All in the Family? The future of the Maltese Family Business

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1 Family businesses in Malta continue to grow in terms of revenue, but in order for them to continue to be profitable, they will need to look at ways to deal with growing competition, increasing costs and managing the transition from one generation to the next. All in the Family? The future of the Maltese Family Business Family Business Survey 2014 Malta

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3 Contents Foreword To grow or not to grow: the competition continues When the going gets tough Can the Maltese family firm survive without exporting? Professionalising the family firm All in the family? What keeps the family business owner awake at night? The digital revolution: how are family businesses faring? Looking ahead to 2020 Conclusion

4 Foreword Every two years, PwC undertakes research specifically designed to provide family businesses with insight and comparative information on matters such as corporate challenges, ownership and succession planning and what role family businesses play in the overall economy. This is our third edition of the report and it is interesting to note the key changes and priorities as they have evolved over the years. Family businesses account for 70-90% of GDP globally, and 35% of the Fortune 500 are family enterprises. The power and influence of family and owner led businesses across our clients is significant. This year's research covered almost 2400 family led businesses globally across over 40 countries and is the biggest and most comprehensive research of its kind. It included a broad cross-section of sectors such How family businesses see themselves compared to other sectors Play an important role in job creation 81% Add stability to a balanced economy 75% Measure success differently not just profit / growth 68% Decision making is more streamlined / faster 62% Re-invent themselves with each generation 60% Were able to withstand the recession better 59% More entrepreneurial 57% Take a longer term approach to decision making 56% Less open to new thinking and ideas 40% Take more risks 38% Harder to benefit from recovery (due to capital access issues) 35% 4 PwC Malta

5 Maltese Family Businesses have a similar outlook to the rest of the world, acknowledging technological advances as being the major trend that will transform business over the next 5 years as hospitality, manufacturing, construction, transport, retail and other services ranging from first generation to fourth generation and beyond. 63 interviews with Maltese family businesses were held during the spring of % of Maltese businesses have been in existence for fifty years or more compared to the global sample of 38%. Additionally, only 7% of Maltese businesses compared to 18% of the global sample have been around for less than 20 years. This could signify a decreasing pipeline of local family business start ups in the last decade. Maltese Family Businesses have a similar outlook to the rest of the world, acknowledging technological advances as being the major trend that will transform business over the next 5 years. The results also tell us that for family firms competition is more intense, price pressure is growing and the speed of change continues to accelerate. Family businesses acknowledge they will have to adapt faster, innovate earlier, and become far more professional in the way they run their operations. There is a powerful 'family factor' in play that many of these firms have still not addressed, and some are even reluctant to acknowledge. The red flag here is the issue of succession - a critical area for the majority of family business owners. One of the biggest challenges Maltese businesses will face in the near future is the transition of the majority of businesses from second to third generation. This is historically the transition where family businesses struggle the most in terms of continuity (49% of businesses are transferred to second generation, yet only 21% are transferred to third generation and 12% to fourth generation and beyond). Another growing concern is that as the trend to have children later in life continues, the gap between generations is lengthening, which, as our Next Gen survey earlier on this year has shown (Spotlight on page 16), has led to dangerous communication gaps between those running the business and the generation coming through. Clearly there is a need to support local family businesses as they make up over 90% of our labour market as well as contributing significantly to our economy. A couple of areas highlighted include the need for increased recognition and government support which should be addressed through the Malta Family Business Act (Spotlight on page 21) as well as the need for guidance on governance and focus on succession planning. PwC has over the years assisted a number of family businesses in these areas as well as with mediation, tax planning and supporting them in the transition to the next generation. We hope you will find this report interesting and useful and will encourage you to engage in conversations on your plans for the future success of your family business. Malta is a small country yet rich in heritage and people resources. This is largely a result of the significant efforts made by our family businesses to contribute to the wealth and continued growth of our economy. Kevin Valenzia PwC Malta Territory Senior Partner Family business survey 5

