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

Family Business Services

*connectedthinking



Acknowledgements

We would like to thank the amily business owners whoparticipated in our survey.

We would also like to thank Caitriona Allis, Rémy Barbeault,Lucille Chartier, Axel Dorenkamp, Colette Du, Karen Glass,Paul Hennessy, Helen Kay, Jan-Olo Lindberg,

Jacques Lesieur, Bob McCullagh, Roderick Reid and Véronique Rode-Coupeau or their active participationin this survey.

About PricewaterhouseCoopers

PricewaterhouseCoopers (www.pwc.com) provides industry-ocused assurance, tax and advisory services to build publictrust and enhance value or its clients and their stakeholders.More than 146,000 people in 150 countries across ournetwork share their thinking, experience and solutions todevelop resh perspectives and practical advice.

This publication has been prepared as a guide only. In theinterests o brevity and clarity, detailed inormation may beomitted which may be directly relevant to an individual’s oran organisation’s circumstances. Proessional advice shouldbe taken beore acting on any inormation contained in thispublication. Re-publication and dissemination o the contents(other than brie quotations with appropriate attribution) isexpressly prohibited without prior written consent.



Table o contents

Foreword 4

Introduction 6

Corporate challenges and priorities 10

Ownership, succession planning and the remuneration o senior management 24

Conict resolution 40

The economic and regulatory changes amily businesses would most like to see 48Conclusion 52

Appendix 54

Contacts 56

Making a dierence November 2007

PricewaterhouseCoopers



Foreword



Family frms are the most common

orm o business structure; they employ

many millions o people; and they

generate a considerable amount othe world’s wealth. Indeed, they oten

deliver better returns than companies

with a wider shareholder base1. Yet,

until now, very ew attempts have been

made to gauge the opinions o the

leaders o amily businesses worldwide.

Our frst global Family Business

Survey aims to redress this omission.

PricewaterhouseCoopers advises

numerous amily frms, many o

which are expanding beyond their

national roots. Recognising this, we

decided that we needed to learn more

about your opinions, intentions andexpectations. We also thought that you

would be interested in fnding out how

your views compare with those o yourpeers around the globe.

The story o every successul amily

business starts with someone who

has the passion, confdence andcourage to put his money where hismouth is. Entrepreneurs are typicallycreative over-achievers; they can seeopportunities where others might not,and are utterly single-minded aboutpursuing them. They work incrediblyhard, make things happen, are positivewithout being unrealistic and possess

the resourceulness to overcome allsorts o hurdles. They are also sociallyadept, capable o communicatingeectively and good at inspiring others.Many o you will probably recognisethese traits in yourselves.

Yet an entrepreneur’s lie is otena lonely one – and this is true oentrepreneurs everywhere, regardlesso where they live or what kinds ocompanies they run. In the earlyyears, they have to turn their hands

to anything and everything, becausethey cannot call on the support staor systems that executives in bigcorporations can summon to their aid.

In later years, some o the decisionsthey must make – such as whethercertain amily members should beallowed to work in the business andwhich roles dierent relatives shouldplay – may be personally as well ascommercially difcult.

Moreover, most entrepreneurs do nothave time to look at the big picture;they are too busy grappling with theday-to-day demands o their ownbusinesses. And most economiccommentaries are directed at largequoted companies anyway, so gettingthe right inormation can be hard.

Our survey aims to identiy the issuesthat most concern you and your amilyfrm. We plan to produce regular ollow-up surveys as part o our continuingeorts to listen to you and understand

your needs. We hope that you will fndthe results revealing – and that they willhelp you in running your business.

Philippe BaillyPricewaterhouseCoopersFamily Business Survey LeaderFrench Middle Market Services Leader

Allan WatsonPricewaterhouseCoopersGlobal Middle Market Services Leader

Norbert WinkeljohannPricewaterhouseCoopers ContinentalEuropean Middle Market Services Leader


PricewaterhouseCoopers 5



Introduction



What is a amilybusiness?

We have defned amily businesses as thosecompanies in which at least 51% o theshares are held by a amily or related amilies,the amily members comprise the majorityo the senior management team and the

owners have day-to-day responsibility or themanagement o the business.

Family frms play a crucial role in theglobal economy. One measure otheir importance is the proportion oregistered companies that are amily-controlled – a fgure which rangesrom more than 50% in the EuropeanUnion (EU) to between 65% and 90%in Latin America and over 95% in

the US. A second is their economicpower. Family businesses generatebetween 5% and 65% o the grossnational product (GNP) o the EUmember states, about 40-45% o theGNP o North America, between 50%and 70% o the GNP o Latin America,and between 65% and 82% o theGNP o Asia2.

In short, the amily frm is thedominant orm o business structure

worldwide.It has produced corporate giantslike Wal-Mart and Samsung, as wellas many millions o more modestoperations. Yet this structure presentssome unique problems. Running a

amily business is arguably moredifcult than running any other kindo business, precisely becauseit involves amily ties as well ascommercial relationships. We hopethat our latest amily business survey– the ourth conducted since 2002and the frst to cover the global scene

– will help to shed light on theseissues.

Our survey explores the key areas ointerest to amily frms, including themain corporate challenges they ace;ownership, succession planning andthe remuneration o management;conict resolution; and the economicand regulatory changes that arehighest on their list o priorities. (Fordetails o our methodology, please

see the Appendix). It draws on theviews o top management in 1,454small and mid-sized amily businessesoperating in a wide range o sectors in28 countries (see Figures 1 and 2).





