The Challenges the Younger Generation Faces When Taking Over Family Businesses

Generational turnover in Italian family businesses is not just a necessity, but can represent a great strategic opportunity: companies that have undergone a generational transition between 2013 and 2022 have above-average economic-financial results, with an average annual positive differential of 7.4 percent in revenues, 3.5 percent in ROE and 11.5 percent in the growth rate of fixed assets. This figure is part of an overall picture of great vitality of the business fabric combined with remarkable (and indeed growing) capital strength.

These are some of the findings of the XVI AUB Observatory report, promoted by AIDAF (Italian Family Business), UniCredit, AIDAF-EY Chair of Family Business Strategy (Bocconi University) and Angelini Foundation with the support of Borsa Italiana and ELITE (the ecosystem that supports family businesses in sustainable growth by accelerating access to capital, skills and relationships) that will be presented today at 5 p.m. at Palazzo Mezzanotte in Milan, headquarters of Borsa Italiana. This edition, edited by Carlo Salvato and Fabio Quarato, covers again some of the most remarkable topics of the 15th edition by illustrating not only the features of the recovery after the pandemic crisis, but also other relevant indicators for this category of firms, which is one of the cornerstones of the Italian economy. This is not a sample survey but a study of all Italian family businesses with a turnover of at least € 20 million, or 15,836 firms. This number in itself represents a major achievement, since as many as 4,201 firms entered the survey this year alone, an increase of 36.1 percent over the previous year and as much as 55 percent over ten years ago. Such strong growth is evidently only in small part due to the threshold effect and testifies to the dynamism of Italian family entrepreneurship.

The recovery after the pandemic-induced setback continued this year, albeit with much lower growth rates than those seen last year. Particular attention was also paid to observing one of the most critical moments in the life of a family business: the handover of leadership from one generation (often the founder's) to the next, called "NextGen," comparing the profiles of family NextGen with those of outside managers. Generational transition has accelerated since 2020, from 1.5 percent per year in the 2013-2019 period to 2.1 percent per year in the 2020-2022 three-year period. Companies that made a generational shift showed improvements in various performance indicators, such as revenue growth, fixed assets, ROA, ROE, and employee performance.

NextGen is characterized by a high level of education, with about 70 percent of successors holding at least a bachelor's degree. External managers but especially NextGen women tend to have a slightly higher level of education than NextGen men. Work experience outside the family business and international work experience positively affect the impact of generational transition on business performance. In particular, successors with outside work experience of at least one year or international experience of at least six months outperformed the average. As Fabio Quarato points out, "The AUB Observatory is the only player to map these dynamics in a rigorous way. This said, the point is of great interest, and we will continue to study it in the coming years: sons who take over from fathers have a comparable level of education to outside managers who take over from leaders of the previous generation. What remains rather wide is the gap in terms of experience outside the family business, which in the family NextGen is much less significant than in outside managers. It should also be noted, however, that today we are taking a picture of those who completed their education about 20 years ago, so it is very likely that this difference is already narrowing."

"The numbers from the AUB Observatory confirm that family businesses that have made a generational handover, which have been growing over the last three years, have shown better performance in terms of profitability, productivity and capital strength," comments Cristina Bombassei, president of AIDAF. "This is also thanks to the strategic role of the family NextGen as an agent of change, able to bring new skills, especially in technological and innovative sectors, to better respond to market dynamics and contribute to the modernization of business processes. From the analysis of the profiles of NextGen-an element of novelty that I found very interesting in this edition of the Observatory-an evolution of leadership models and the degree of diversity present in the governing bodies of family businesses is evident. However, female NextGen, while showing greater academic preparation, still have limited leadership opportunities in family businesses. Continuing to encourage the path of diversity is a constant goal of AIDAF, which has been long and passionately striving to achieve a transition to more evolved governance models and foster increasingly strategic generational change" 

Another aspect covered in the report is the capital opening of family businesses. Approximately 8.1 percent of family businesses with revenues over 20 million euros have opened their capital through minority stake sale, stock market listing or transfer of control. As Carlo Salvato, holder of the AIDAF-EY Chair in Family Business Strategy in memory of Alberto Falck at Bocconi, explains, "The positive effect of capital opening is very strong when capital opening occurs with the entry of minority shareholders, especially if industrial in nature, and through listing on the stock market. In particular, minority operations with industrial partners have a particularly positive impact on profitability and revenue growth. Likewise, IPO’s greatly amplify the level of internationalization and the positive effect on investment."

The opening of capital in Italian family firms has a significant impact on their business performance: firms that have opened capital through minority transactions and IPOs show improvements in various performance indicators. In particular, these companies show higher profitability than the national average, with ROI increasing from the year of capital opening. In addition, capital opening is associated with higher revenue growth rates and a significant increase in the level of internationalization. Companies that have opened capital also tend to invest more, with higher than average growth in fixed assets.

Finally, the number of family businesses investing abroad has increased by 704 since the 11th edition survey (with 2019data), however, their incidence has decreased slightly. This is due to the (large) increase in family businesses monitored by the Observatory, which are largely smaller and often non-internationalized firms. The propensity to internationalization is favored by collegial leadership models and less "family-like" governance models. In particular, models with an "open" board show a greater tendency to internationalize. Therefore, the contribution of non-family professionals is confirmed to be decisive, especially in larger family firms, which are also those most likely to invest abroad.

Massimiliano Mastalia, Head of Wealth & Large Corporates at UniCredit, says, "The 16th AUB Observatory, with which UniCredit has been collaborating since 2009, once again confirms the central and driving role of Italian family businesses for our country's economy. The findings of the analysis, conducted on a sample that has grown by 36 percent since the last survey, highlight positive developments. These are in line with our strategy of being close to productive realities that express the excellence of our territories and prove capable of changing and innovating their business models, developing and repositioning the way of doing business and contributing to creating value for our communities. UniCredit is committed to supporting and developing their growth, working alongside entrepreneurs especially in strategic phases of discontinuity - such as opening up governance and capital, generational transitions, internationalization and M&A - with the best financing and advisory solutions, using our global European platform integrated with product factories."

For his part, Fabrizio Testa, managing director of Borsa Italiana-Euronext Group, said, "According to the AUB Observatory, listing on the stock exchange represents a strategic lever for Italian family businesses, fostering an increase in profitability, more sustained growth in turnover and an acceleration of the process of managerialization. Borsa Italiana and Euronext Group have always supported companies in their development path, promoting initiatives aimed at simplifying and facilitating access to the capital market, as well as providing training and dedicated tools. These include IPOready, Euronext's pre-IPO program that prepares companies for the transition to the stock market, and ELITE, the ecosystem that supports SMEs in their sustainable growth by facilitating access to capital, expertise and strategic networks. Listed companies perform above the national average, thanks to a greater ability to attract investment, access key resources, and accelerate international expansion. For an entrepreneur, it is the best solution to give the company longevity."