6 To grow or not to grow: the journey continues 57% of Maltese firms report growth in the last 12 months 5% aim to grow aggressively in the next five years Over the past year, family businesses in Malta have grown at a slower rate in terms of sales (57%) compared to the global average (65%) but not significantly so. Growth plans for the future are more conservative than the global average with just 5% aiming to grow quickly and aggressively over the next five years (vs 15% globally). However, future growth expectations are positive with 91% of Maltese family businesses confident that they will achieve growth. The key internal challenges facing family businesses in Malta are similar to those across the world, although there is more emphasis locally on company re-organisation (up by 21% since 2012) and succession planning (up by 14% since 2012). The internal issues can be split into two main categories those that relate to the long-term success of the organisation and those that relate to the everyday running of the business. In the long term, the main concerns focus around the need to re-organise, or rather, to professionalise the business in order to lay the foundation for this generation and the next. The second set of issues focus around the day to day challenges of running the business - recruitment and training, managing cash flow and controlling costs. The availability of finance scores relatively low on the list of issues that local family businesses will face. This is likely due to the caution that firms exert when sourcing finance preference is given to sourcing funding internally. Limited recourse to external finance may in turn restrict family businesses from pursuing opportunities for growth (Spotlight on page 13). 6 PwC Malta

7 Key internal issues in the next 12 months To find management know-how outside the family. Recruitment of staff and attracting quality people. We need to reduce our costs to retain our competitiveness. Staff recruitment Company re-organisation Business / Product dev Succession planning Cash flow / Cost control 46% 49% 40% (21%) 28% 27% 25% 27% (14%) 10% 25% 19% The collection of cash and cash flow management. Making sure we can acquire finance at a competitive price. Staff training Availability of finance Technology Profitability / Margins 21% 12% 13% 15% 13% 13% 11% 11% (6%) PwC Malta PwC Global Figures in brackets are Malta % in 2012 Key external issues in the next 12 months Market conditions / Euro uncertainty Competition Govt policy / regulation Exports / Problems in foreign markets 68% 63% 41% 32% 27% 33% 14% 12% Increasing and unfair competition - we have a situation in Malta with goods imported from Sicily that are not subject to the same taxes. The stability of the Euro, as a currency. We are in the Mediterranean and we want to make sure our neighbouring markets show some growth. Both Italy and Libya are key focuses for us; Libya is a troubled region. Availability of finance 8% 12% We have a lot of competition with franchises from abroad. PwC Malta PwC Global Competition - China is targeting European markets and they can produce our product cheaper than we can. We cannot compete on price so we have to concentrate on quality, which I am very proud of. Family business survey 7

8 Compared to the global average, Maltese family businesses are less concerned over the general economic situation In the coming twelve months, family businesses in Malta are more likely than the global average to see competition and market conditions/ Euro uncertainty as likely challenges. Firms in Malta are worried about the volatility of the markets where they operate in the Mediterranean region such as Libya with its ongoing internal conflicts. Additionally, emerging markets such as China pose threats in terms of pricing. Technology is changing the way we do business and therefore the online market is becoming more and more of the way to do business. For those who are not online, there is increased competition from those who have taken this journey. Many people nowadays prefer to shop online and it is therefore increasingly important for family businesses to jump on the bandwagon and take this leap. The younger generation would certainly be keen to take this route, as it is the environment that they have grown up in. Compared to the global average, Maltese family businesses are significantly less concerned over the general economic situation and in fact this score has dropped to 43% from 80% two years ago. This could perhaps be due to the fact that as most family businesses in Malta are small with limited need for external financing, the effects of the recession were not as intense as in other countries. On a more long-term basis over the next five years, the key challenges revolve around the need to continually innovate, address increasing competition and contain costs. Innovation is a key issue that needs to be addressed for family businesses to remain competitive. It is a great opportunity to encourage the younger generation to look at innovative ways how to move the business forward in the face of increasing competition whilst finding creative ways to bring down costs. A worrying statistic shows that only 29% of Maltese family businesses (compared to 40% of the global sample) feel that professionalising the business will be a challenge within the next five years. Could this be a lack of awareness, a tendency to run business as usual and assume that they can continue to run their business in the same way that they always have? 8 PwC Malta

