The Company Is a Family Affair
They seldom make headlines, and yet they employ four out of every ten workers in Switzerland: Family firms are a pillar of the Swiss economy.
The business section of most newspapers rarely reports on their doings. They communicate little about themselves, and few researchers explore them. They are family firms. What sets them apart? How many of them are there, even? And how do they manage succession? A large-scale study conducted by Credit Suisse and the Center for Family Business at the University of St. Gallen recently investigated family firms, focusing on succession – an issue that is particularly important for such businesses and one that often turns out to be complicated.
More than 99 percent of all Swiss companies are categorized as small and mediumsized enterprises (SMEs). Of these, three out of four describe themselves as family firms, that is, wholly owned by the founding family. This amounts to about 375,000 family businesses in Switzerland, employing 1.6 million people, or 41 percent of the Swiss labor force. Clearly, family firms are important to the Swiss economy. Worldwide, they are estimated to constitute 60 to 90 percent of all companies. One interesting fact is that the "owner family" is rather narrowly defined. In most cases, the owners are a married couple, parents and their children, or siblings. The extended family is involved in only 10 percent of the companies.
Lack of Interest from the Next Generation
The earlier the founding year, the higher is the proportion of family businesses among SMEs. Are family firms no longer in tune with the times? Not necessarily; it could also reflect a pattern in the life cycle of the companies. Many business founders do not regard their companies as family-owned; often, this perception develops only when their offspring join the company. Furthermore, the founders of non-family firms consider it less important to transfer their enterprise as an existing company (see below). In other words, as the founding generation gradually withdraws and the second generation comes along, the proportion of family-owned businesses automatically increases.
But another finding strengthens the hypothesis that family businesses are becoming less popular. Growth industries such as the healthcare, corporate service and IT sectors include significantly fewer family firms. If this trend continues, a further decline in the share of family firms can certainly be expected. However, this does not necessarily mean that the business world will become less "private." Rather, it is far more likely to also reflect a trend toward a society of multiple options. Thus, it is hardly surprising that one reason for a business to be transferred outside of the family is that the next generation is not interested in taking over. Under certain circumstances, the potential successors may want to leave the private sphere of the family and pursue a career elsewhere.
Many business founders do not regard their companies as family-owned; often, this perception develops only when their offspring join the company.
Greater Participation by Women
As mentioned above, 75 percent of SMEs are family businesses. But the families control the company mainly by participation in ownership; only 55 percent of companies have a member of the owner family in every senior management position, and only 48 percent of SME boards of directors consist entirely of family members. Across all SMEs, 80 percent of owners are also engaged in the management. Conversely, members of the management board own an average 77 percent of the company’s shares. The board of directors does not limit its activity to its role as a governing body either. On average, 65 percent of managing directors are also actively involved in the company’s operations. Overall, there is no clear separation between ownership, management and the board of directors. This is the case even though good governance guidelines recommend separating the performance of these functions. Women are clearly underrepresented on SME management boards (23 percent), but as family members their managerial roles significantly improve: 80 percent of female board members are part of the owner family.
The Question of Succession
Finally, family circumstances strongly influence the arrangements for corporate succession. Here, the terminology draws a distinction among four types of transfer:
- FBO: family buy-out, transfer to other family members
- MBO: management buy-out, transfer to senior executives
- MBI: management buy-in, transfer to persons outside the company
- Sale to another company or to a private equity firm
In 53 percent of cases, SMEs without family ownership expect the future transfer to be an MBO. This drops to only 31 percent when ownership includes some family members, and to 16 percent if all the owners are family members. On the other hand, if the company is entirely family-owned, the owners prefer an FBO in 52 percent of cases, that is, transfer to other family members. Understandably, the desire to keep the company in the family is greatest if the owners include parents with children. Sibling relationships among the owners also intensify the effort to ensure future control within the family. Although a slight trend away from family-owned businesses can be detected, the need to keep the company within the close family circle remains strong.
However, these results do not reflect the succession strategies actually implemented, but rather the wishes and plans of the current managing directors. The actual outcomes often differ. Interestingly, more transfers occurred within the family than had been planned (figures rounded): 46 percent versus 41 percent. Perhaps the owners would have liked to place the company outside the family, but found no buyer. Employees took over the company (MBO) in 25 percent of cases – exactly the share the owners wanted. Transfer to people outside the company (MBI) occurred in 30 percent of cases, 13 percent more than wanted.