Family businesses that are owner-operated run the high risk of collapse as they pass to the next generation of sons and daughters, especially if there is no succession plan in place, according to a major study.
The risk is high in the case of Baby Boomers, who are confronted with the challenges of the Millennial Generation, it said.
Baby Boomers (or X Generation) refer to people born between 1946 and 1964, now in their mid or late sixties, whereas Millennials or the Y Generation belong to the 30-35 age group, with their year of birth placed between 1980 and 2001.
The yawning gap
The Study formed a part of a research conducted by PricewaterhouseCoopers (PwC) on ‘Bridging the Gap: Handing over the Family Business to the Next Generation.’
PwC New Zealand Partner and Private Business Leader Robbie Gimblett said that the ‘risk of getting it wrong’ loomed large as Baby Boomers hand over the reins of their companies to their next of kith, usually Millennials.
“Passing control from one generation to the next can make or break a family business,” he said following his research, which held conversations with more than 200 members of local and global family business companies.
Strong support
He warned that unless the next generation of family business was guided appropriately through a smooth transition, the business could land itself in serious trouble.
“The next generation needs strong support if they are to follow the success of many leading New Zealand companies that began or continue as family-owned firms. A family business transition can be likened to a game of tug of war, particularly given the nature of the family business model where some owners rarely retire,” he said.
According to him, the next generation can be ambitious and full of ideas for change and growth, but many expect to remain in a state of limbo and frustration.
Tough process
More than 60% of the respondents to the Survey said that the current generation will find it tough to give up their hold on business.
“We came across businesses where the next generation are in their 60s and their father is still running the show in his 80s. Many New Zealand family firms face big challenges to their business models given the pace of change regarding global forces, technological advances, demographic changes and economic power shifts. The children of the older generation wish their parents would embrace technology and be open to new ideas. With the pace of change accelerating, it may be time to give the next generation more credit and control,” Mr Gimblett said.
Serious apprehension
The Survey found that the older generation invariably overestimated the way they operated their business and underestimated the ability of their children to follow.
It outlined the risks to family businesses and said that relationships were stacked against a successful transition and revealed that only 12% of family firms make it to the third generation, with the handover for first generation businesses even more fraught.
“The issues are most marked for those taking over from the founding owner. About 20% of the next generation in these circumstances tell us that they are not looking forward to running the family business, compared to less than 10% of respondents as a whole,” Mr Gimblett said.
Almost 59% of the respondents to the Survey said that their greatest challenge was to establish credibility with colleagues, employees and customers.
Credibility is hard to win, with a majority of respondents saying that they have to work harder than others to gain respect and prove that they are more than the boss’s son or daughter. Even with such hard work, promotion to the post of Chief Executive is no longer automatic for the next generation, the Survey revealed.
Unique strengths
“The family way of doing business has unique strengths but also unique challenges, as it is not always easy working with relatives. The next generation wants the family business to focus more on planning for succession and conversations that address roles, responsibilities and timings early to ensure their businesses are successful for generations. Interesting times ahead,” Mr Gimblett said.
