Family businesses face succession challenge as next generation look elsewhere for employment

September 28, 20158:02 am422 views

Few students from a family business background plan to take over their family firm and the number that do are falling, according to Coming home or breaking free? (2015), an EY study into the succession intentions of more than 34,000 next-generation family business members globally, carried out with the University of St Gallen Center for Family Business.

Just one in five (19.7%) college students who are potential successors in family businesses are open to the prospect of one day taking over their family firm.

When asked when they would like to do this, only 3.5% want to take over directly after graduating, while 4.9% plan to do so five years later. Succession intentions have fallen by as much as 30% when compared with like-for-like figures in a comparable survey that took place in 2011.

Peter Englisch, Global Leader, EY Family Business Center of Excellence, says: “Family businesses face a challenge in convincing younger members of the family that their long-term futures lie within their businesses.”

Not only is there competition from the wider jobs market, with young people keen to explore their options in today’s fast-moving economy, but many also feel that they need to prove themselves outside of the family firm first. In many ways, this is a healthy attitude.

“The challenge for family businesses is how to harness the next generation’s ambitions to break free to benefit the family firm in the longer term. While fewer next-generation members intend to become successors, those that do may be more motivated and better prepared.”

Thomas Zellweger, Chair of Family Business at the University of St. Gallen says: “Clearly, the succession career path is in competition with other career options, such as taking another job or starting a company. The healthier capital and job markets are, the stronger the competition is from elsewhere.

See: Redefining Career and Succession Management

“This fall isn’t necessarily bad news for family businesses. While the number of successors may have declined, those that actually wish to join the parental firm may be more motivated and better trained to take on the challenge.”

Survey participants in Mexico (11.5%), Belgium (8.9%) and Slovenia (8.5%) have the strongest intention of joining the family business five years after studies, with those in the US (1.2%), Israel (2.4%) and Denmark (2.5%) the least likely to follow in their parents’ footsteps.

In Singapore, only 3.8% of survey participants intend to join the family business five years after their studies and even a lower proportion (1.1%) are willing to do so right after graduation.

Goh Siow Hui, Tax and Private Client Services Partner at EY in Singapore notes that the low level of succession interest among next-generation family members could be linked to the possibility that succession planning has not been at the top of the agenda among family businesses in Singapore.

Siow Hui explains: “A clear plan in inculcating and articulating family values, formulating long-term goals and identifying successors may be lacking in many family businesses here. Further, most family businesses in Singapore are fairly young and into their second or third generation only.”

Hui adds: “The presence of the ‘founder figure’ who still controls the business may influence the next generation’s desire to join the family business. Family businesses in Singapore should consider proper succession planning and integrate the next generation into the business early to better enable the successors to succeed in the business.”

Meanwhile, globally, female potential successors are less likely to want to take over the family firm than their male counterparts – 4.3% of women want to take over the family business five years after graduations compared to 5.7% of men.

The size of a family business is one factor that appears to affect succession intentions, with only 5.2% of next-generation members wanting to take over at firm with two to five full-time staff, rising to 16.3% for family firms with more than 100 full-time staff.

The study also identifies a number of potential drivers of succession intentions. As GDP increases, succession intentions decrease, although it appears that as countries reach a certain GDP level they rise again.

Prof. Dr. Philipp Sieger, Assistant Professor at the University of St. Gallen, adds: “In less developed countries, taking over the parental firm is often the only viable career option. As countries become wealthier, the career alternatives become more numerous and attractive. In this way, only successors who are interested and capable should enter the family firm in countries where they have career alternatives. In such settings, it makes even less sense to pressurize children into the family business.”

The report also found that where inheritance or gift taxes are high, succession intentions are lower. In addition, to find out the impact of cultural factors, the survey asked students about how they perceived different cultural aspects of their society.

It found that succession intentions were higher in cultures that cherish pride in one’s organization and family, prioritize job and economic security, and have a culture that strongly respects power and authority.

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Also read: 5 Quintessential Tips to Boost Succession Planning At All Levels

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