9 Key challenges in five years' time Need to continually innovate Price competition Number of businesses competing Containing costs 68% 64% 62% 58% 62% 42% 57% 44% Attracting the right skills / talent Company succession planning General economic situation Need for new technology Retaining key staff Complying with regulations Increasingly international environment Need to professionalise 48% 61% 44% 36% 43% 56% 40% 41% 38% 48% 35% 42% 32% 33% 29% 40% (80%) Suppliers / Supply chain 19% 26% Conflict between family members 17% 11% Figures in brackets are Malta % in 2012 PwC Malta PwC Global Family business survey 9

10 When the going gets tough In terms of personal and business goals over the next five years, Maltese family businesses have similar priorities to the rest of the world they are focused on the future of the company and ways to improve profitability. In order to do this, they acknowledge that they need to focus not only on professionalising the firm but also to become more innovative. These two points go hand in hand professionalising the firm will demonstrate to the outside world that they are aiming to be transparent and fair; this will enable them to recruit highly talented performers, even non-family members, who can drive the innovation agenda. They recognise that creating employment for family members is no longer a driving factor family members need to professionalise themselves, otherwise there will not be a future for them in managing the business. 10 PwC Malta

11 Relative importance of personal and business goals over the next 5 years (out of 10) Ensure company's long term future Improve profitability 15.6% 16.2% 14.7% 13.7% More innovative Attract high quality skills Ensure staff are rewarded fairly Run business more professionally 10.3% 9.3% 9.9% 10.1% 9.5% 9.4% 9.5% 8.8% Diversify into new products / sectors Enjoy work and stay interested Ensure business stays in the family Grow as quickly as possible Different export markets Contribute to the community / positive legacy Move into new regional markets in the home country 6.4% 5.6% 5.6% 5.4% 4.1% 4.4% 4.1% 4.0% 4.0% 4.3% 3.2% 4.3% 2.4% 3.8% Create employment for other family members 0.8% 0.6% PwC Malta PwC Global Family business survey 11

12 Can the Maltese family firm survive without exporting? Around a fifth of sales are currently international, expected to rise to just over a quarter in the future, mainly within Europe. This is slightly lower than the global picture. Exports continue to be mainly within mainland Europe, followed by Africa. Malta continues to export to traditional markets. There seems to be some interest in emerging markets such as China but since they are low cost producers, one would consider whether this was a feasible option for Maltese exporters. The lower exports compared to our global counterparts correlates well to the research undertaken (Spotlight on page 13) where it was found that Maltese firms in particular SMEs (made up mainly of family businesses) do not have a strong tradition of exporting. 21% of Maltese firms are exporting 27% aim to be exporting within five years Europe 51% Africa 30% Middle East / Gulf 12% Malta Malta exports within the next 5 years 25% of Global firms are exporting 32% aim to be exporting within five years Global UK: 14% Italy: 14% France: 7% Americas 9% Asia Pacific 9% China: 7% No new countries 7% 12 PwC Malta

13 SPOTLIGHT SME Access to Finance In November of this year, an analysis was conducted by PwC to identify the main characteristics of SMEs access to finance in Malta, to draw a picture of the current situation, identify the major constraints and analyse any existing financing gaps. The analysis revealed that the Maltese economy remained resilient during the crisis and that SMEs have largely contributed to this resilience. It was noted however that this resilience largely derived from the fact that the Maltese economy and especially SMEs do not have a tradition of exporting activities and thus are more protected from shocks in the external environment. The tightening of credit standards across the EU has affected SMEs in all Member States; however, Maltese SMEs were impacted to a lesser extent. This is mostly related to the fact that banking financing is only available to those SMEs with sufficient assets while other companies have learned to rely on informal sources of financing. The key recommendations emerging are: 1. To support and expand the implementation of JEREMIE or similar instruments. 2. To consider developing specific guarantee instruments or complementing the existing instruments to facilitate access to short-term debt for working capital purposes and long-term debt for investment purposes. 3. To consider the introduction of a risk sharing loan facility. 4. To support the provision of microfinance for existing and potential entrepreneurs. 5. To create the conditions for the development of an environment that will support equity financing and an active Business Angel community. In this context, the recent Budget proposals to grant incentives tin this area is a step in the right direction. 6. To consider an appropriate combination of grants and Financial Instruments for investment purposes or mentoring and training support to SMEs. Family business survey 13

