Final Report Overview of Family Business Relevant Issues


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KMU FORSCHUNG AUSTRIA
Austrian Institute for SME Research
In co-operation with
Overview of Family Business Relevant Issues Contract No. 30-CE-0164021/00-51 Final Report
Vienna 2008

KMU FORSCHUNG AUSTRIA
Austrian Institute for SME Research
This study is conducted on behalf of the European Commission, Enterprise and Industry Directorate-General.
Author: Irene Mandl (Austrian Institute for SME Research)
Review Ulla Hytti (TSE) Johan Lambrecht (EHSAL - K. U. Brussel) Pekka Stenholm (TSE) Peter Voithofer (Austrian Institute for SME Research)
Layout: Martina Gugerell (Austrian Institute for SME Research)
The contents of this publication do not necessarily reflect the opinion or position of the European Commission. Neither the Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of the information contained herein.
This study has been elaborated with reasonable care. The project team does not, however, accept responsibility for printing errors and/or other imperfections and potential (consequential) damage resulting thereof.

Overview of Family Business Relevant Issues - Final Report

I

Content

Executive Summary.................................................................................................... 1

1

Introduction ..................................................................................................... 7

1.1 Background and Objectives of the Study ........................................................... 7

1.2 Methodology Applied and Structure of the Report ............................................. 9

2

Understanding of “Family Business” Across Europe ................................ 13

2.1 Definition of “Family Business” in Public and Policy Discussion as well as Research......................................................................................................... 13

2.2 Family Businesses within the Enterprise Population ........................................ 35

3

Economic Importance of Family Businesses in Europe............................. 39

3.1 Family Businesses’ Contribution to the Economy ............................................ 39

3.2 Size Class Considerations............................................................................... 48

3.3 Sectors of Activity ............................................................................................ 50

4 4.1 4.1.1 4.1.2
4.2 4.2.1 4.2.2 4.3 4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 4.4 4.4.1 4.4.2 4.4.3 4.5 4.5.1

Characteristics of Family Businesses in Europe ........................................ 53 Interrelationships between Family and Business Sphere ................................. 54 Overlaps Between the Family and the Business.............................................. 54 Governing Relationships Between Family Members/Family Members and Other Stakeholders................................................................................... 56 Motivation/Drivers............................................................................................ 56 Long-term Sustainability .................................................................................. 56 Business Transfer ........................................................................................... 57 Social Endowment/Social Capital .................................................................... 58 Personal Values .............................................................................................. 58 Personal Engagement/Involvement ................................................................. 58 Risk Behaviour/Local Commitment.................................................................. 59 Corporate Social Responsibility ....................................................................... 59 Social Capital and Networking ......................................................................... 60 Management ................................................................................................... 62 Composition of the Management Team ........................................................... 62 Management Expertise.................................................................................... 63 Decision Making Processes............................................................................. 64 Economic Endowment..................................................................................... 65 Capital/Finance ............................................................................................... 65

II Overview of Family Business Relevant Issues - Final Report

4.5.2 4.5.3 4.6 4.6.1 4.6.2 4.7

Market Monitoring/Reaction to Market Developments...................................... 66 Staff Issues ..................................................................................................... 66 Performance.................................................................................................... 68 Financial Performance..................................................................................... 68 Business Growth ............................................................................................. 68 Résumé........................................................................................................... 70

5

Institutional Framework for Family Businesses in Europe ........................ 71

5.1 Relevant Actors and Their Fields of Activities .................................................. 71

5.1.1 Family Business Networks............................................................................... 74

5.1.2 Employers’ organisations................................................................................. 76

5.1.3 National and Regional Governments ............................................................... 77

5.1.4 Support Service Providers ............................................................................... 78

5.2 Family Business Supportive Instruments ......................................................... 79

5.2.1 Company Law ................................................................................................. 80

5.2.2 Taxation of Reinvested Profits ......................................................................... 81

5.2.3 Governance..................................................................................................... 81

5.2.4 Planning of Business Transfers ....................................................................... 83

5.2.5 Competence Development for a Successful Business Transfer....................... 84

5.2.6 Market Places for Business Transfers ............................................................. 84

5.2.7 Financial Support of Business Transfers ......................................................... 85

5.2.8 Taxation Related to Business Transfers .......................................................... 85

5.2.9 Management/Entrepreneurship Education....................................................... 87

5.2.10 Information Provision/Research....................................................................... 89

5.2.11 Awareness Raising.......................................................................................... 91

5.2.12 Lobbying/Policy Advice.................................................................................... 92

6 6.1 6.1.1 6.1.2 6.1.3 6.1.4 6.1.5 6.1.6

Future Issues ................................................................................................. 93 Specific Challenges for Family Businesses in Europe ..................................... 93 Intransparency of the Family Business Sector ................................................. 93 Business Transfer ........................................................................................... 94 Balancing Business and Family Sphere........................................................... 95 Family Business Specific Competence Development ...................................... 95 Access to Finance ........................................................................................... 95 Image on the Labour Market............................................................................ 96

