Why family businesses in the Netherlands are an opportunity for private equity?
Family businesses are the cornerstone of the Dutch economy; they contribute almost 27% of the total nationwide annual turnover and are responsible for 29% of all the jobs created in the country.
The ageing society, succession challenges, family emotions, lack of governance, lack of good employment practices, limited digitisation and innovation efforts within these family businesses are challenging their continuity.
Opportunity?
Only 1 out of 3 family businesses survive beyond the first generation. This is where private equity can potentially fill the gap and tap on undervalued and overlooked opportunities, especially if these firms are willing to enter with smaller investment tickets and have a ‘family-friendly’ approach.
Assuming 2 out of 3 family businesses will not be able to resolve the challenges faced without the involvement of a third-party, there’s a market opportunity of roughly 176 thousand businesses that together have a turnover of 226 billion euros.
What is a family business?
‘A family business is a business in which one family, direct or indirect, is in the possession of the majority of decision-making rights (for listed companies 25 per cent). At least one representative of the family is formally involved in the governance of the firm and the legal entity must be transferrable.’.
Family businesses in the Netherlands
There are roughly 276 thousand family businesses in the Netherlands. This group represents 71% of all enterprises in the nation.
Turnover
Dutch family businesses together generated 343 billion euros in revenue in 2015. This number represents almost 27% of all enterprise’ turnover in the Dutch business economy.
Industries
Family businesses in accommodation and food serving, construction and trade and repair of motor vehicles and motor cycles account for over half of the turnover in these economic activities. Family businesses have a relatively small share in the turnover generated by enterprises in wholesale trade, manufacturing and information and communication.
Size
Most family businesses are small businesses. Almost 89% of family businesses are enterprises with less than 10 persons employed.
Jobs
Family businesses are responsible for the creation of 2.16 million jobs (about 29% of the total number of jobs in the Netherlands).
Where are they located?
The majority of the family businesses are located outside the 4 major cities (the largest metropolitan region in Europe: Amsterdam, The Hague, Rotterdam and Utrecht).
Why is there an opportunity?
Family businesses are facing a range of challenges and so there’s a clear opportunity for private equity to help addressing these challenges and generate value for all stakeholders.
Family businesses are struggling with succession
As mentioned before, only few family businesses (1 out of 3) survive beyond the first generation. This is typically due to conflicts amongst the (2nd or 3rd generation) family members and poor governance.
Only 12% of all the family businesses have multiple generations of the family involved on the board of the company and only 25% has a clear plan for succession.
Succession challenges are created by both the first and second generation:
First Generation: unwillingness to ‘let go’ and trust the next generation.
Second Generation: unwillingness to invest in Research & Development to innovate. In general they tend to be more conservative and rather receive dividends.
Impact of the corona-crisis
Around 43% of all the family businesses expect profits to drop and 25% expect to incur losses. The final economic impact is unclear as we are currently still in the midst of this crisis.
Lack of governance
For family businesses, the journey of transformation and innovation takes on another dimension because the personal nature of family relationships adds another layer of complexity. Conflicts can arise when family and business goals are not aligned and there’s a lack of governance.
Family business lack quality good employment practice
According to the Erasmus Centre for Family Business, family businesses are falling behind when it comes to good employment practices.
Lack of diversity
Family businesses tend to be more conservative when it comes to hiring.
Training and education
Most family business invest less in training and education as compared to non-family businesses.
Flexible working hours
Family businesses tend to be less flexible when it comes to working hours.
Potentially the ‘bedrijfsopvolgingsregelingen’ will be cancelled
The ‘bedrijfsopvolgingsregelingen’ is a tax exemption when family members inherit (and continue to operate) the family business. The government is currently debating whether to cancel this exemption. According to research; cancelling this exemption will lead to severe financial problems for 35% of the family businesses.
Family businesses struggle to digitise, innovate and thus grow
Study reveals that although family firms are aware of the need to innovate and are visibly committed to change, they are still struggling to make this a reality. While they realise that they need to change, they are unsure of how to take the first step and may face difficulties in developing a viable roadmap for sustainable change.
Making the business ‘fit for sale’
A good part of the family businesses in the country will be able to find succession and solve the above challenges they are facing, but for those that can’t and are looking to sell (either in the near term or longer term) or continue to grow using a management buy-in, a private equity partner can bring the right resources.
Private equity can bring a clear exit and secure wealth for the family while creating value for investors and other stakeholders.