14 Professionalising the family firm 22% of family businesses in Malta compared to 17% globally do not have procedures in place to deal with family member issues/conflict and those who do are more likely to use third party mediators (46%) compared to the global average (27%). This signifies the reluctance of the majority of family businesses who prefer to be reactive when faced with conflict, rather than introduce measures to prevent it or address it proactively. Over half the businesses have some form of governance in terms of a shareholders agreement, however it is clear that the family business needs to become more professional both in terms of the way the business is managed and in terms of the responsibilities of the owners/ shareholders in enabling the business to be run professionally. There needs to be an appreciation of the difference between involvement, which is helpful, and interference, which is not. On the other hand, family members as the main shareholders need to be kept informed of what is going on and not be treated patronisingly - leave it to us, we know what s best for you. Family businesses also need to show far more professionalism in the way they run their operations. This covers everything from IT systems and finance processes, to risk management and corporate governance. Procedures in place to deal with Conflict Shareholders agreement Third party mediator Measuring and appraising performance Family council Family constitution Entry and exit privision Incapacity and death arrangements Conflict resolution mechanisms Nothing 54% 54% 46% 27% 38% 39% 29% 21% 29% 22% 27% 33% 24% 43% 17% 27% 22% 17% I'd like to leave the business in professional hands. PwC Malta PwC Global Having set up the first generation management structure with exceptional people providing an exceptional service to our customers. 14 PwC Malta

15 All in the family? Family businesses in Malta are less likely than the global average to have nonfamily members holding an equity interest, although there is evidence that there are plans to offer shares in the future. They are also less likely to be planning to sell or seek a public listing for their business. Local family businesses are more likely than the global average to have family members working in the business, with all businesses we spoke to having family members in senior roles. Again, there is evidence that things are changing with higher than average numbers planning on passing on ownership to the next generation but bring in professional management (46% vs. 32%). In this regard, there is a need for businesses to adapt the way they operate externally, and organise themselves internally, to exploit the full opportunities of digital and avoid being overtaken by more advanced competitors. Social media can enable start-ups to cast a much wider marketing net at limited cost, which allows them to compete effectively and cost-effectively with much bigger players. Future Plans Pass on ownership but bring professional management in Pass on management to next generation 46% 32% 35% 40% Sell / float 10% 20% Breakdown in Malta Flotation / IPO: 8% Sell to private equity investors: 2% Don't know 8% 8% Other 2% 1% PwC Malta PwC Global Family business survey 15

16 SPOTLIGHT Bridging the gap Handing over the family business to the next generation 86% of the next generation are ambitious, wanting to do something significant and special 80% have big ideas for change and growth 88% say they have to work harder than others to prove themselves 59% say gaining the respect of their co-workers is biggest challenge In the Next Generation survey conducted by PwC in April 2014, the survey looked specifically at the issue of succession - how family firms were planning for this, how the next generation is preparing for it, and the challenges all family firms need to face in implementing the transition. Throughout the research, it became clear that these challenges presented themselves, in many cases, in terms of gaps the generation gap between the current generation and the one in waiting; the credibility gap the next generation may face, as they attempt to establish themselves; and the communications gap that can open up between parents and children whatever age they are, even in the most successful businesses. The Generation Gap - The PwC survey suggested that the handover for first generation businesses those making the transition from start-up venture to family firm - was more fraught. Those taking over under these circumstances were far less enthusiastic about the prospect; 20% said they were not looking forward to running the business one day, compared to 8% for respondents in their second generation and beyond. Nevertheless, there is no doubting the ambition of those of the next generation who have decided to go into the family firm. 86% of those surveyed showed their desire to do something significant and special when they took over, and 80% had big ideas for change and growth. Some wanted to launch new products or ventures, or make changes to where and how the business operates; others wanted to invest in new technology and explore new approaches to marketing using social media. The Credibility Gap - Bearing the family name is not enough on its own to impart credibility, with many of the next generation thinking it could even work against them. 88% said they had to work even harder than others did in the firm to prove themselves. 59% considered that gaining the respect of their coworkers was the single biggest challenge they faced. Promotion to CEO was no longer automatic for the next generation, with a growing number of family businesses being prepared to make tough succession decisions. The survey revealed that 73% said they were looking forward to running the business one day, but only 35% thought that was definite, and as many as 29% thought it at best only fairly likely. The Communications Gap There was a tendency for some in the older generation to overestimate how well they have run the business, while underestimating their children s capacity to do this as competently as they did. Members of the current generation often commented that their children were not sufficiently entrepreneurial and were not prepared to put in the long hours they did to build the business; while down the hall their children were wishing their parents would embrace the possibilities of new technology, and be more receptive to new ideas. 16 PwC Malta