Overview of Family Business Relevant Issues - Final Report III

6.2 6.2.1 6.2.2 6.2.3 6.2.4 6.2.5 6.2.6 6.3

Recommendations for Policy Actions............................................................... 96 Addressing the Intransparency of the Family Business Sector ........................ 96 Supporting Business Transfers...................................................................... 100 Supporting the Balancing of Business and Family Sphere............................. 102 Enhancing Competence Development........................................................... 102 Supporting Capital Endowment of Family Businesses ................................... 103 Improving Family Businesses’ Image on the Labour Market .......................... 104 Summary of Family Businesses’ Specific Challenges and Respective Policy Recommendations .............................................................................. 104

7

Bibliography ................................................................................................ 107

Annex I: Country Codes ......................................................................................... 119

Annex II: Glossary/List of Abbreviations .............................................................. 121

Annex III: Project Partners ..................................................................................... 123

Annex IV: Selected Family Business Support Instruments ................................. 125

Annex V: Country Fiches ....................................................................................... 169

IV Overview of Family Business Relevant Issues - Final Report

Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9
Graph 1 Graph 2 Graph 3 Graph 4 Graph 5

Tables
Elements of the Definition of Family Businesses by Country ................ 20 Family Firm Typology United Kingdom................................................. 33 Stages of Ownership - Typology .......................................................... 35 Relation of Family Businesses to Other Business Classifications......... 37 Economic Indicators of Family Businesses in Europe .......................... 40 Main Differences between the Average Family and Non-Family Business ........................................................................... 70 Overview on Institutional Actors Dealing With Family Businesses in Europe ................................................................................................. 72 Examples for Family Business Friendly Inheritance/Gift Tax Regulations .......................................................................................... 86 Summary of Family Businesses’ Specific Challenges and Policy Recommendations................................................................... 104
Graphs
Potential Family Businesses Status over the Company Life Cycle ....... 14 Size Class Distribution Within the Family Business Sector, Selected Countries............................................................................... 49 Size Class Considerations of the European Economy and the European Family Business Sector ....................................................... 50 Main Specific Characteristics of Family Businesses ............................. 54 Overview on Family Business Specific Support Instruments ................ 79

Overview of Family Business Relevant Issues - Final Report 1
Executive Summary
Objectives and Methodology of the Study
Family businesses are a traditional way of conducting business within the private sector. However, only recently family businesses have increasingly been attracting more attention in public and policy discussions, both at a European and a Member State level. The drivers for this enhanced attention are a greater awareness of the contributions family businesses make to economic and social/societal development, increased attention to the issue of business transfer, as well as a higher degree of academic interest in the issue.
However, the information available on the family business sector stems from individual research studies and experts’ opinions. As a result, it is quite fragmented and very difficult to compare due to the different definitions of what constitutes a family business as well as the methodologies applied. Furthermore, little is so far known about the existing institutional frameworks and instruments benefiting family businesses, and about their working methods and effects.
Against this background, this study aims to:
• review the national definitions of “family business” used in the 33 countries covered (i.e., EU-27, Iceland, Norway, Liechtenstein, Turkey, Croatia and the Former Yugoslav Republic of Macedonia) and identify common elements in order to propose ideas for a European definition
• provide an overview of the specific characteristics and the current situation of family businesses (particularly in comparison to SMEs)
• identify existing national networks and institutional players as well as policy activities to support and promote family businesses
• analyse the need for and the shape of possible future policy initiatives in favour of family businesses
The information compiled in this report was gathered at a national level by conducting desk research as well as qualitative interviews with relevant stakeholders. In addition to this consolidated European report, individual Country Fiches are available for 33 European countries, describing the family business sector within their national contexts.
Understanding of “Family Business” Across Europe
In all of the 33 countries under analysis, there is not a single definition of “family business” which is widely and exclusively applied to every conceivable area, such as to public and policy discussions, to legal regulations, as an eligibility criterion for support services, and to the provision of statistical data and academic research. However, a wide range of different definitions have been applied in socio-economic research and also partly in legal regulations.

