how they would also like assistance in creating The simplification of the tax regime and/or a reduction in the tax burden tops the list of
resolve internal conflicts, so far. But closer links with academia for the changes family businesses would most like to see
what about the external reforms purposes of product development,
respondents would most like to see? a stronger corporate compliance
Head of their list of priorities by a large environment and the provision of Simplification of the business tax rules and/or 23 20 66 65
a reduction in the tax burden
margin is a better tax regime. Eighty- more state support for training and 73
five percent say that the simplification staff development. They are less Better links between industry and universities
16 10 23 27
of the rules governing corporate taxes concerned about getting access to for product development
74
and/or the lessening of the tax burden additional funding, although almost The provision of increased financial assistance
is very, or quite, important to them 40% think that an injection of venture and support from the state for training and staff 14 14 77
24 24
development
(see Figure 33). capital, greater access to the capital
78
markets or government subsidies The strengthening of the corporate compliance 11 12 24 24
for developing new markets and environment
79
expanding their existing markets
would be helpful. Many family Greater access to the capital markets 21 15 21
79 16
business owners, it seems are
confident of being able to raise any The provision of increased financial 81
“Taxation should be money they need to grow on their
assistance from the state and support
to develop new or expanded markets
28 15 16
83
20

own.
changed to make it The availability of additional venture capital
24 14 22 14
easier for family firms” funds to back expansion 85
Percentage of respondents
Finnish respondent Very unimportant Quite unimportant Quite important Very important

Source: PricewaterhouseCoopers Family Business Survey, 2007/08

Making a difference November 2007


PricewaterhouseCoopers 49
Almost two-thirds of respondents consider
that simplification of the tax regime/reduction
of the tax burden should be a top priority for
governments over the next three to five years

November 2007 Making a difference


50 PricewaterhouseCoopers
Conclusion
It is clear from the feedback we “to create a well established, well the level of crime [in South Africa]
received that the family firms in run business that my children can through projects initiated by the
our survey do not intend to rest on carry on”. Indeed, family business business”. Another actively supports
their laurels. Asked what one lasting owners from Australia to Brazil and all his local cancer clinic, while others are
achievement they would like to stand points between aspire to pass sound, concerned with Green issues.
as their legacy, respondents provided successful firms on to their heirs.
a wide variety of answers. But there Of course, more commercial
were several recurring motifs. The importance of behaving in an ambitions were also overtly in
upright fashion also surfaced as a evidence, including the desire to build
A number of respondents said that regular theme. An Irish respondent prestigious brands, modernise and
they want to make their companies talked of establishing a “culture of introduce cutting-edge technologies.
bigger. Some of them talked in terms honesty”, for example, and a French But only 20 people talked in terms
of “sustainable growth”. Others respondent of leaving a company of financial enrichment – and, even
were more ambitious; they spoke of that possesses “integrity”, while an then, their aspirations were often
“international expansion”, of creating American respondent expressed the quite modest: enough money to “live
“a market leader” and even of desire to be remembered as “someone comfortably” or “allow the [members
“building a billion-dollar business”. who helped to build an ethical of the] family to lead the lifestyle
company and who’s grateful to our they want”. Those whose aim is to
Similarly, some respondents hope to Creator for the opportunities I’ve been “make a lot of money” or build a
establish companies that will “stand provided with”. “rich estate” are in the tiny minority.
the test of time”, as one individual put What drives most family business
it, and bequeath a strong business Improvements in the existing social owners, it appears, is the desire to
to their offspring. “I want to leave a and environmental order were “leave something worthwhile for the
healthy, profitable company for the likewise high on the agenda of next generation” or “give something
next generation,” stated a Belgian some respondents – and a number back to the community” and sheer
proprietor, sentiments echoed by have quite specific goals in mind. “passion” for their work.
a Canadian entrepreneur who aims One entrepreneur wants “to reduce

Making a difference November 2007


PricewaterhouseCoopers 53
Appendix
Our survey covers small and mid-sized family companies in 28 countries: Australia, Belgium, Brazil, Canada, Cyprus, Denmark,
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Mexico, the Netherlands, Norway, Oman, Portugal, Qatar, Saudi Arabia,
Spain, South Africa, Sweden, Switzerland, Turkey, the United Arab Emirates, United Kingdom and United States.