17 What keeps the family business owner awake at night? What will happen to my business when I no longer run it? Who will succeed me? Will my lasting legacy go on? Have all the sacrifices I have made been in vain? These and many other questions are silently asked but often not addressed by family business owners who are often very sensitive to discuss issues of succession. The local situation is on par with the global average and shows that although 2 in 5 businesses have some sort of succession plan, only 16% of family businesses have a succession plan in place that is robust and documented. Succession is a global problem, coming more and more to the forefront as global competition increases. Family business survey 17

18 The digital revolution: how are family businesses faring? Family businesses in Malta have a similar outlook to their global peers in terms of the global trends that will transform business over the next 5 years, with technological advances having the major impact. Although they recognise this, what are they doing to attract the technologically well-informed individuals who can lead them into the technological revolution? How are they transitioning from traditional family business owners who have lived with limited technology to the new generation who do not know otherwise? Is there a process in place for upward mentoring to allow the younger generation to give insights to current owners? Is this culturally accepted to be mentored by the younger generation or is there a large element of pride that prevents this from occurring? Top three global trends that will transform business over the next 5 years Ranked top 3 (Malta) 57% 25% 19% 13% 70% 24% 27% 19% 49% 22% 19% 8% 84% 10% 22% 35% 52% 17% 10% 8% Ranked 3rd Ranked 2nd Ranked 1st Demographic Shifts Shift in global economic power Resource scarcity & climate change Technological Advances Urbanisation Ranked top 3 (globally) 56% 60% 52% 79% 40% 18 PwC Malta

19 Looking ahead to 2020 Apart from the Malta Family Business Act, there are also other considerations that Maltese family businesses should take into account. Globally, there is an intense focus on the professionalisation of the family business. This could be because in general these businesses tend to be larger than Maltese ones that range from the micro family business to those listed and trading on regulated markets with international portfolios. In the future, will Maltese family businesses who wish to grow and expand overseas need to become listed on the stock exchange? Organisations that have transformed themselves from being a family set up to obtaining a public listing will certainly not underestimate the time and effort to undertake this step. Becoming a listed company entails a number of obligations accountability, reporting obligations and governance including the need to identify and appoint independent directors. However there is not one company who has been through this rigorous process that would deny the fact that this has opened doors both in terms of sourcing finance, thus enabling an organisation to grow faster, attracting professionals to work there and facilitating the process to work with businesses overseas. As Maltese businesses move to successive generations, there is increased pressure as more and more family members become dependent on drawing an income from the company. Another issue is the fact that reinventing themselves is not easy as in practice they find it hard to divest legacy businesses with which they have a strong and usually a lifelong emotional attachment. In order to enable Maltese businesses to continue to grow, consideration should be given to enabling the facilitation of acquiring finance beyond resorting to traditional bank funding. The recent PwC analysis on SME access to Finance provides such recommendations that may be useful for Maltese Family Businesses (Spotlight on page 13). Getting credit from the banks is becoming more difficult. The availability of alternative financing. The collection of cash and cash flow management is increasingly problematic. Family business survey 19

