Credit Suisse Study: One in Five SMEs Facing Company Succession Mittwoch, 22. Juni 2016 - 13:00

Succession planning is one of the core strategic tasks facing entrepreneurs. Almost every entrepreneur has to address this question sooner or later. And the issue not only concerns financial assets, but almost always also intangible assets, as one's own business typically represents more than a mere source of income. It's now the third time – following on from 2009 and 2013 – that Credit Suisse has collaborated with the Center for Family Business of the University of St. Gallen to conduct a broad-based survey on the issue of company succession at small and medium-sized Swiss companies (SMEs).

More than three quarters of SME entrepreneurs have addressed their own succession
The 2016 survey confirms the great relevance of this issue for Swiss SMEs: More than three quarters of the chief executives questioned have at least partially addressed the question of their own succession. Specifically, every fifth SME entrepreneur is planning to hand over their company within the next five years. Extrapolated for the overall economy, this means that by 2021 around 70,000 to 80,000 SMEs will be facing a generation change, making this issue relevant to around 10% of all employees in Switzerland. The macroeconomic value of effective succession processes therefore is highly significant.

Demographics will lead to more succession cases in the next few years
The share of SMEs seeking for a succession solution within the next five years has fallen slightly from 22% to 20% when compared to the 2013 survey. According to the authors of the study, however, this decline will very likely be temporary. More than half of SME chief executives are currently between 50 and 65 years of age and thus belong to the baby boomer generation. Around 560,000 people throughout Switzerland are currently between 60 and 65 years of age and therefore on the brink of retirement. This figure will be around 750,000 in 2030, what corresponds to an increase of approximately one third. As a consequence, those baby boomer retirements will very likely result in significantly more company successions in the next 15 years. At the same time, the age group of the successor generation is growing much more slowly, which could lead to an increasing shortage of potential successors. One possible strategy for plugging this gap is to appoint more women chief executives. Even though the share of women holding management positions has risen in recent decades, women are still only in charge of just under 10% of all SMEs as things stand. An increasing share of female chief executives could potentially reduce the upcoming and demographically-related imbalance between sellers and acquirers.

Falling share of family firms
Family firms are particularly affected by the issue of company succession, as the entrepreneur's financial and personal ties to the company are strong. According to the survey, 75% of all SMEs are currently family firms. Compared with the 2013 survey, this share has fallen somewhat, a development that could be attributable to causes of both an economic and sociological nature. On the one hand, the industries that have grown most strongly in Switzerland in recent years are those that are less dominated by family businesses, such as the healthcare sector. On the other hand, social changes over the last few decades have led to an increasing number of descendants of entrepreneurial families pursuing a career outside the family business.

More than a half of companies opt for non-family succession
Presently, succession plans of family and non-family SMEs balance each other. Although a relative majority of 41% of SMEs still wish to find a succession solution within the family, around a fifth of these are also considering non-family options. Overall, marginally more SMEs are today seeking a purely non-family succession solution (34%) than a purely family solution (33%). Among the non-family succession plans, the most frequently cited preferences are a sale to former (senior) employees (management buyout, 25%), followed by a sale to another company or private equity company (21%) and a sale to an individual outside the company (management buy-in, 17%). In reality, management buy-ins in particular occur much more frequently than envisaged by many SMEs. Forty-six percent of today's chief executives took over their company from a family member – 25% as part of a management buyout and 30% by means of a management buy-in.

Form and strength of family influence determines type of succession
The influence of the family within a company has a decisive impact on the choice of the type of succession, whereby family relationships among the owners play a particularly important role. SMEs in which there are no family members among the owners typically plan to hand over the company to (senior) employees at some point. The more family members there are among the owners and on the executive board, the more emphasis there is likely to be on the family buyout as opposed to the management buyout. However, the willingness to sell to buyers outside the family and company does not depend greatly on the strength of the family influence within the company. According to the survey, the intention to keep a family company within the family is at its greatest if the owners include parents with their child and/or sibling relationships. If the ownership structure is limited to a spouse relationship, almost half of family firms plan a non-family takeover.

Executive management to the most capable descendant, ownership to all
In all cases of family succession, the question arises as to which younger members of the family the management and ownership of the company should be handed over to. The authors of the study observe that a number of different distribution principles can be crucial for this decision. According to the survey, the majority of SMEs would prefer to hand over ownership to all their descendants in equal shares (65%). When handing over the reins of management, however, SMEs would focus on the most capable family members from an entrepreneurial perspective (81%). The analyses of Credit Suisse and the University of St. Gallen show that the selection of distribution principles also exerts an influence on company performance. If the previous generation focused on the performance principle when handing over management, today's managers will assess the development of company performance to be better than if the principle of equality was applied to the change of management.

SMEs seek greater recourse to governance instruments in family succession cases
According to the survey, frequent use of governance instruments is made by owners of SMEs. Forty-two percent of SMEs seek recourse to shareholder agreements, 36% to contracts under inheritance law and 35% to contracts under matrimonial law. Among other things, governance instruments can serve to pave the way for future succession planning. For example, those SMEs that make use of a large number of governance instruments exhibit a greater leaning toward family succession solutions. Family firms therefore appear to fall back on governance instruments in order to preserve future family control within the company, thereby preventing the sale of the company to non-family members.


The publication "Company Succession in Practice – The Challenge of Generation Change" is available on the internet in English, German, French and Italian at:www.credit-suisse.com/research (Swiss Economy)