Family-Owned Businesses Face the Future. What Succession Looks Like.

Among companies globally with annual revenue of at least $100 million, 22%—or more than 18,000—are owned by families, according to a new report. (Dreamstime)

Key Points

• A Deloitte Private study reveals 26% of global family businesses seek outside investment, 19% aim to increase nonfamily ownership, and 12% plan to go public in the next three to five years.
• Globally, 22% of companies with at least $100 million in annual revenue are family-owned, with 83% of surveyed businesses being 70% or more family-owned.
• Succession challenges, including next-generation interest and qualifications, along with current generation’s desire for liquidity, are driving shifts in family business ownership and leadership.

Just as trillions of dollars of wealth is moving from one generation to the next, families with their own businesses are in the middle of major shifts in ownership.

But the next generation isn’t always stepping into the shoes of their parents.

A study from Deloitte Private released on Monday finds 26% of family businesses globally in the next three-to-five years are looking for outside investment, including from private-equity firms. Another 19% want to increase the ownership of nonfamily members in their enterprises, while 12% intend to go public and only 3% are looking to sell.

The future of these businesses warrants watching. Among companies globally with annual revenue of at least $100 million, 22%—or more than 18,000—are owned by families, according to the report, titled “Defining the Family Business Landscape.” Deloitte Private is a unit of the multinational accounting and consulting firm that serves privately held companies.

The research included a spring survey of 1,587 businesses with at least $100 million in revenue, in which families controlled 51% or more of the company. It also analyzed more than 200,000 companies of that size, including family and nonfamily owned enterprises, to formulate market-sizing data. And researchers conducted in-depth interviews with senior family business executives, several who lead multibillion-dollar businesses that have been around 100 years or more.

As the study notes, nearly three-quarters of family businesses surveyed worldwide are in their first (27%) or second (45%) generation of family leadership. It’s a critical juncture considering the well-known 1987 study by emeritus Northwestern professor John L. Ward that found only one out of 10 families retains their wealth to the third generation, the report said.

Among Deloitte’s findings: 83% of businesses surveyed are 70% or more family owned, meaning that these families have tight control over their enterprises. But the owners of these businesses are getting older—in their late 60s, on average—and they’re looking to step down, says Rebecca Gooch, Deloitte Private Global Head of Insights.

“Some of them are thinking, ‘fantastic, I can transfer the family business to the next generation, this will be seamless’—but not everybody’s in that position,” Gooch says.

“Sometimes there are challenges. It might be the next generation isn’t particularly interested in going that direction or they’re insufficiently qualified to take over,” she says. “This is creating a kind of a shake up in both the ownership and leadership of family businesses worldwide.”

The shake ups taking place against this backdrop of the great wealth transfer reflect two issues that can stem from succession. First, who is going to lead the business into the future. That is particularly challenging to figure out when the current generation isn’t ready to relinquish control, Gooch says.

Second, a demand by the current generation for liquidity. That is either because those running the business want to retire, start a family office, or give to philanthropy, she says. They also may want to buyout more passive shareholders.

“Organizations are in varying states as to their willingness to engage in that [succession] conversation and either admit the importance of it, or elevate the importance of it within their organization,” says Laura Pearson, U.S. Family Enterprise leader at Deloitte Private.

In one of several excerpts in the report, Steve Long, president of Long and McQuade, a musical instruments retailer with more than 100 stores throughout Canada, and a second generation family principal, described succession planning as becoming more complex as their business has grown.

“To manage a company with 2,100 employees requires special skills that not everyone possesses,” Long said in the report. “Selecting a family member without the appropriate skills wouldn’t be fair to anyone. We are exploring options for when the current generation retires, like employee ownership, to ensure the company’s future is secure. It is more important that the employees who have built this business can continue to thrive than financial considerations for the ownership group.”

As this example shows, there are lots of options for families at the juncture of succession. In North America, home to 5,152 family businesses with at least $100 million in revenue, 22% of families plan to bring in external investors in the next three-to-five years while 17% will boost the ownership of nonfamily members. As is the case globally, 12% plan to go public and 3% plan to sell.

Those looking for outside investment, however, aren’t necessarily turning over the keys to their businesses. Pearson is working with a business that secured private-equity funding to fund acquisitions that have allowed the company to expand geographically and within different parts of their industry. This client has retained majority family ownership in the business, however.

“There’s an openness to external investment, but that doesn’t change the fact that in most cases, organizations themselves are still majority family-owned and intended to be family-owned—they’re just looking for a little bit of a boost,” Pearson says.

That’s why the survey shows only 3% of family-owned businesses planning an outright sale, she says.

Write to Abby Schultz at abby.schultz@barrons.com