Source: PricewaterhouseCoopers Family Business Survey, 2007/08

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

Chief Executive

Owner/Proprietor

Financial Director

Other Director

Other(a)

59%

8%

16%

9%

8%

(a) Other includes:

Shareholder, Finance/Accounts Manager, General Manager, Consultant,

Partner, Company Secretary

Consumer Goods

Retail/Wholesale

Construction and Civil Engineering

Manufacturing

Automotive

Transportation and Distribution

Chemicals

Forestry, Paper and Packaging

Hospitality and Leisure

Financial Services

Agriculture

Property and Real Estate

Business Services

Other

19%

13%

13%

11%

8%

4%

3%

2%

3%

5%

3%

2%

2%

12%

More than 90% o the companiesin our sample have been trading orlonger than a decade. Indeed, 8%have been trading or at least 50 years,so they have already passed rom onegeneration to the next. Seventy-two

percent have ewer than 250 people onthe payroll – and, predictably perhaps,the majority o the companies thatemploy larger numbers are those that

have been in business longest. Buthal the frms we surveyed generaterevenues o over €51m a year, so theyare clearly thriving in the hands o theamilies who manage them.


November 2007 Making a dierence

8 PricewaterhouseCoopers





Corporate challengesand priorities

Three-quarters o the amily rms in our survey have expanded in the past12 months

Many respondents are wary o growing too rapidly, but 70% are optimisticabout the immediate uture and anticipate that demand or their productsor services will increase during the next 12 months

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

However, more than two-ths o respondents – especially those based inNorth America and Europe – are keeping a close eye on market conditions

Diculties in recruiting skilled sta are also a major source o concern.Respondents everywhere agree that labour shortages represent the singlemost important internal challenge on the horizon



The global economy has been fringon all cylinders, with gross domesticproduct increasing by 5.4% worldwidein 2006, the highest rate o growthor 0 years4. Most amily businesseshave prospered on the back o thisstrong perormance. Three-quarterso the frms in our survey report that

demand or their products or serviceshas risen during the past 12 months(see Figure ).

Companies trading in themanuacturing and constructionsectors have ared especially well;41% and 44%, respectively, haveenjoyed signifcant growth. Thosebased in the emerging marketsare also ourishing; 47% o thecompanies operating in developing

economies have seen demand ortheir products and services soar,compared with just 2% o thoseoperating in Europe and 21% o thoseoperating in North America.

Figure 3:Three-quarters o respondents report that demand or their products or services hasgrown in the past 12 months

Significant growth(Total = 33%)

Modest growth

(Total = 42%)

No change comparedto previous 12 months

(Total = 15%)

A modest reductioncompared to previous

12 months

(Total = 8%)

A significant reductioncompared to previous

12 months(Total = 2%)

21%

32%

47%

45%

42%

37%

17%

16%

8%

13%

7%

7%

4%

2%1% North America Europe Emerging Markets






A substantial number o the companiesin our sample are cautious about over-stretching themselves. Only hal theexecutives we surveyed stated that theyhad increased their capital expenditurewithin the last 12 months, while 41%have maintained the same level oinvestment (see Figure 4). Executives

in North America and Europe areparticularly wary o growing too ast.Only 4% and 47%, respectively, haveboosted their capital expenditure,whereas 66% o executives trading inemerging countries have lited capitalspending – a dierence that reectsthe pace at which their economies areexpanding.

Nevertheless, the majority orespondents are optimistic about theimmediate uture. Fity-eight percentbelieve that the markets in whichthey operate will get better over thecoming year, and 70% expect to seean increase in the value o the orderstheir companies secure (see Figures

5 and 6). Executives in the emergingeconomies are especially positive;1% anticipate that their main marketswill grow signifcantly, and 84% thatthe value o the orders they win willrise, during the next 12 months. North

American and European respondentsare rather less upbeat, with theexception o those trading in theconsumer goods sector; even so, 6%and 68%, respectively, think that theirorder books will grow.

Figure 4:Only 50% o responding companies have increased their capital expenditure andoperating prots in the past 12 months

Increased

Remained the same

Decreased

Refused/Don't know1%

50%

57%

41%

24%

8%

17%

3% Capital expenditure Operating profit






Figure 5:Nearly 60% o responding companies believe that the markets in which they dobusiness will get better over the next 12 months

North America Europe Emerging Markets

14%Get a lot better

(Total = 16%)

Get a little better

(Total = 42%)

Stay the same

(Total = 29%)

Refused/Don't know(Total = 2%)

Get a little worse

(Total = 9%)

Get a lot worse

(Total = 2%)

8%14%

31%

42%42%

45%

31%32%

15%

15%8%

7%

3%2%

1%

1%2%

1%

Figure 6:Seventy percent o responding companies expect the value o the orders or contracts theysecure to increase over the next 12 months

Increase

(Total = 70%)

Remain the same

(Total = 24%)

Refused/Don't know

(Total = 2%)

63%

Decrease

(Total = 4%)

68%

84%

33%

25%

15%

5%

4%

1%

3%


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





Figure 7:Nearly 90% o those companies that have a business plan have reviewed them within thelast 12 months

In the last 6 months

In the last year

Don't know/can'tremember

16%

1-2 years ago

1%

More than 2 years ago

Other 1%

61%

28%

5%

5%

Moreover, most o the executives wesurveyed believe that their companiesare in a strong position to capitalise onany new opportunities. Seventy-fvepercent o them have business plans– although the percentage varies rom72% in small companies (those with250 or ewer employees) to 85% in

large ones, and rom 70% in North American companies to 81% in thosebased in the emerging economies.

