The state of succession planning

Family businesses in Latin America lag behind other regions 

10 Jan 2020

For a region in which 85% of companies define themselves as family businesses, Latin America is underprepared  when it comes to succession planning. Regionally, fewer than 29% of these companies are passed on to the second generation, and less than 10% reach the third generation, often due to poor planning when it comes time for new generations to assume leadership.

Family businesses are the lifeblood of the Latin American economy. In Mexico, family businesses account for 62% of GDP and 70% of jobs. In Argentina and Peru, the number climbs to almost 80%. While many of these businesses are small- and medium-sized enterprises (SMEs), which do not employ large labor pools, the lack of readiness for succession planning can be a daunting prospect.

Key takeaways

  • Family businesses, which comprise 85% of companies across Latin America, are the lifeblood of the region’s economy.
  • When it comes to succession planning, Latin America is not a homogenous bloc. Countries with higher GDP per capita and stable economic growth, such as Chile, Panama and Uruguay, have implemented policies to raise awareness about succession planning with positive results.
  • Despite the fact that increases in GDP per capita are accompanied by decreases in the percentage of family businesses within a country, such businesses nonetheless remain valuable to their employees, their customers and their country’s economy.

César Caceres, director of Peru’s Center for Family Enterprises at the University of Piura, warns that many family companies cling to the hope that obstacles will sort themselves out, instead of facing the difficulties of succession planning head-on.

“Few entrepreneurial companies are aware of the need to have a succession plan. This includes influential families with highly successful businesses in their sector,” he explains, adding that they often simply fail to engage. This mirrors the advice of Kai Grunauer-Brachetti, Executive Director, Family Advisory and Philanthropy at UBS, who explains that “when we talk about the transition of a family business we are not facing a simple act or a single or isolated event. It is rather a continuous process, composed of several stages and that develops at different levels. In that sense, it is important that in this process the family members and their advisors focus not only on the aspects inherent to the business, such as finances or legal structures, but also on the family, seeing it as a whole and considering its strengths and its potential to grow.”

In a report about family businesses, UBS identified common obstacles to effective succession planning (PDF, 1 MB) ahead of a transition:

  • Conflicts over employment and compensation of family members
  • Parent-child and sibling conflict over control
  • Conflicts over different ownership strategies (e.g., keep vs. sell)
  • Conflicts between shareholders who are also managers versus shareholders who are “outside” the business
  • Tensions between the spouses of family members who are owners or managers in the business
  • Conflicts over strategy and direction

The latter two of these point to a common challenge experienced by Latin American businesses: seeing power devolve from company founders. Ernesto Niethardt, founder of Niethardt & Asociados, a family business consultancy in Argentina, says ego has caused more than a few businesses to fail. “A fear of delegating, old rivalries … internal fights that divide families, the unconscious resistance of founders … to step aside” are all major risks, he warns.

But it is incorrect to see Latin America as a homogenous bloc for succession planning. A country-to-country breakdown shows that countries with higher GDP per capita and stable economic growth have typically implemented policies to raise awareness about succession planning with positive results.

Below, we examine three categories of countries, all with differing levels of readiness for succession planning, and look at the economic consequences for the countries in question.

Well prepared: Chile, Panama, Uruguay

In these countries, many family business owners have taken the time to plan their legacies well in advance. Not only have their succession plans defining the precise transition of power been established, but elements of their plans are also implemented and road-tested long before they’re needed.

Across all three countries, business owners share the same expectations for succession, regardless of whether they operate a family-owned or private enterprise. Uruguay, for example, has published detailed regulations outlining how to manage these transitions, accounting for commonplace goals, such as paying dividends to shareholders, transferring shares and dealing with the death of a founder. The main concerns of family businesses thus do not differ from those of other types of companies. Instead, a focus on economic policy, taxation and labor shortages is common across all types of entrepreneurs.

Surmounting the threats that plague family businesses in the region has helped these countries become Latin American leaders with regard to GDP per capita and foreign direct investment (FDI). Over time, however, this trend appears to lead to family businesses bearing less of a country’s economic load. For example, Chile’s family enterprises now contribute just 39% of GDP and 41% of jobs, which is significantly lower than historical figures.

Somewhat prepared: Mexico, Peru

Mexico’s dependence on the US for its economic and industrial growth has actually been a boon for family businesses, especially for the manufacturing sector along its northern border. This has provided significantly more security for a business’ main activity, though it has also detracted from diversification.

Mexican regulation has three well-established separate mechanisms for succession:

  • Plan de Sucesión (Succession Plan)
  • Protocolo Familiar (Family Protocol)
  • Consejo de Familia (Family Council)

All three have found popularity. Deloitte outlines the advantages of each , based on the structure of the particular business, but all require an element of advance planning as well as implementation of a succession plan long before it becomes an imperative.

For Dr. Jorge Durán, a professor of family business economics at the University of Las Américas Puebla, this element of early implementation is a major stumbling block.

“Even among family businesses that expect major change in the next five years, only 23% have a succession plan in place,” he says.

According to Durán, the complete implementation of a succession plan can take between seven and 10 years—a fact most companies simply are not aware of. For him, this lack of awareness remains a significant drag factor on the Mexican economy.

Poorly prepared: Argentina, Colombia, Ecuador

Tellingly, in both Colombia and Argentina, polls found that internal family conflict was the main business concern for family companies. The death of a founder or main stakeholder was also identified as a real threat that could lead to a company breaking up. This shows that succession plans, if they exist, have not widely been put into practice.

Jorge Hambra, director of the Argentina Club for Family Businesses, gives his country’s succession readiness a scathing review. He admits that a lack of professionalization, planning and established family protocols are a hindrance, but he points the finger more at Argentina’s perceived lack of economic and policy stability.

“Constant changes to the rules of the game fuel the idea that formalizing [a succession plan] isn’t worth it, since we don’t know what might happen tomorrow,” explains Hambra. “Few companies have succession plans … they truly believe in.”

The likes of Colombia, Argentina and Ecuador have been wracked by protests in 2019, accentuating fears of economic underperformance. A focus on succession planning implies stability in other political and economic matters, whereas a lack of economic stability, fear of rising crime and social unrest, suggests that family businesses will be focused on more pressing matters than succession planning.

Family businesses remain valuable

While in Latin America at large, economic improvement seems to be accompanied by a decrease in the total number of family businesses, those that survive are hugely important. This is not merely true in economic terms but also in the legacy and trust they represent among their customer base and staff.

“We can appreciate their working culture, their contributions to society. Staff in family companies are often more loyal to the company and identify with the family of owners. There are real competitive advantages that [only family businesses] can provide,” concludes Caceres. These more intangible elements are equally crucial to successful succession planning.

As UBS writes in its report on family business transitions (PDF, 1 MB), “a family business transition is not a one-time event. It is an ongoing process that takes place on multiple levels. It requires attention by family members and their advisors not only to the business and its finances, or to the ownership structures and their interplay, but also to the family and its growth and strength.”

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