South African family businesses have maintained a constant level of performance over the last financial year
Local family firms are bullish about the future with 84% expecting to grow and 22% expecting to grow quickly and aggressively
Cost containment is the most significant challenge facing family firms over the next five years
Despite the current economic uncertainty and the accelerating pace of change, South Africa’s family business sector has high ambitions for quick and aggressive growth over the next five years. At a time when other businesses are struggling to create revenue, around 78% of South African family businesses reported growth in the last 12 months, and 62% are expecting to grow steadily over the next five years.
These are some of the highlights from PwC’s ‘Family Business Survey: New vines from strong roots 2016/2017’ released today. The study, which was carried out among 2,800 family business firms across the world, including 130 South African family businesses, represents a broad spectrum of industries such as agriculture, retail and manufacturing.
Andries Brink, PwC National Private Company Services Leader, says: “In spite of the tough economic climate, South Africa’s family business sector continues to be vibrant, successful and ambitious. The vast majority of family businesses believe they offer stability to the economy and look after their staff even in the bad times.
“Although the outlook remains steady, the absence of any change from year-to-year in our research around areas such as succession planning, diversification, digital transformation and innovation is a cause for concern.”
Growth and globalisation
South African family businesses have maintained a consistent level of performance over the last financial year compared to the results of our 2014/2015 Family Business survey. According to the survey results, South African family businesses are bullish about the future with 84% expecting to grow and 22% expecting to grow quickly and aggressively (compared with 15% globally expecting similarly fast growth).
Among those businesses expecting to grow by 10% or more, the majority (83%) will use external financing to help fund this growth. Sixty-nine percent will use their own capital. Ninety-one percent of businesses aim to grow their businesses by expansion into existing markets, compared to only 36% who aim to achieve growth by moving into new sectors.
Even if the worst of the economic downturn has passed in most countries, price pressures remain intense and margins are tight. “The businesses that triumph will be those that are able to embrace change and are willing to be disrupters themselves – either in their approach to market, in their products and services, or in their willingness to change strategy,” Brink adds.
South African family businesses indicated that cost containment (78%) is the most significant challenge facing them over the next five years, followed by the general economic situation (72%). More than half also identified corruption, the need to innovate and attracting/retaining talent as concerns. In the new business landscape, innovation is no longer just a ‘nice to have’. The pace of change is so fast now – sustainable competitive advantage is about an organisation’s capacity for constant reinvention: not just its business model, but its products and services, and its route to market.
Although family business firms have made significant progress in the realm of professionalisation of the firm, this year’s survey results show more still needs to be done. At least 50% of respondents (2014: 29) have indicated that professionalising the family business is a key challenge over the next five years.
Managing succession and the role of the next generation
As the business gets older, more potential successors come into play, the numbers in the wider family grow, and the potential for conflict arises. Although most businesses have some sort of succession plan, only 17% of South African family businesses have a succession plan that has been discussed and implemented. It is disconcerting to note that this figure has not risen significantly in recent years. In this year’s survey 68% of respondents (aligned with global) believe their family and business strategies are completely aligned, but the anecdotal evidence suggests this is very unlikely to be the case.
More than a third of family businesses in South Africa plan to pass the business ownership onto the next generation. The same proportion plans to pass the management of the business onto the next generation, while 22% plan to sell or float the business. PwC’s recent research on the next generation of family business leaders shows they want to do something special with the business when they take over. The Next Generation have big ideas for change and growth – some want to launch new products or ventures; while others want to invest in new technology and explore new approaches to marketing using social media. “The sort of person who is going to be running a family firm in five to ten years’ time will look and think very differently from most of those doing it today. ‘From strong roots new vines will emerge’ which is why a more robust approach to succession is critical for the whole family business sector,” comments Brink.
Adds Brink: “It is welcome to note progress has been made in some areas, with 88% of South African respondents having at least one mechanism in place to deal with family member issues or conflict, which is higher than the global average of 82%.” Mechanisms include shareholder agreements, incapacity and death arrangements, family councils, third-party mediations, and family constitutions.
Like their global counterparts, the majority of family businesses in South Africa recognise the need to adapt to an increasingly digital world. But only 55% understand the tangible benefits of digital strategies and systems or have a realistic plan for measuring them (Global: 59%). At least half of South African family businesses believe that digital transformation is already integrated into their business’ culture and that they have a strategy fit for the digital age. A quarter believe that they are vulnerable to digital disruption. The family business sector urgently needs to develop a ‘medium-term mindset’ regarding the challenge of digitisation as it will require considered and even significant investment to stay ahead of the curve, and the skills inside the business to ensure that investment delivers.
Black economic empowerment
Half of the respondents have taken steps to implement Broad-Based Black Economic Empowerment (B-BBEE) initiatives and a further 30% plan to do so. Some respondents feel that such initiatives will help empower/reward their workforces and also assist in dealing with suppliers. On the other hand, some say they have not gained any advantage from B-BBEE initiatives, except perhaps more business, in particular government contracts – but many say they have seen no evidence of this so far.
Sound corporate governance
The need to adhere to sound corporate governance principles has changed the landscape for South African family businesses. Less than half of survey respondents (47%) see no barriers to adopting and applying the King Code in their businesses. Barriers mentioned by the remainder include: the costs outweigh the benefits; the Code is not appropriate for family and small businesses; the Code is too complicated; and implementation of the Code can make it difficult to deal with clients if controls are too stringent.
The King IV Code is expected to address the concerns that corporate governance principles are not appropriate for the family business as the new code takes on a more simplified approach.