Nearly 90% o the frms that havebusiness plans have also updatedthem within the past 12 months (seeFigure 7). However, a ull 25% o thecompanies in our sample have nobusiness plan – a weakness that couldultimately constrain their ambitions,since a robust commercial strategy

is essential or any organisation thatwants to secure additional unding(through venture capital or debtfnancing), key personnel or newpartners.

“I would like to leavebehind a frm that isin good health”French respondent






Figure 8:The vast majority o responding companies are condent that they can competeeectively with the market leaders in their sector

Very competitive

Somewhat competitive

Refused/Don't know

Not very competitive

Not competitive at all 1%

54%

40%

2%

3%


The overwhelming majority oexecutives are likewise convincedthat their companies can competeeectively with the market leadersin their sector (see Figure 8). Theyare particularly confdent about thedesign and quality o their productsand their ability to retain customers

– attributes in which one-fth orespondents believe they lead thefeld (see Figure 9). And thoughsome respondents admire someo these same eatures in theirmain rivals, 16% think that theircompetitors have no distinguishingqualities at all (see Figure 10).





Figure 10:The key strengths responding companies most admire in their competitors are a strongbrand, product quality, size and competitive pricing

Strong brand/market awareness /acceptance

Product design/quality/range

Financial strength/ability to raise capital /access to funds

Competitive pricing/lower cost

Assertive/aggressive marketing /presentation

Size

Consistent/can win business /customer loyalty

Technical capability

Procurement

None

Refused/Don't know

Other

11%

10%

8%

10%

10%

8%

5%

5%

16%

1%

9%

7%

Figure 9:The key strengths in which responding companies believe they surpass their competitorsare product design and customer loyalty

Product design/quality/range

Consistent/can win business /customer loyalty

Refused

Financial strength/ability to raisecapital/access to funds

Strong brand/market awareness

/acceptanceTechnical capability

Flexibility

Competitive pricing/lower cost

Human resources

Vision & strategy

Size

Procurement

Other

None

Assertive/aggressive marketing /presentation

3%

5%

1%

2%

3%

3%

4%

4%

5%

5%

6%

9%

11%

19%

20%








Customer relations

(19%)

Product design

(22%)

Product design

(20%)

Product design(14%)

Customer loyalty(1%)

Strong brand(15%)

Flexibility

(12%)

Technical capability

(11%)

Customer loyalty

(10%)

Table 1:There are signicant regional dierences in the key strengths responding companiesbelieve they possess

That said, there are some notableregional dierences in perspective.Seventy-one percent o respondentsin North America and 64% othose in the emerging marketsbelieve that their companies are“very competitive”, or example,compared with just 48% o those in

Europe. North American executivesalso think that they are better atwinning business and keepingtheir customers than their peersin other parts o the world do.Conversely, executives in Europeand the emerging markets are moreconfdent o their ability to designand manuacture good products(see Table 1).






Figure 11:Responding companies believe the main external challenges they will ace in the next12 months are market conditions, competition and changes in government policy

Market conditions

Product competition

Interest rates

Currency/exchange rates

Exports/problems in foreign markets

Government policy regulation/ legislation/public spending

International/national fiscaltax regime

Economic stability

Infrastructure

Other

Refused/Don't know

Nothing

44%

39%

13%

33%

14%

12%

9%

7%

11%

5%

4%

4%

“I want to be known asthe person who turneda small amily businessinto a big institutionalcompany”Mexican respondent

Despite this mood o optimism, thereare ew signs o complacency. Askedwhat external challenges they thoughtwould most aect their companies overthe coming year, 44% o respondentscited market conditions – evidence,perhaps, that they ear an economicslowdown, as interest rates in a number

o developed economies continue toclimb, leaving consumers with lessdisposable income.

Thirty-nine percent o respondentsalso pointed to competitive pressuresand % to government policy,including regulation, legislation andpublic spending (see Figure 11). Ocourse, government policy has a hugebearing on the commercial climate inwhich companies operate, but such

caution is especially understandableat a time when the political leadershipo a number o countries, includingFrance, Turkey, Ukraine, the UK andUS, is changing or due to change quiteshortly.






Figure 12:Responding companies believe the main internal challenges they will ace in the next12 months are labour shortages, corporate restructuring and cash fow management

2%

2%

Recruitment of skilled staff/ labour shortages

Company re-organisation/ company-specific issues

Finance/availability of funds

42%

28%

12%

Raw materials/prices/supply/quality

26%

Profitability/margins

23%

Cash flow/controlling costs

Capacity/meeting orders

Technology

StrategyTax planning/optimisation

of tax structure

Refused/Don't know

Family politics

12%

10%

9%

6%

12%

20%

6%

5%

Succession planningat senior management level

Nothing in particular

Other

Many o the amily businesses inour sample are equally concernedby several internal challenges, byar the most important being labourshortages. Forty-two percent orespondents believe that difcultiesrecruiting skilled sta will be oneo the biggest obstacles they ace

over the next 12 months (see Figure12). Executives in the consumergoods, retail, wholesale, civilengineering and automotive sectorsare particularly anxious about beingable to hire the people they need,whereas those in the manuacturingsector are more concerned aboutraw materials, production costs andsupply chain issues.






