A lack of skills and market conditions remain the key challenges for family-owned businesses, states PwC report

South African family business owners reported a lack of confidence in the Government, with the majority believing that the Government is not doing enough to help family businesses to survive and develop their activities in the current economic climate. Red tape, an inflexible labour market, an increase in electricity tariffs, a lack of tax incentives, overregulation, uncertainty around government policy, an inadequate education policy, and deterioration in the country’s infrastructure remain the greatest constraint to the growth of family owned businesses in South Africa.

These are the conclusions culled from the latest edition of ‘Family Business Survey: The future is now 2012-2013’ released by professional services firm PwC today. The report comes amidst the Government announcing its intention to support the key economic challenges facing South Africa, including job growth, skills development and inequality in the next ten years, according to the proposed economic Growth Plan.

This lack of confidence in market conditions has a knock-on effect on the long-term decisions that business leaders make. Global and local family business owners feel that compliance with the regulatory environment affects them to such an extent that they become uncompetitive and that the financial incentives and assistance afforded to them is not enough. Furthermore, many do not have the expertise or financial resources to meet the regulatory compliance requirements.

The study, which was carried out among 1 952 family business firms across the world, including 100 South African family businesses, represents a broad spectrum of industries such as manufacturing, wholesale and retail, automotive, agricultural and construction. The survey was carried out prior to the Mangaung Conference held in December 2012.

Characteristics of a family business

Owners of a family business tend be more quicker and flexible decision makers than their corporate competitors. They are generally proud and emotionally attached to what has been achieved and for that reason tend to keep the business within the family. Furthermore, many believe that they win business because they are closer to their customers and have a more personal relationship with them.

Growth outlook

A significant percentage of family businesses (69%) have grown sales in the past year, compared with less than half in 2010. Over 93% of businesses expect steady or aggressive growth in the next five years and 53% of those who expect to grow are very confident about their company’s prospects over that period.

External and internal challenges

Family-owned businesses are finding the current market conditions more of a challenge (76%) than they were in 2010 (69%). Government policy features prominently as an external challenge and it has increased from 25% in 2010 to 32% in the current report. “Businesses want to be able to plan ahead and government policy (including regulation, legislation and public spending) needs to be executed in a stable environment in which there are clearly defined fiscal and monetary policies for the foreseeable future,” says Andries Brink, PwC National Private Company Services Leader.

Some businesses locally have opted to invest more in their operating capital and buy more foreign raw materials than they would typically need in the production cycle, rather than be exposed to continuous currency fluctuations when the raw materials are sourced only when needed.
Broad-Based Black Economic Empowerment (BBEE) is seen as a challenge to family business owners, particularly with regards to the availability of qualified empowerment partners and the importance of a good ‘fit’ between the family business culture and the culture of the empowerment partner.

“Many businesses have had to take action to streamline internal processes, improve inventory control and reduce debt. A number of entities also cited the importance of establishing or improving their internal IT systems, particularly in relation to regulatory compliance,” says Brink.
He says that family business owners should take responsibility and ownership for initiating development and succession plans to attract, retain and develop more talent, as well as networking, mentoring and coaching programmes.

Competing for skills

The majority of South African family-owned businesses (61%) agree that the country does not have enough skilled people entering the job market. Family businesses are competing with other entities for the same pool of talent. The challenge is that most highly-qualified people have not traditionally opted to work for family firms because they believe that their progress will be constrained by the shareholding structure, and they will achieve greater financial rewards and career fulfilment elsewhere, adds Brink.

“Family businesses should consider implementing a formalised talent management process that will map the skills and capabilities within each department to ensure there is a pipeline of suitably qualified people coming through in the short, medium, and long term.”

What do family business owners expect from the Government?

Only three markets (Singapore, Turkey and Malta) agree that their government is doing everything  it can to assist them and there was dissatisfaction from countries such as Australia, Denmark, France, Romania, the US, Italy, South Africa, Russia and Greece.
Family firms want a simpler tax regime, particularly when it comes to capital gains and inheritance tax. They also want to see more financial incentives and tax reliefs for start-ups, additional grants and incentives to support R&D and investment in new technology, improved access to long-term finance and more training.

Succession planning

Only 40% of family businesses intend to pass on the management of their business to the next generation. Around a quarter (26%) of business are apprehensive about the transferring of their business to the next generation, stating that they will not have the required skills and aptitude to own and run the company. Almost a quarter (23%) intend to pass on their shares, while bringing in professional managers, citing the next generation’s lack of skills as the main reason for this decision.

Another 22% foresee that there will be conflict between the family and those managing the entity. Although more than 90% of businesses in South Africa have procedures in place to deal with family member issues and conflict, there is no way of knowing how effective they are should an actual conflict arise.

Brink says: “We suspect that some family businesses are seriously underestimating the degree of conflict that the next transition point may generate and would benefit from a greater understanding of the best practice governance measures they might take now to mitigate it.”

Globalisation

Seventy-five percent (75%) of the family businesses surveyed identified Africa as their most significant expansion opportunity. The results of the study suggest that the most significant challenges encountered when doing business in other countries are: exchange rate risks (23%), understanding the local culture (16%), logistics (14%), and ways of doing business/competition (19%), and understanding and complying with local regulation (15%).

Brink concludes: “Family businesses are a vibrant and vital part of the global and economy and can make an even more substantial contribution to growth and recovery if they are given the right support at the right time.”