20 Another issue faced in Malta is that although the older generation hands over management of the firm in theory, in practice they still retain complete control over everything that really matters. Whilst the mentoring process from one generation to the next is highly recommended, especially in terms of business acumen acquired over the years, nevertheless, continuing to hold onto the reins could inhibit innovation and prevent the organisation from moving forward. There is the need for family firms to counsel and encourage future generations to further their education, supported by the firm, before joining the family business. This could include scholarships and a spell working outside the business, preferably also outside Malta. Since Malta joined the EU in 2004, opportunities to study and work abroad have been facilitated greatly. Maltese businesses should strongly encourage the future generations to travel, study and work abroad for a number of years as this will give them the business acumen to run their local business with an international mind-set. There is another issue with handing over the reins that could also link to the above point where a new world of opportunities has now opened up. Taking a typical situation in Malta, first generation family business owners have worked very hard to set up a successful business and are very passionate and proud of what they have built. The next generation has likely been brought up in a relatively wealthy environment and may not be so passionate about working hard. This is of course not true of all businesses, however this aspect needs to be taken into account and the success of future generations of family businesses will be strongly impacted by the values learned by successors as they grow from children to young adults. All too often we meet with family business owners who are worried about handing over the reins as they know that their successors are not capable or do not have the maturity or passion to run the business. This is where some tough decisions will need to be made in terms of continuing as is and risking the demise of the business, or professionalising the business which can lead to family conflicts in the short run but longer term continuity of the business. 20 PwC Malta

21 SPOTLIGHT The Malta Family Business Act A group of family business owners recently set up MAFE (the Malta Association of Family Enterprises) in order to collaborate to allow the sector to have its voice heard. Brought together to address the current obstacles to the governance and transfer of family businesses through generations, its founding members have the vision of a strong and sustainable economic sector, growing by its transfer to every future generation. During the summer of 2013, the Ministry for the Economy, Investment and Small Business held a consultation exercise where PwC and other parties were invited to provide input on articulating the Family Business Act in particular the complexities of defining the family and family business. In the recent Budget Speech for 2015, it was announced that the Family Business Act would be introduced next year (i.e. 2015). In terms of the said Budget Speech, the said Act is expected among others to provide a clear definition of what constitutes a family business and to facilitate and incentivise the transfer of business between members of the same family. In Malta, around 75% of enterprises are family businesses and 98% of all businesses in Malta are classified as SMEs. This makes it even more crucial for Malta to support its economy through effective legislation and could also serve to attract foreign family businesses to Malta as no such legislation has been enacted in any other European Union member state. The Institute for Family Business UK (IFB) is also a source of information for local family businesses to tap into in order to learn and also share best practises performed by similar businesses. Family business survey 21

22 Conclusion There is evidence that business has been somewhat challenging in Malta over the past two years although family businesses are reasonably confident about the future. They are however more likely than the global average to foresee a period of steady growth or consolidation rather than aggressive growth. Family businesses in Malta appear to be particularly concerned about the need for innovation, controlling of costs and responding to the increasing number of competitors. They have fewer concerns in other areas than average. In particular, concerns around the general economic situation have declined significantly since Maltese family businesses continue to retain a belief in the importance of family businesses to the community and in providing employment. However, there is evidence that some of these values are eroding, perhaps due to the tougher economic climate. Businesses are less likely than in 2012 to feel that family businesses protect staff, have strong values or a greater sense of responsibility to the community. A relatively high proportion of Maltese companies plan to bring in non family members to the management team, whilst passing ownership on to the next generation. However, only 16% have a well documented succession plan in place. The proportion planning to sell or to seek a public flotation of shares is significantly lower than the global average. In Malta the community contribution is wider the Island and for some there is a sense of pride in professionalising, internationalising and improving a small Maltese organisation. The lasting legacy is to be known as the firm that has helped to contribute to employment and the quality of life on the Island. That I have provided a service to the community and to the market sectors in which we operate, which is deemed to be professional and offering our client base good value for money and our staff good employment terms and conditions. That we have given 40 years of excellent service and efficiency to our Island community. A business that truly cares for employees and the community. That we provided employment and have had a long term presence on the Island and have contributed to employment and the quality of life on the Island. I would like to see the family who take the succession of my company over to keep expanding, to keep on employing people and to give technology priority because that is the way forward and to take care of the environment for future generations. I wish my legacy to be that I helped to internationalise a Maltese company allowing it to foster global ambitions and create the right conditions for attracting international investors. This is quite an achievement for an island with the size and population of Malta. A legacy of how family businesses should be run and managed, family owned but not family managed. A modern model of business management. 22 PwC Malta

23 Key contacts Joe Muscat Advisory Service Line Leader Tel: (356) David Valenzia Middle Market Leader Tel: (356) Family business survey 23

24 This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details.