Figure 13:The top external challenges companies identied, by region

Market conditions

(Total = 44%)

Competition

(Total = 39%)

Changes ingovernment policy,

public spendingor interest rates

(Total = 33%)

59%


43%

42%

41%

39%

38%

26%

33%

37%

Recruitment

of skilled labour/staff

shortages(Total = 42%)

Controlling cash flows

or costs(Total = 26%)

Raw materials prices/ supply/quality issues

(Total = 23%)

57%

37%

49%

21%

28%

26%

23%

Reorganisationor company-

specific issues

(Total = 28%)

18%

30%


21%

11%

29%

Figure 14:The top internal challenges companies identied, by region







However, the weight respondentsplace on some o these problems alsovaries rom one region to another.North American and Europeanexecutives are more concernedabout market conditions than anyother external risk, or example,while those running companies in

the emerging economies see theprospect o changes in governmentpolicy as a bigger threat. Similarly,executives based in North Americaand the emerging economies aremore worried about the shortage olabour than their European peers,although all agree that it is the singlemost important internal challenge onthe immediate horizon (see Figures 1and 14).

This almost certainly explains whyhuman resources heads the list oareas in which amily companiesplan to invest over the coming year.

Although respondents intend to investin a wide range o activities, includingsales, marketing and the developmento their electronic inrastructure, a

hety 7% say that their frst priority isto hire and train good new employees– and the percentage is even higher,at 78%, in companies with an annualturnover o more than €50m (seeFigure 15).

Figure 15:The top investment priorities o responding companies over the next 12 months arehuman resources, sales, marketing and IT

Human Resources/training

Sales activities

Supply chain/CRM

73%

69%

44%

IT Infrastructure

64%

Management/Governance structures

62%

Marketing

Web-enablement

Research & development

Manufacturing

Procurement

Other

Finance

42%

42%

42%

39%

35%

5%

48%

39%

34%

Transport & logistics

Developing business overseas






More than 70% o respondents say that theirtop investment priority is human resources







Ownership, successionplanning and theremuneration o senior

managementOne-quarter o the amily rms in our sample are due to change hands withinthe next ve years

Hal o these companies are expected to remain in the amily

Yet almost hal o all responding companies have no succession plan, andthe percentage is even higher in small rms or those that have been in

business or ewer than 20 years

Conversely, more than two-thirds o companies have plans or dealing withboth business and amily issues, should a key manager or shareholder allsick or die

A surprisingly high percentage o amily business owners have also ailed togauge their potential tax exposure, and are unaware o the domestic capitalgains tax or inheritance tax liabilities they may have accrued

However, more than our-ths use some sort o incentive scheme to

remunerate senior management, the most popular option being the annualbonus



While many entrepreneurs happilydevote their time and energies tobuilding a business, they pay lessattention to what will happen whenthey are no longer running the show.They fnd it difcult to address issueslike illness, incapacity, retirement anddeath, and thereore postpone dealing

with such problems.

Passing the amily business on to thenext generation is difcult. Indeed,most amily frms ail to make theleap. According to the Cox FamilyEnterprise Center at Kennesaw StateUniversity, Georgia, only one-third oamily businesses, worldwide, managethe transition rom one generation tothe next5. The majority o amily frmsare either sold or wound up ater the

ounder’s death. This is sometimesbecause the business itsel is notviable, the ounder does not wantto let go o the reins or the ospringare reluctant to join the frm. But the

main reason why so many amilybusinesses expire ater just onegeneration is lack o planning.

A good succession plan outlines howthe succession will occur and whatcriteria will be used to judge whenthe successor is ready to take on the

task. It eases the ounder’s concernsabout transerring the frm to someoneelse and provides time in which toprepare or a major change in liestyle.It encourages the heirs to work inthe business, rather than embarkingon alternative careers, becausethey can see what roles they will beable to play. And it endeavours toprovide what is best or the business;in other words, it recognises thatmanagerial ability is more important

than birthright, and that appointing anoutside candidate may be wiser thanentrusting the company to a relativewho has no aptitude or the work.

“I would like to handover the company to thenext generation in bettershape than I got it”Finnish respondent





Figure 16:Twenty-ve percent o the companies in our sample are expected to change hands withinthe next ve years

Yes - in 1 to 2 years

Yes - in 3 to 5 years

Yes - in morethan 5 years

Don't know

No

12%

13%

5%

4%

66%

Twenty-fve percent o the companiesin our sample are expected to changehands within the next fve years (seeFigure 16). This is probably a reectiono the act that many amily frms werecreated in the two decades ollowingthe Second World War. In a recentanalysis o more than 20m business

owners trading in the US in 2002, orexample, 1% were 55 or older, and11% were at least 65 years o age 6.So the shit to second-generationownership is growing steadily.

“We are the thirdgeneration, so we wantto be as good as thefrst and second”Swiss respondent






Figure 17:Hal the respondents who anticipate that their companies will change hands over the nextve years expect the business to remain in the amily

Pass to the next generation

of the family(Total = 51%)

Sale to private equity investor

(Total = 20%)

Trade sale to another

company

(Total = 15%)

Sale to management team

(Total = 14%)

Flotation/IPO(Total = 11%)

Merger or acquisition

(Total = 2%)

Management changes(Total = 2%)

Other(Total = 5%)

Refused/ Don't know

(Total = 4%)

84%48%

38%

22%14%

6%

15%22%

20%

9%19%

7%

4%9%

19%

2%6%

6%

7%7%

1%

2%

1%5%


Fity-one percent o thoserespondents who oresee changesin the ownership o their businessanticipate that the business willremain in the amily (see Figure 17).

And the older the company, themore likely this is. Sixty-two percento proprietors running frms that

have been trading or more than 50years plan to hand the reins to theirospring, compared with just 5%o those running frms that havebeen trading or less than 20 years.

