With 2022 holding out the prospect of growth and relatively greater stability than recent years, KPMG partner Tom McGinness anticipates a few key subjects on the family business agenda.
While a perennial business issue, the pandemic has pushed diversification up the agenda of many families in business. Having discovered the hard way that having all their wealth dependent on the performance of one sector can result in a significant dividend squeeze, the diversifying of business assets will grow in 2022.
As a result, a number of families will be buying a business in a different sector to their legacy business, providing an alternative profit return, with a modest number exiting legacy sectors also.
Acceleration of succession
Since the pandemic, we are seeing an increase in the current leadership generation recognising their mortality and seeking a different work-life balance. From stepping back from the business a little, through to retiring earlier than before, this shift is leading some families to fast-forward their considerations regarding succession and leadership development for the next generation. With the pandemic thrusting digital into the spotlight, it has also underlined questions about the skillset needed to transform businesses and lead them in the future. During the coming year, an above-trend number of next-gen family members will take the reins on the back of one or both of these themes.
Responding to a growing shareholder base
As a family grows and becomes more complex through children, divorce and remarriage, often so too does the shareholder pool. We are seeing a number of these become too large for the existing business to fund. Families are having to respond by either managing the dividend policy or managing who can be an owner.
Some are rationalising the ownership through ‘Pruning’ policies, restricting ownership to immediate family only for example, possibly buying out non-active branches of the family.
Alternatively, the business must grow. In some cases, the family will decide to undertake a transformation programme to make it more operationally efficient and profitable, but, more usually inorganic growth will be pursued – another driver for the M&A trend we anticipate.
We will be advising on more exits in the coming year than previously, and again, I put this down to pandemic-related decision making to some extent. An increased proportion of the next gen will seek family wealth to seed a new business, rather than joining the family firm. In some cases, this is triggering a business sale and consequent establishment of a family office, allowing both the primary investment in the next gen and the opportunity to put the rest of the proceeds to work in other directions.
The S in ESG
Family businesses will leverage their outperformance of others in terms of the social element of ESG. Their strong sense of shared purpose and identity mean their judgements on success often encompass socio-emotional wealth and philanthropy. An ‘extended family’ ethos may be behind the higher employee retention our research found during the pandemic when compared to other ownerships. These strengths, alongside those relating to the E and G, will increasingly be commercial assets that will assist in securing talent and capital.
Attracting and retaining talent
As competition for talent ratchets up yet further, family firms will need to become ever clearer about their employee value proposition in order to beat the market.
At the executive level, where they may be competing for leadership talent with firms offering candidates equity, having, and communicating about, long-term incentive plans and phantom equity schemes could strengthen their hand. Equally, strong messages on their positive culture, progression, flexible working and appreciation will enhance employee attraction and retention, as will a strong ESG strategy. Employees are increasingly looking for a workplace where they can continue to progress their skills as well as secure satisfying working arrangements.
Developing wealth outside of the collective
In pursuit of funding both current gen retirements and later-gen lifestyles, families in business are increasingly thinking about how to build and pass on multi-generational wealth. In many cases after a lifetime or more of having the family wealth almost entirely bound up in the business, shareholders are becoming clearer that independent wealth is sought.
For some families, it is quite the shift to move from reinvesting most of the profit to ensuring a dividend significant enough to kickstart independent wealth creation is taken by family members. In scenarios where this isn’t possible, we’ll see family businesses take on debt or even secure partial exits to facilitate the passing on of wealth independent of the business.