A total of 1,454 interviews were conducted between 5 February and 15 June 2007. All respondents were interviewed via a 20-minute
telephone interview, with the exception of respondents in Spain and Luxembourg, who were interviewed
face-to-face. The research was coordinated by the PricewaterhouseCoopers International Survey Unit, Belfast, our global
centre of excellence in market research, which designed the questionnaire in conjunction with family business experts from
PricewaterhouseCoopers. A separate survey was completed in India, the results of which are not included here.

Making a difference November 2007


PricewaterhouseCoopers 55
Contacts
For further information, please contact:

Global Cyprus Norway The survey core team:


Allan J. Watson George Loizou Thomas Holst
allan.j.watson@uk.pwc.com george.loizou@cy.pwc.com thomas.holst@no.pwc.com Philippe Bailly
Family Business Survey Global Leader
Europe, Middle East & Africa Denmark Poland philippe.bailly@fr.pwc.com
Norbert Winkeljohann Kent Hedegaard Antoni Tyminski
kent.hedegaard@dk.pwc.com antoni.tyminski@pl.pwc.com Jacques Lesieur
norbert.winkeljohann@de.pwc.com
Family Business Survey Project Leader
Finland Portugal jacques.lesieur@fr.pwc.com
North America
Ola Saarinen Jaime Esteves
Eric S. Andrew Rémy Barbeault
ola.saarinen@fi.pwc.com jaime.esteves@pt.pwc.com
eric.s.andrew@ca.pwc.com Family Business Survey Coordination
France South Africa remy.barbeault@fr.pwc.com
Richard Calzaretta
Philippe Bailly Andries Brink
richard. calzaretta@us.pwc.com Axel Dorenkamp
philippe.bailly@fr.pwc.com andries.brink@za.pwc.com
Family Business Survey Coordination
Asia Pacific Germany Spain axel.dorenkamp@de.pwc.com
Robert Gazzi Norbert Winkeljohann Jose Felix Galvez
robert.gazzi@hk.pwc.com norbert.winkeljohann@de.pwc.com jose.felix.galvez@es.landwellglobal.com
Central and South America Greece Sweden
Carlos Biedermann Marios Georgiou Jan-Olof Lindberg
carlos.biedermann@br.pwc.com marios.georgiou@gr.pwc.com jan-olof.lindberg@se.pwc.com
Abelardo Macotela Ireland Switzerland
abelardo.macotela@mx.pwc.com Paul Hennessy Marcel Widrig
paul.hennessy@ie.pwc.com marcel.widrig@ch.pwc.com
Australia Italy Turkey
Gregory Will Marco Tanzi Marlotti Adnan Nas
gregory.will@au.pwc.com marco.tanzi-marlotti@it.pwc.com adnan.nas@tr.pwc.com
Belgium Luxembourg United Kingdom
Wilfried D’haese Luc Henzig Frank Blin
wilfried.dhaese@be.pwc.com luc.henzig@lu.pwc.com frank.blin@uk.pwc.com
Brazil Mexico United Arab Emirates
Carlos Biedermann Juan Carlos Simón Amin Nasser
carlos.biederman@br.pwc.com juan.carlos.simon@mx.pwc.com amin.nasser@ae.pwc.com
Canada The Netherlands United States
Eric S. Andrew Steef Klop Alfred Peguero
eric.andrew@ca.pwc.com steef.klop@nl.pwc.com alfred.peguero@us.pwc.com

Making a difference November 2007


PricewaterhouseCoopers 57
References

1 Chris Flood, “Family companies top value league”, Ft.com (January 30, 2007).

2 International Family Enterprise Research Academy, “Family Businesses Dominate” (2003).

3 PricewaterhouseCoopers has produced three previous family business surveys. The first covered family firms in Ireland
and was published in 2002. The second covered family firms in Ireland and was published in 2004. The third covered
family firms in 12 of the 27 member states of the European Union (Belgium, Cyprus, Denmark, Finland, France, Germany,
Greece, Ireland, Luxembourg, Malta, the Netherlands and Sweden) and was published in 2006.

4 International Monetary Fund, “World Economic Outlook” (April 2007).

5 “Passing on the Crown – Family Businesses and How a Family Firm can Avoid a Succession Crisis”, The Economist
(November 6, 2004).

6 US Census Bureau, “Characteristics of Business Owners: 2002” (September 2006).

7 Jay W. Eisenhofer and Gregg S. Levin, “Does Corporate Governance Matter to Investment Returns?” Corporate
Accountability Report, Vol. 3, No. 57 (September 23, 2005). The Bureau of National Affairs, Inc.

November 2007 Making a difference


58 PricewaterhouseCoopers
pwc.com

© 2007 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.