North American respondents areparticularly keen to keep their amiliesin the picture. Eighty-our percentaim to pass their companies on totheir descendants, whereas only48% o those based in Europe and

8% o those based in the emergingeconomies intend to do so.

“It’s very important toleave an organisation withthe right managementand structures in place”Canadian respondent






Figure 18:Nearly hal o all responding companies do not have a succession plan

Yes, for all senior executive roles 16%

Yes, for a small number ofsenior executive roles

16%

Yes, for the most senior executive role 16%

No 49%

3%Don't know

“My aim is to establisha proper succession orthis business.That does not meanamily-owned”Swiss respondent

Yet nearly hal the companies wesurveyed have no succession planin place, and the percentage is evenhigher in small frms or those that arerelatively young (see Figure 18). Fity-six percent o all companies with aturnover o less than €50m a yearand 60% o those that were ounded

within the last 20 years have not madeany preparations or transerring keymanagement positions to anothergeneration. This is a grave oversight,given that creating a suitable newholding structure typically takesbetween three and fve years andthat uncertainty about the uture canseriously impair a company’s earningsor, worse still, jeopardise its entireexistence.






Figure 19:Seventy percent o respondents expect that amily members will assume at least one othe key senior roles within the business

10+ 1%

1-5 67%

6-10 2%

None 17%

Refused/Don't know 13%

Number of family membersin the business

Moreover, even in many o thosecompanies that have drawn upa succession plan, some o themost important details have notbeen worked out. Seventy percento respondents expect that amilymembers will assume one or moreo the most senior management

positions in the business, although17% – predominantly those runninglarge companies – intend to bypasstheir amilies altogether (see Figure19). But only 48% have actuallychosen a successor.






Nevertheless, the majority orespondents with succession plans inplace are confdent that their amilieswill welcome the arrangements theyhave made. Only 17% think it is quite,or very, likely that the plans they havemade may create dissent within theamily, although another 7% say that

they do not know what will transpire(see Figure 20).

Figure 20:More than two-thirds o respondents with succession plans in place think it is unlikely thatthese will create minorities or disenranchised actions within the amily in the uture

Very unlikely 48%

Quite likely

Quite unlikely

Very likely

Don't know

21%

7%

7%

7%Neither likely nor unlikely

10%






69% 16%Don't know/have not

considered equitable

allocation issues

15%

Do not have

sufficient resources

Have sufficient

resources

This is possibly because more thantwo-thirds o all respondents havesufcient resources to treat theirheirs airly, whether or not they areinvolved in the business (see Figure21). North American entrepreneursare particularly well placed; morethan our-fths o those surveyed

claim that they are wealthy enoughto redress any inequalities in thedivision o the shares by giving theremaining members o their amiliesother assets.

Figure 21:Most proprietors have sucient resources to divide their assets airly between amilymembers who are involved in the business and those who are not

“I want to ensure thatthe amily business isdivided airly between theamily members and thateveryone is content…beore I retire”South Arican respondent






Ironically, while many o the amilybusinesses in our survey have notdeveloped a succession plan orappointed someone to take over thereins when the current head o thecompany retires, they may be betterprepared or other – less predictable– contingencies. More than two-thirds

o all respondents say that they havemade provision or dealing with bothbusiness and amily issues, should akey manager or shareholder becomeincapacitated or die (see Figure 22).

However, the quality o some o theseplans is open to question. Only 4%o the companies we surveyed haveappointed a caretaker managementteam to run the business, shouldthe incumbent chie executive diebeore any o his or her childrenare old enough to assume control.Only 48% have put procedures inplace or purchasing the shares

o incapacitated or deceasedshareholders. And only 45% haveagreed the basis on which thecompany should be valued, shouldsomething happen that requires thesale or transer o any shares.

North American companies are more

ready or the unexpected than theirpeers in the rest o the world. The vastmajority have already put contingencymeasures in place. Three-quartershave likewise established proceduresor purchasing the shares o anyshareholders who all sick or die, andnearly two-thirds have agreed thebasis on which the shares should bevalued, whereas ewer than hal othose companies based in Europeor the emerging markets have takensimilar precautions.

67%

33% Don't have

plans

Have plans

Figure 22:Most responding companies have plans or dealing with business and amily issues,should a key manager or shareholder become incapacitated or die






A surprisingly high percentage oamily business owners (particularlythose in the retail and automotivesectors) have also ailed to gaugetheir potential tax exposure, eventhough tax planning is essentialto realise any opportunities ormitigating the fnancial burden.

The frst step is to get the businessproessionally valued, in order toassess the likely tax liability i thebusiness were to be transerred tothe next generation or sold to themanagement team or an externalparty. But more than hal o allrespondents have not had theircompanies valued domestically,and more than our-fths o thosewith a cross-border presence havenot had their companies valuedinternationally, within the last 12months (see Figure 2).

Figure 23:More than hal o responding companies have not been valued domestically, and morethan our-ths have not been valued internationally, within the last 12 months

Been valued

Not been valued

84%

56%

44%

16%

Domestically Internationally

“I would like to give mychildren as good anopportunity as I inherited”UK respondent



PricewaterhouseCoopers



As a result, 5% o the amily businessowners in our survey have no idea othe domestic capital gains tax or whichthey or their companies might be liable,while 71% do not know about theinternational implications (see Figure24). Similar numbers are unaware o thedomestic and international inheritance

taxes to which their heirs might beexposed (see Figures 25 and 26).

