Protecting the Legacy of Family-Owned MSME Businesses – Advancing Economic Growth & Job Creation
According to the World Bank Group, around the world roughly 90 per cent of all enterprises are micro, small and medium-sized enterprises (MSME), which include around 50 per cent of the labor force. MSMEs play a vital role in national economies around the world, generating employment and value added and contributing to innovation and growth. As seen in research conducted by the Global SME Policy Network (GSPN) at Prince Sultan University, MSMEs are central to the efforts to achieve more inclusive and sustainable economic growth.
Within the subset of MSMEs, are the crucial demographic of family businesses. As noted by Tharawat, it is estimated that family businesses account for approximately 70% of global GDP, are significant job creators, drive innovation and are important caretakers of their communities and environment. As such, MSME family businesses continue to represent an important area of business research. Numerous studies have explored whether family firms have distinct goals or strategic plans, approach towards risks, governance structures, mindset, access to finance and whether they outperform non-family firms and why.
Most important is the global research on the exit-entry of family business, in particular, the choices of emerging generations to follow in the footsteps of their relations as opposed to choosing to start a new and separate entity. Specifically, what are the drivers influencing the decisions of Millennials and Generation Z in pursuing one option over the other? What are the business, economic and further social implications of a business leader’s decision to succeed their relatives and assume control of a family business?
In this article, ‘exit-entry’ or ‘business succession’ is defined as the change of ownership of any family firm (spousal couple, biologically linked family - fathers, mothers and children, and who live in the same or another household) to another person or legal entity assuring the continuous existence and commercial activity of the enterprise, and it encompasses different kinds of transfers both to family and non-family members. Typically, the transfers/exits occur within the owner family, from one generation to the next. Figure 1 below illustrates the visual representation of the exit-entry process for a family-owned MSME as well as the three unique phases of succession.
Fig. 1. Exit-Entry Process of Family-owned MSMEs
The Biggest Challenge to the Long Term Viability of MSME Family-Owned Businesses: Succession
Research on family owned businesses depicts succession as a complex process, influenced by personal goals or intentions of the owners, family structure and relationships, ability and ambitions of potential successors and legal and financial issues. In a review study of global trends in family businesses, issues highlighted included the problems of close kinship, ownership and management transfers, and conflicts of interest which challenge business exit / entry and succession planning. However, the single largest hurdle to the continuity of family businesses is much more foundational: the lack of any formal succession planning. According to the 2019 STEP Global Family Business Survey, “The impact of changing demographics on family business succession planning and governance,” more than half of global family firm CEOs noted that they did not have a formal retirement plan and an estimated 70% of global family businesses surveyed did not have a formal succession plan.
According to research conducted by Mathews and Blumentritt (2015), less than one third of the family business appears to succeed in managing an effective succession process and reaching intergenerational transition, making succession one of the most important challenges for the continuity of family firms.
The Role of the Accountancy Profession in Nurturing MSME Family-Owned Business Longevity
The failure of MSME family businesses to transfer successfully from one generation to another presents a more macro-level threat to economy and society as MSMEs are a recognized engine of economic growth and global social fabric. How can the accounting profession improve the success of family business longevity?
- Encourage strong governance within family businesses – including formality and alignment with modern business governance practices.
- Raise awareness amongst family businesses of the need for early succession planning – early intervention is key to grooming future leaders and gradually transferring business leadership.
- Provide advisory services to support family businesses through the succession planning process – initial planning is just the beginning, regular reflection and adjustments may be needed to keep pace with personal and business priorities.
- Assist clients in navigating gift and inheritance tax opportunities which may be available through governmental programs to support family-owned business legacy – for example, several OECD countries have introduced preferences targeted at SMEs under gift and inheritance taxes, with the aim to address adverse tax consequences, including on retirements savings or intergenerational transfer of assets, and ease business transfer so as to ensure business continuity.
- Contribute to global research to build the evidence base on business transfer trends - As noted by the OECD Policy Note from the 2018 SME Ministerial Conference “Business Transfer as an Engine for SME Growth,” despite considerable progress in research on business transfers in recent years, better evidence is needed to monitor business transfer processes across countries, sectors, firm typologies and entrepreneurs’ characteristics, assess the main causes of transfer failure and main impediments to cross-border transfer, and identify the levers for successful transmission in different contexts, including the growth performance of transferred firms and the impact on jobs. A better understanding is also needed of the implications of various tax issues for SME business transfer.
- Advocate at both the national and global level for policies and programs that recognize and seek to nurture family owned MSMEs and their succession planning and implementation – Contributing to global research on family business succession planning and transfers is important, but so too is raising awareness amongst policymakers and regulators of the need to utilize research and data to inform policy decisions which support the legacy of family-owned businesses.