EY: Family businesses globally face succession challenge

06 January 2016 Consultancy.uk 6 min. read

Family businesses face succession challenges as more and more young graduates turn to the outside world for opportunities. A recent EY study finds that only 3.5% of graduates intend to succeed in their families business straight out of university, increasing marginally to 4.9% for those five years out of school. Particularly in middle income countries the employment market is more attractive straight out of school, while in the longer term, many would prefer starting their own business.

Taking on the family business has been a long standing tradition within the middle class in many countries, and many companies around the world are still being run this way. Research shows that family-run businesses experience several advantages, such as a strong identity, a short decision-making line, as well as home-field advantage, as a result of which their influence is not only rising globally, but also in the UK. Although this is the case, in recent years, with improvements to education and more opportunities to seek fulfilment outside of family bonds, succession rates have fallen.

In a recent study, EY considers the trends related to succession in family businesses and what conditions them across the globe. The research*, titled ‘Coming home or breaking free?: A closer look at the succession intentions of next-generation family business members’, considered the results of the 34,113 students (31.3%) with a family business background (one or both parents are self-employed). Three-quarters (76%) of those surveyed are studying for their Bachelors, 60% are female and the average age of those participating is 23.

Response characteristics

Succeeding otherwise
The study considers the intention of respondents directly after and five years after having completed their university studies. The most attractive pursuit directly after university is to join a large firm (more than 250 employees), as cited by 22.7% of respondents. Medium and small firms attract 37% of respondents. 8.6% do not know yet what they will do directly after university, while 7.2% plan to work on their own business straight out of school. Of the more than 34,000 respondents, 3.5% intent to be the successor of their family’s business.

The picture changes dramatically in the long term however. Five years out of university, 34.7% expect to be self-employed, whilst almost 17% see themselves working at a large firm. Interest in medium and small firms drops off to a combined 12%. Around 8% do not know what they will be doing five years down the line. Interest in being a successor to the family business increases slightly however, to 4.9% of all respondents.

Career choice intentions

Succeeding countries
The average across all 34 countries hides interesting trends within individual countries. Mexico, Belgium, Slovenia, Japan and Liechtenstein come out on top in terms of intent to take on the role five years after graduation. There is considerable variation in the top five, between those wishing to succeed their elders directly after university and those willing to do so five years later. In Mexico, 9.5% want take the challenge directly after university, increasing to 11.5% five years later. In Belgium on the other hand, 4.9% will do so directly and 8.9% five years later. Japan has the highest degree of difference; merely 1.5% is willing to take on the role straight out of university, while 8.1% intend to do so in the mid-term.

The least eager are students in the US. Only 1.2% say they want to take their family business five years down the line (although 4.9% say they would do so straight out of school). Other countries with low interest levels are Israel and Denmark, at 2.4% and 2.5% in five years down the line respectively, and 1.2% each, straight out of school.

Intentional successors across countries

Changing success
The study further shows that there is a downward trend in terms of people intending to succeed their parents within a family business. In a more limited study of 29 universities, 6.8% of students said they want to continue their family business line five years after studies in 2011, a number that drops to 4.8% of respondents for the 2013-14 period. The reason for the decline, according to the researchers, is that the labour markets have improved in many of the respective countries, and with more plentiful job opportunities, next-generation members can find more attractive career options, reducing the appeal of the family business.

Intentional successors

Potential success
Even though the report highlights that few students have the intent to enter into their family’s business straight out of school, and even five years later, the potential for them to take over is considerably higher. One in five (20%) of survey participants say they will be willing to become a family business successor one day.

Success factors
A number of factors condition whether students are more or less inclined towards taking a position at the family firm. One interesting correlation found by the research is the ‘U-shaped effect on the strength of succession intentions’, which relates primarily to the gross domestic product (GDP) per capita of the corresponding countries. Particularly the countries with lower GDP tend to have higher rates of success intentions, including Romania, Mexico, Russia and Greece. On the other side of the U are some of the world’s richest countries, including Luxemburg and Liechtenstein.

Relationship GDP per capita and strength of succession intentions

According to the authors, the trend can be explained by the relative rates of necessity. In lower GDP countries attractive alternatives in the job market are rare, whereas in very rich countries financial incentives become less important than status, reputation and self-actualisation — all of which can be satisfied by taking over the family business.

* The research, carried out by University of St Gallen Centre for Family Business, is based on results from the GUESSS (Global University Entrepreneurial Spirit Students’ Survey) project, which surveyed 109,000 students across 34 countries and more than 750 universities.