Lack o knowledge about the level oinheritance tax that could be leviedon their personal estates is especiallymarked amongst those who have beenin business or less than 20 years;44% do not know the extent o theirdomestic liabilities, while 67% do notknow the extent o their internationalliabilities. It is also more pronounced inemerging countries than it is in North

America, where 66% o respondentsclaim that they are aware o the domesticinheritance tax they will have to pay, eventhough only 8% have arranged or theircompanies to be proessionally valuedwithin the past 12 months.

Conversely, the vast majority oproprietors are ully aware o theimportance o remunerating seniormanagement properly – urtherevidence, i any were needed, that theyare generally better at ocusing on theimmediate demands o the businessthan preparing or a uture in which

they have no part. More than our-fths o the companies in our sampleemploy between one and 10 people assenior executives, although large frmssometimes have bigger managementteams. Seventeen percent o those withrevenues o over €50m a year employbetween 11 and 20 people in positions osenior management.

Expanding the management roster toinclude external directors oten paysdividends. Numerous studies suggestthat there is a positive correlationbetween good corporate governanceand fnancial perormance – and that thecomposition o the board is one o themost important actors in this equation7.

Figure 24:More than one-third o amily business owners are unaware o their potential domesticexposure, and more than two-thirds are unaware o their potential international

exposure, to capital gains tax

Aware

Unaware

71%

35%

65%

29%

Domestically Internationally






Figure 25:One-third o amily business owners are unaware o the domestic inheritance tax orwhich their heirs might be liable


Aware

(Total = 67%)

Unaware

(Total = 33%)

71%

68%

60%

29%

32%

40%

Aware

(Total = 28%)

Unaware

(Total = 72%)

38%

29%

21%

62%

71%

79%


Figure 26:More than two-thirds o amily business owners are unaware o the internationalinheritance tax or which their heirs might be liable

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





Figure 27:The most popular means o rewarding senior management is the annual bonus

Deferred bonus

None of these 22%

1%Refused/Don't know

7%Other

Other share plans 7%

Options 4%

13%

Annual bonus 67%

Almost our-fths o all respondents alsouse some sort o incentive scheme toreward their most senior personnel, themost popular option being the annualbonus (see Figure 27). And most o theseincentive schemes have been in placeor longer than two years (see Figure28). Again, large companies – and those

based in North America – are more likelythan smaller companies to have bonusschemes, and to have operated themor a longer period o time. However,respondents rom companies o all sizesbelieve that they have a positive eect(see Figure 29).






Figure 28:Most o the incentive schemes responding companies use have been in place or morethan two years

Deferred bonus

2%

Other

Other share plans

Options

10%

Annual bonus9%

79%

17%

8%

3%

72%

19%

14%

62%

5%

14%

10%

60%

16%

5%

0%

84%

11%

Less than 12 months

1-2 years

Over 2 years

Don't know

Figure 29:Most respondents believe that incentive plans have a positive eect on seniormanagement

Positive effect

Negative effect

No effect

Don't know

2%

12%

5%

82%







Twenty-fve percent o responding companiesare expected to change hands within the next

fve years







Conict resolution

More than one-third o the amily rms in our survey have quarrelled aboututure strategy, while more than one-quarter have quarrelled about thecompetence o amily members actively involved in the business or aboutwho should be allowed to work or the company

Two-thirds o amily businesses have no dened criteria or choosing whichamily members who want to take an active role in the organisation shouldbe allowed to do so

More than hal also employ relatives without requiring them to compete ortheir jobs on the open market

More than two-thirds o the companies in our sample do not have anyprocedures or dealing with disputes between amily members



Family frms combine all thetensions o amily lie with those obusiness lie, so it is hardly surprisingthat conicts sometimes erupt.This is especially likely when themanagement o the business is aboutto change hands or where ownershiphas already passed to the second or

third generation. Most entrepreneursare strong characters and enjoy agreater degree o control than theirdescendants by virtue o the actthat they set up the business in thefrst place. Moreover, as a companymatures, it is increasingly probablethat some o the shareholders will notbe involved in the day-to-day runningo the business – and that they mayperiodically disagree with the way inwhich their relatives are managing it.

Fortunately, most o the amilybusinesses in our survey experiencecomparatively ew conicts but, whenthey do, there are several issuesthat generate heat. At least 20% orespondents report that decisionsabout who can and cannot workin the amily business, ailure to

consult with the wider amily on keyissues and the role o “in-laws” havesometimes caused strains. But it isdiscussions about the uture strategyo the business and the competenceo amily members actively involvedin the business that are most likely totrigger a dispute. Thirty-our percento respondents say that they havequarrelled about the uture direction othe business, and 27% that they havequarrelled about the perormance oamily members employed within thefrm (see Figure 0).

Figure 30: Although most amily businesses experience relatively ew conficts, a core group oissues are likely to cause tension

10

12

13

14

14

15

16

19

19

25

5

5

6

7

7

7

7

7

8

966

73

74

77

78

79

79

81

83

85

No tension Some tension A lot of tension

Discussions about the future strategyof the business

Performance of family members activelyinvolved in the business

Decisions about who can and cannot workin the business

Failure of family members actively involved inthe business to consult the wider familyon key issues

Decisions about the reinvestment of profitsin the business versus the payment of dividends

The setting of remuneration levels for familymembers actively involved in the business

The role “in-laws” should or should not playin the business

Decisions about who can and cannot holdshares in the business

Discussions about the basis on which sharesin the business should be valued

Rejection of chosen successor by otherfamily members

Percentage of respondents






In act, two-thirds o amily businesseshave no defned criteria or choosingwhich amily members who want totake an active role in the organisationshould be allowed to do so. However,companies based in the emergingmarkets are more rigorous than thosebased in Europe and North America

in this regard. Only 2% o Europeanfrms and 28% o North Americanfrms have established guidelines ordeciding who can work in the business,compared with 44% o those located inother parts o the world.

