Keeping it in the family
Mention family and business in the same sentence and many of us conjure up images from the hit movie The Godfather. But the classic “mafia” movie didn’t feature at the recent media presentation covering the PwC Family Business Survey 2010/11. Come to think of it, the small family businesses which dominate South Africa’s small and emerging company landscape didn’t feature either. That’s because the PwC survey, featuring 1,606 respondents from 35 countries, defines a family business as “one in which the founding family has a significant stake in the business, with one or more relatives holding senior positions.”
According to Andries Brink, national leader: Private Company Services for PwC Southern Africa, the typical respondent employed between 21 and 500 employees, generated R50 million or more in annual revenues, and had been in business for more than 20 years... The 2010/11 survey included responses from 81 South African companies, spread across 13 industry sectors.
Lessons for financial services intermediaries
I attended the PwC presentation because I believed financial services intermediaries could learn some valuable lessons from the findings. And I wasn’t disappointed – because although the respondents were “larger” than the average financial services company they face similar challenges. These include global economic conditions, the shortage of skilled labour, the impact of regulation and the need for thorough succession planning, among others.
The first observation centres on the impact of the global economic contraction. It seems family businesses (70% of global respondents) identified market conditions as the primary external challenge to their businesses through 2010. This represents a definite swing from the 2007/8 survey result, where regulation was flagged as the major challenge beyond a businesses immediate control. “Nearly half of the executives interviewed reported that demand for their products and services grew in the last 12 months,” says Brink. “However, more than a third of respondents reported that operating profits had fallen – and two thirds are concerned about conditions going forward.”
The shortage of skilled labour was singled out as the most pressing internal challenge, with 54% of businesses surveyed saying the struggled to hire and retain appropriately skilled staff. As a result, 75% of all firms said human resource training would be the top investment area through 2011.
Planning for the future
Succession planning can be seen as one of the positive spin-offs of South Africa’s burgeoning financial services regulatory environment. The FAIS Act requires companies to give due consideration to their succession plan, specifically to service client’s interests in the event key stakeholders “move on”. It makes sense for any small or family business to ensure management remains in place at all times. Additional preparation is required if you hope for your son (or another member of your immediate family) to take over the reins upon your retirement. Gert Nel of PwC Tax, Bloemfontein observes: “The importance of having a well-defined executive organisational structure with clearly articulated roles and responsibilities is essential to ensuring proper succession planning and the development of the requisite skills of family members.”
The survey indicated an impressive stability among local family businesses. Almost two thirds of these companies expected no change in ownership in the short term, while only 29% predicted some change within five years. And the bulk of these changes would typically take place from within the family – a father handing over the reins to the son, for example. This fact highlights the importance of retaining family members within the family business.
A massive 91% of the South African businesses surveyed indicated salary as the best way to retain family members in their management structures. They indicated that sound management techniques (80%), career progression (74%) and challenging job opportunities (73%) also play an important role. A quick glance at South Africa’s latest matriculation result – and subsequent run on tertiary institutions – suggest the skills development backlog will shift even more firmly into employees’ hands.
Regulation still a “thorn in the side” of small business
Brink reminded the presentation attendees just how much of an influence regulation had on South African businesses. A recent PwC tax compliance survey suggests a mid-size UK company spends approximately 110 hours per annum to comply with all its tax requirements. The same level of compliance demands 200 hours from a similar size South African company. He believes government should urgently consider a different form of tax relief: “It’s not tax relief in a sense of a monetary value, but rather how we go about things, and how much time we need to comply with the various tax laws…” The South African Revenue Service has greatly improved its returns submission and revenue collection over the past decade – but should now focus on simplifying the country’s overly complex tax regulation.
Editor’s thoughts: It’s amazing how many “big business” challenges carry through to small businesses. If tax and regulatory compliance requirements impact negatively on firms surveyed in the PwC Family Business Survey then we can only imagine the impact on those companies employing 20 persons or less. What changes would you like to see made to VAT and employee tax regulations? Add your comment below, or send it to [email protected]
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