2 Overview of Family Business Relevant Issues - Final Report
Across Europe, a total of 90 different definitions were identified, which mainly require major family influence on ownership and management/strategic control. Other characteristics used to differentiate family businesses from non-family businesses are the active involvement of family members in the enterprise’s everyday activities (i.e., the formal or informal employment of family members in non-managerial positions), the enterprise’s contribution to the family’s income generation, and intergenerational considerations (i.e., the intention to ensure the enterprise’s sustainability beyond the entrepreneur’s (professional) lifetime).
Most of the prevailing definitions have not been operationalised, particularly as far as the term “family” is concerned, but also with regard to strategic/managerial control.
In numerous countries, family businesses are widely equated to Small and MediumSized Enterprises (SMEs) in public and policy discussions. At the same time, there is an awareness that family businesses are run in all legal forms, including (listed) stock market enterprises.
Economic Importance of Family Businesses in Europe
Across Europe, about 70 % - 80 % of enterprises are family businesses and they account for about 40 % - 50 % of employment. On the one hand, a large share of European SMEs are family businesses, and some of the largest European companies are also family businesses. On the other hand, similar to the European economy in general, the family business sector is dominated by SMEs, and particularly by micro enterprises with less than 10 employees.
Family businesses are active in all sectors of the economy. In some countries, data are available highlighting that family firms are more prevalent in traditional and labour intensive sectors. However, a shift towards more modern industries is taking place.
Characteristics of Family Businesses in Europe
Within family businesses, there is a strong interrelationship between the family and the business. The family is (formally, but also informally) at the centre of the company. This results in two structures encountering each other, namely the family and the business, increasing the potential for conflict which affects both the family and the business sphere.
Family businesses tend to focus on the firm’s long-term sustainability rather than realising short-term profits and on realising generational changes in ownership and management. In line with this, family businesses are on average older than non-family businesses.
When a firm is transferred to the next generation, it is not only financial assets which are passed on, but also social and cultural capital. The latter refers, for example, to the value system, i.e., the importance of honesty, credibility, modesty, respect etc. On the one hand, this has led to particular emphasis being placed on the personal commitment and engagement of family members within the enterprise and, on the other hand, on the firm’s engagement in (local) Corporate Social Responsibility activities.
Another characteristic of family businesses is the dominance of management from within the family. In this context, paternalism and nepotism are also often prevalent in family firms, as is the existence of emotional and informal decision making.

Overview of Family Business Relevant Issues - Final Report 3
The capitalisation of family firms stems from family funds and bank loans. Profits are often reinvested in the company and the owners are more willing to wait for a return on their investment (so called “patient capital”).
Family businesses’ growth trajectories are quite stable and continuous in comparison to non-family businesses, which take more dynamic and volatile routes.
Institutional Framework and Support Instruments for Family Businesses
Different players influence the environment of the family business sector (with a higher level of activity prevalent in the EU-15 than in the New Member States):
• Family business networks focus their activities (mainly networking, information provision and lobbying) specifically on the family business sector.
• Several employers’ organisations or chambers of commerce address issues specifically relevant to family firms (e.g., succession), therefore explicitly or implicitly benefitting family businesses.
• National and regional governments indirectly influence the environment of family businesses by setting public strategies, enforcing legislation, and providing support measures.
• Providers of support services (e.g., education/training providers) actively address managers of family businesses and offer services that, owing to their contents, are of particular interest to family businesses.
• Researchers gather and disseminate information on the sector to highlight its specific characteristics.
These players are engaged in different (support) activities, which are favourable to the family business sector, as outlined below:
• Regulations in company law facilitate business transfers or allow for the establishment of non-voting stocks, enabling family firms to take in external investors without having to share control.
• Favourable tax treatment of reinvested profits is beneficial for family businesses aiming to use accrued gains for business growth.
• The technical or financial support provided to establish corporate governance codes, family governance, family protocols, family constitutions, family councils, family assemblies or similar enable family businesses to cope with the interrelationships between the family and the business sphere.
• In the field of business transfer, there are several different support instruments across Europe. They, for example, foster entrepreneurs’ awareness of the challenges involved in a business transfer, support the timely and thorough planning of the transfer process, or equip successors with the necessary competences and skills for their future role. Also favourable regulations with respect to (reducing or abolishing) inheritance and gift tax are advantageous for family firms.
• Some university courses as well as workshops/seminars run by, e.g., chambers of commerce, enhance the managerial/entrepreneurial capacities of present and future family business leaders by integrating the specific characteristics and challenges of family firms into their curricula.

4 Overview of Family Business Relevant Issues - Final Report

• Providing and disseminating information on and towards the family business sector as well as political lobbying contribute to improving the family business environment.
Specific Challenges for Family Businesses in Europe and Policy Recommendations
In addition to the general economic/business challenges which all enterprises face to a similar extent, family firms are hampered by factors peculiar to their specific characteristics. These are summarised in the following table, together with recommendations on how they could be supported by public players.

Challenge

Policy Recommendation
Provide an operational definition of “family business”

Lack of awareness by politicians of the economic and social/societal contribution of family businesses, resulting in a low level of activity to create a family business friendly environment

Conduct and disseminate research on family businesses
Establish family business representative organisations

Empower the family business representative organisations

Lack of family firms’ awareness of the importance of timely planning for intergenerational business transfer (particularly in the NMS and against the changing framework conditions such as socio-demographic change), resulting in ill-prepared successions endangering the firms’ survival

Establish/continue awareness raising measures of the importance of planning business transfers as well as the provision of practical planning tools
Establish training for entrepreneurs and successors to prepare them to cope with the challenges of the transfer process

Financial obligations

Reduce/abolish inheritance/gift tax
Establish access to finance which does not involve the loss of control of business decisions

Concerned Level
Expert Group on Family Business Relevant Issues
National governments, chambers of commerce in cooperation with researchers
Family business sector with the assistance of the European Commission and national governments
European Commission and national governments
European Commission and national governments, in cooperation with chambers of commerce and family business networks as well as education providers
National governments

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Final Report Overview of Family Business Relevant Issues