More than hal the amily businessesin our sample also employ relativeswithout requiring them to competeor their jobs on the open market.It comes as no surprise, perhaps,that preerential treatment o amilymembers is quite common in smallfrms, particularly small frms working inthe retail and wholesale sector.

But the prevalence o such behaviourin the capitalist heartlands o the NewWorld seems rather more noteworthy.Sixty-our percent o North Americancompanies award amily members arole in the business without measuringthem against external candidates,whereas only 46% o those based in

the emerging economies do the same.

Given the absence o ormal hiringprocedures in many amily frms, then,it is probably inevitable that conictsabout which relatives can work or thebusiness and how well they perormshould sometimes emerge. It is alsovital or the health o the business andamily alike that such disagreements beeectively managed. However, barely aquarter o the companies we surveyedhave introduced any procedures ordealing with disputes between amilymembers (see Figure 1).

“I believe that in anyamily business todayyou need a balanceand blood rom outsidethe amily. You needan outside outlook onhow you are running thebusiness”US respondent





N/A

70%

27% Have procedures

Don't have

procedures

3%

Figure 31:More than two-thirds o responding companies have not adopted any procedures orresolving conficts between amily members

“I’d like to ensure peaceand continuity in theamily business”South Arican respondent






Thirty-one percent o these companiesrely on amily councils, which providea useul orum or discussing issuesoutside the boardroom and giving“passive” owners who are notengaged in managing the businessan opportunity to air their opinions(see Figure 2). Another 0% have

drawn up shareholder agreements,and 28% have created amilyconstitutions – a ormal set o rulesor the alignment o corporate andamily governance. Formal rules orthe management o a amily businesshave several advantages; they clariythe assumptions and expectationso the dierent amily members,depersonalise sensitive issues andavert many disagreements beore theyemerge.

Figure 32:Family councils, shareholder agreements, constitutions and mediation are the mostcommon measures amily businesses use or resolving conficts

Family council

Measuring and appraisingperformance

Third-party mediator

Incapacity and death arrangements

Entry and exit provision

External council

Meetings

Refused/Don’t know

Other

31%

30%

14%

28%

14%

2%

4%

27%

11%

1%

2%

Shareholder agreement

Family constitution






More than a quarter o the companieswith conict resolution procedures inplace also use third-party mediation,where appropriate. This can takemany orms. It might, or example,entail calling in an independentconsultant to provide a completelyobjective perspective and develop

the best solution or the business. Alternatively, it might involvedelegating a decision to the non-amily members o the managementteam or even nominating a specifcindividual to act as a “tie breaker”– although it is clearly essential thatany non-amily executives should begenuinely ree to express their views,i such unofcial arrangements are towork.

However, third-party mediation isa predominantly Western practice.North American and Europeanrespondents regard it as one o theirmain options or resolving disputes,whereas respondents in the emergingeconomies typically preer amilyconstitutions or councils (see Table 2).

Table 2:There are regional variations in the confict resolution procedures amily businesses mostpreer to use


Third-party mediation(44%)

Shareholder agreements(2%)

Family constitutions(42%)

Shareholder agreements

(6%)

Family councils

(1%)

Family councils

(28%)

Family councils(6%)

Third-party mediation(29%)

Shareholder agreements(2%)






More than one-third o amily businessesexperience tension when considering

their uture business strategy





Th i d



The economic andregulatory changesamily businesses

would most like to seeThe vast majority o amily business owners would like to have a simpler taxregime and/or pay lower taxes

They would also welcome help in creating closer links with academia orthe purposes o product development, a stronger corporate complianceenvironment and the provision o more state support or sta training

Their motives or running a amily business – and the achievements or whichthey wish to be remembered – vary hugely. Some respondents want to buildcompanies that will last a long time or bequeath strong businesses to theirospring. Others love their work so much that they cannot imagine doinganything else

A number o entrepreneurs are also rm believers in the importance ocorporate social responsibility. One in 12 stressed the importance otrading in an honest, ethical ashion or improving the existing social andenvironmental order in some way



We have ocused on the key issuesamily frms ace, and how theyresolve internal conicts, so ar. Butwhat about the external reormsrespondents would most like to see?Head o their list o priorities by a largemargin is a better tax regime. Eighty-fve percent say that the simplifcation

o the rules governing corporate taxesand/or the lessening o the tax burdenis very, or quite, important to them(see Figure ).

Hal the companies in our samplewould also like assistance in creatingcloser links with academia or thepurposes o product development,a stronger corporate complianceenvironment and the provision omore state support or training andsta development. They are less

concerned about getting access toadditional unding, although almost40% think that an injection o venturecapital, greater access to the capitalmarkets or government subsidiesor developing new markets andexpanding their existing marketswould be helpul. Many amilybusiness owners, it seems areconfdent o being able to raise anymoney they need to grow on theirown.

