If you’re a family business owner, you likely didn’t choose that path because you hungered for business growth. But did you know that growth is the key to your family business thriving past the first generation?
The latest PwC Global NextGen Survey sheds light on this factor, along with how different generations within a family business think that growth should be achieved. Spoiler alert: the generations don’t always see eye-to-eye.
The survey pinpoints a rule of thumb that to serve family interests and maintain generational wealth, a family business should grow 10% every two to three years. PwC found that current business owners and their successors/heirs agree that expanding into new markets or sectors and adopting new technologies are two of the most essential priorities in achieving that growth. That’s great news. But the survey then uncovered some troubling contradictions that can hinder that progress:
- Only 28% of future family business leaders oversee significant internal operations.
- Just 32% feel like they’re used as a significant sounding board.
- And one in four say it’s difficult even to get an understanding of how the business operates.
The most alarming aspect is how these stats line up with the survey findings in 2019. Pre-pandemic, family business owners were much more willing to share control of the business with their heirs. For instance, nearly 50% of family business owners in 2019 shared significant control over internal operations with their successors; that number is now 28%. About 57% of what PwC calls “NextGen” leaders (family business successors) say being able to move into a supporting role in the business is a challenging aspect of succession planning and that the current generation’s hesitance to retire is becoming a problem.
The pandemic scared many small business owners, and rightfully so. But research, including a study from Deutsche Bank, shows that family businesses are resilient. With their more conservative capital base and agility, family businesses are often better able to cope with complex crises than non-family businesses. The key is trusting that and understanding that there’s no better way forward than to involve heirs in succession efforts early and often.
About 61% of the family businesses surveyed by PwC report having a succession plan in place. That leaves quite a few family businesses trying to feel their way forward in the dark. Up to 66% of small business owners don’t even have a will, much less a shareholder’s agreement, contingency procedures or exit provisions in place for their business. In a family business, personal and professional assets can be intertwined in a way that one can fully affect the other (in good ways and bad).
You’ve likely heard the odds: Only 12% of family businesses survive into a third generation, and 3% make it to the fourth. The business growth necessary to keep a family business thriving generation after generation starts now, not “someday.” In other words, a smart succession plan takes years to play out. The incremental steps needed include an eye on business growth through sales and operations but also through asset protection and tax strategies. Without careful planning in each area, business survival is at stake, much less business growth. For example, overlooking a tax-advantaged exit plan can lead to taxes as high as 40% of the sale of the business, even to heirs, or worse: a sudden dissolving of the business you worked so hard to build.
The earlier you plan and involve heirs in those considerations, the more prepared they will be to grow the business further one day. Feel free to contact us with questions.