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Succession and safe harbours

There's no shortage of findings that suggest family businesses have their work cut out in terms of succession planning. In the US, 40% of family owned businesses are expecting a leadership change in the next four years. Billions of dollars will change hands. In Europe, it's a similar tale. But the plot has a new twist: fewer companies are being passed down the generations. As more owners exit, succession planning has lost its urgency. But private investors can be forgiven for feeling a little wobbly.

Eight years ago 30% of owner managers intended to exit by handing the torch to their children, according to research by Grant Thornton. Last year the proportion had dropped to 8% with 92% contemplating selling out instead. The trend is already apparent in the sale of some high profile family businesses such as Weetabix in the UK, Germany's Sulo Group and Brake Brothers, the British frozen food distributor.

Succession planning is so unpleasant a duty that few entrepreneurs manage it. When questioned about the process last year, 49% of American CEOs of small- and medium-sized ­enterprises said they intended to sell their business, according to TEC International, a CEO development group. Some 24% were unable to determine the future of their company. In ­larger enterprises alarm bells are ringing. Investors are keenly aware that corporate scions must earn their inheritance. Indeed, when Christopher Galvin, the grandson of Motorola's founder, announced his early departure from the technology group last September, the company's share price leapt 10%. But are investors too sceptical of bloodlines and the bottom line? If the consistenly higher profits of family companies on the Standard & Poors 500 index and on Europe's major share markets are any indication, then yes.

Of course it would be naïve to shrug off the good sense of a balanced investment portfolio: family businesses are no more impervious to economic downturns or leadership changes than non-family businesses. Many may be looking to exit their big stakes in a company, causing shares to head south. Britain's EasyJet – although no longer run by the family – has navigated choppy waters of late with two profit warnings within a month under the leadership of chief executive Ray Webster. As with all enterprises, there is uncertainty associated with investing in family-run companies. The founding members cannot run them forever.

Meanwhile, corporate successors are facing intensified scrutiny. Today, business is tougher. Before, says John Davis of Harvard Business School, it was more likely a company could muddle through a generation with a weak successor. No longer. If nepotism is a possibility, it's viewed with greater scepticism. This is sensible. And yet there are certainties. One of the features that analysts and fund managers look for when assessing a company is employee ownership. Staff ownership of shares often results in highly motivated teams with a vested interest in doing a good job. Family members are more conservative in the way they run the business. They tend to be less geared and cash rich. They realise that building shareholder value is the same as building their own wealth. But for many owner managers the business is their life. Come time for succession planning it is not unusual that a lack of will emerges. So are ­family-controlled businesses a safe bet for investors? No. But they are a safer bet than many other financial instruments. In an uncertain world, that can't be bad.

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