“Taxation should bechanged to make it

easier or amily frms”Finnish respondent

Figure 33:The simplication o the tax regime and/or a reduction in the tax burden tops the list ochanges amily businesses would most like to see

Simplification of the business tax rules and/ora reduction in the tax burden

Better links between industry and universitiesfor product development

The provision of increased financial assistanceand support from the state for training and staffdevelopment

The strengthening of the corporate complianceenvironment

Greater access to the capital markets

The provision of increased financialassistance from the state and supportto develop new or expanded markets

The availability of additional venture capital

funds to back expansion

Very unimportant Quite unimportant Quite important Very important

66

73

74

77

78

79

79

81

83

85Percentage of respondents

22

16

21

24

24

23

20

14

20

16

24

24

27

65

10

14

12

3

14

15

15

2

16

14

24

28

21

11






Almost two-thirds o respondents considerthat simplifcation o the tax regime/reduction

o the tax burden should be a top priority orgovernments over the next three to fve years





Conclusion



Conclusion



It is clear rom the eedback wereceived that the amily frms inour survey do not intend to rest ontheir laurels. Asked what one lastingachievement they would like to standas their legacy, respondents provideda wide variety o answers. But therewere several recurring motis.

A number o respondents said thatthey want to make their companiesbigger. Some o them talked in termso “sustainable growth”. Otherswere more ambitious; they spoke o“international expansion”, o creating“a market leader” and even o“building a billion-dollar business”.

Similarly, some respondents hope toestablish companies that will “standthe test o time”, as one individual put

it, and bequeath a strong businessto their ospring. “I want to leave ahealthy, proftable company or thenext generation,” stated a Belgianproprietor, sentiments echoed bya Canadian entrepreneur who aims

“to create a well established, wellrun business that my children cancarry on”. Indeed, amily businessowners rom Australia to Brazil and allpoints between aspire to pass sound,successul frms on to their heirs.

The importance o behaving in anupright ashion also suraced as aregular theme. An Irish respondenttalked o establishing a “culture ohonesty”, or example, and a Frenchrespondent o leaving a companythat possesses “integrity”, while an

American respondent expressed thedesire to be remembered as “someonewho helped to build an ethicalcompany and who’s grateul to ourCreator or the opportunities I’ve beenprovided with”.

Improvements in the existing socialand environmental order werelikewise high on the agenda osome respondents – and a numberhave quite specifc goals in mind.One entrepreneur wants “to reduce

the level o crime [in South Arica]through projects initiated by thebusiness”. Another actively supportshis local cancer clinic, while others areconcerned with Green issues.

O course, more commercialambitions were also overtly inevidence, including the desire to buildprestigious brands, modernise andintroduce cutting-edge technologies.But only 20 people talked in termso fnancial enrichment – and, eventhen, their aspirations were otenquite modest: enough money to “livecomortably” or “allow the [memberso the] amily to lead the liestylethey want”. Those whose aim is to“make a lot o money” or build a“rich estate” are in the tiny minority.What drives most amily business

owners, it appears, is the desire to“leave something worthwhile or thenext generation” or “give somethingback to the community” and sheer“passion” or their work.



Appendix



Appendix



Our survey covers small and mid-sized amily 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 Arica, Sweden, Switzerland, Turkey, the United Arab Emirates, United Kingdom and United States.

A total o 1,454 interviews were conducted between 5 February and 15 June 2007. All respondents were interviewed via a 20-minutetelephone interview, with the exception o respondents in Spain and Luxembourg, who were interviewedace-to-ace. The research was coordinated by the PricewaterhouseCoopers International Survey Unit, Belast, our globalcentre o excellence in market research, which designed the questionnaire in conjunction with amily business experts romPricewaterhouseCoopers. A separate survey was completed in India, the results o which are not included here.



Contacts



Contacts

For urther inormation, please contact:



Global Allan J. [email protected]

Europe, Middle East & AricaNorbert [email protected]

North AmericaEric S. [email protected]

Richard Calzarettarichard. [email protected]

Asia PacifcRobert [email protected]

Central and South America Carlos [email protected]

Abelardo [email protected]

AustraliaGregory [email protected]

Belgium Wilried D’[email protected]

Brazil Carlos [email protected]

Canada Eric S. [email protected]

Cyprus George [email protected]

Denmark

Kent [email protected]

Finland Ola [email protected]

France Philippe [email protected]

Germany Norbert [email protected]

Greece

Marios [email protected]

Ireland Paul [email protected]

Italy Marco Tanzi [email protected]

Luxembourg Luc [email protected]

Mexico Juan Carlos Simón [email protected]

The NetherlandsStee [email protected]

Norway Thomas [email protected]

Poland

Antoni [email protected]

Portugal Jaime Esteves [email protected]

South Arica Andries [email protected]

Spain Jose Felix Galvez [email protected]

Sweden

Jan-Olo Lindberg [email protected]

Switzerland Marcel [email protected]

Turkey Adnan [email protected]

United KingdomFrank [email protected]

United Arab Emirates Amin [email protected]

United States Alred [email protected]

The survey core team:

Philippe BaillyFamily Business Survey Global [email protected]

Jacques LesieurFamily Business Survey Project Leader [email protected]

Rémy BarbeaultFamily Business Survey [email protected]

Axel DorenkampFamily Business Survey [email protected]



Reerences



Reerences

1 Chris Flood, “Family companies top value league”, Ft.com (January 0, 2007).

2 International Family Enterprise Research Academy, “Family Businesses Dominate” (200).

PricewaterhouseCoopers has produced three previous amily business surveys. The frst covered amily frms in Irelandand was published in 2002. The second covered amily frms in Ireland and was published in 2004. The third coveredamily frms in 12 o the 27 member states o 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 o Business Owners: 2002” (September 2006).

7 Jay W. Eisenhoer and Gregg S. Levin, “Does Corporate Governance Matter to Investment Returns?” Corporate Accountability Report, Vol. , No. 57 (September 2, 2005). The Bureau o National Aairs, Inc.





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