EY: Family businesses globally face succession challenge

06 January 2016 Consultancy.uk

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.

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High employment drives deals to access fresh talent

09 April 2019 Consultancy.uk

The UK continues to have a historically low unemployment rate, resulting in a tightening employment market and demand for recruitment services. The industry topped £12.3 billion last year, while valuations continued to rachet up. There were were 32 firm acquisitions in the recruitment services space last year, up significantly on the previous five-year average.

Labour markets globally are tightening, particularly in developed economies. At the same time, access to top talent is becoming increasingly difficult to source, as demand for that talent continues to rise. Higher demand has been one of the key drivers for acquisitions in the space. New analysis of the recruitment M&A market, from consultancy firm BDO, looks at current trends and future projections for activity in the segment.

The UK employment rate has grown considerably over the past decade, with the number of NEET decreasing, more women joining the workforce, and older people continuing to work, among other trends. Participation rates hit more than 75% in 2018, up from around 73% in 2014. The unemployment rate dropped to 4.1% last year, the lowest level in more than 40 years.

UK Recruitment Market

 

The recruitment industry has enjoyed strong growth over the same period, with revenues increasing from around £8 billion in 2014 to £12.3 billion last year. However, the growth rate for the industry is expected to stall for the coming years – the firm is projecting annual growth of 0.1% to 2024. The stall reflects deep seated uncertainties stemming from the future of the UK, from migration to internal employment in an increasingly uncertain future.

According to the firm’s analysis of market trends for UK listed FTSE recruitment companies, their performance over 2018 outperformed the wider FTSE market by a significant market during some months – the end-of-year uncertainty hit both recruitment and non-recruitment firms with relatively equal strength. The drop partly reflects market sentiment about the future of the UK.

FTSE Listed Recruitment Firms Average EV/EBITDA Multiple

 

The study also considered the multiples growth, average EV/EBITDA multiples, over the past year – which has shown considerable ups and downs. The yearly average multiple of 10.4x was above that of 2017’s 9.9x – although a 26% drop at the end of the year was significant. The drop was tied to the relative volatility in macroeconomic conditions affecting the globe, though another major contributing factor has been Brexit and political instability.

Global M&A

The global recruitment M&A market was particularly active in the UK, with 32 deals last year – a five-year high, and well above the 17 recorded for second-place US. Deal activity in the UK was focused on expertise and capacity in industrial and technical sectors, reflecting skills shortages in those segments. The US was largely focused on healthcare-related M&A, representing 25% of their market.

Overall, of the 92 deals in 2018 (a 21% drop on 2017) generalist firms were the most in demand, at 25% of the total, followed by education at 14% and engineering & construction at 13%. Software saw relatively low demand, at 2%.Investment into the UK by country

In terms of investments made into the UK, domestic investment continues to be the most dominant, accounting for 24 deals. Japan made three deals, although Brexit is seeing the country become increasingly nervous about investment. The US accounted for two deals. The longer-term trend shows that domestic investment is up on 2017, hitting the highest level in five years, while the US has reduced its M&A investment into the UK.

Commenting on the results, the firm noted, “The latest report shows the recruitment sector remains strong and continued to grow through 2018 despite facing many challenges. Notwithstanding the personalised nature of these services, the market continues to evolve, seeing traditional recruitment firms utilising available technology along with new entrants showcasing innovative platforms.”

Related: High UK employment masks troubled economy.