Family-owned businesses play a hugely important role in the overall UK economy. According to a research paper published in 2011 by the Institute for Family Business and Oxford Economics, family-owned companies employ more than nine million people and account for three-fifths of private sector enterprise. While the vast majority of businesses in this sector are SMEs, there are around 900 large family firms, including high-profile names such as JCB, Clarks Shoes and Warburton’s Bakery. Overall, family-owned companies account for more than a third of UK economic activity.
Family firms typically operate along very different lines to other companies in the private sector, having a tendency to focus on long-term preservation of value rather than quick wins or short-term gains. Rather than starting (or buying) and growing their businesses with a view to a big payoff at an exit event, a family business owner is more likely to pursue a strategy to create a sustainable business that can be passed on to subsequent generations.
This can lead to a misconception that while entrepreneurial businesses are dynamic, vital and hungry for growth, family-owned companies tend to plod along, making safe but unexciting decisions. But that certainly is a misconception. While there’s a whole swathe of research showing that family firms tend to prioritize long-term sustainability over short-term measures, they can be just as entrepreneurial, ambitious and hungry for growth as their competitors.
But they face two perennial and related challenges. Typically, companies pursuing a growth strategy require funding and access to management talent. The question facing family firms is how to raise cash and bring on board new managers at senior level without ceding a degree of ownership and control of the company to others.
On the face of it, family-owned businesses have access to the same sources of funding as any other company, with both debt and equity finance available. Indeed, according to Office for National Statistics figures quoted by an Institute for Family Business report, family firms have recently been more successful at securing credit than others in the private sector. For instance, in 2010 – in the wake of the financial crisis – 76% of loan applications by family-owned SMEs succeeded, compared with a 68% acceptance rate for other small and medium sized companies.
But raising money through equity investment is potentially more of a problem for family firms as any injection of cash from external sources will mean a dilution of ownership and perhaps a measure of control slipping away.
For an exit-focused entrepreneur, the thought of surrendering equity may be unwelcome but if the investment will enable the company to grow more quickly the reduction in the percentage stake will be more than offset by the rise in value of his or her shareholding. For family business owners, the calculation is rather different. Investment by outsiders not only means less for the family, it can alter the way the business is run.
"The question facing family firms is how to raise cash and bring on board new managers at senior level without ceding a degree of ownership and control of the company to others."
For instance, Private Equity Fund investment is certainly available for larger SMEs with growth potential and many investors will now accept a minority stake, allowing members of the family to retain control. Nevertheless, even with a minority holding, PE investors have a considerable amount of power and will come in with their own timelines, milestones and exit plans for business. This will dilute both ownership and control. Crucially, the deal may ultimately result in the sale of the whole business when the time comes for an exit.
Family-owned firms can also raise money through the flotation of part of the business via an IPO or by seeking out their own private investors. Again, there are control issues.
"Family businesses really have to get their heads around this at an early stage," says Jack Neill-Hall, a spokesman for the Family Business Institute.
So what does that mean in practice? Well as Neill-Hall points out, there are various ways to ensure that control remains with the family. These include binding shareholder agreements concentrating voting rights in the hands of family members. In other words, while the ownership is extended, effective control is limited to a select few. This is not simply to limit the influence of outsiders. It will also restrict the input of a wider group of family members who may have ownership of shares through inheritance but not necessarily the skills and inclination to take an active role in the business.
Control can also be retained through structural measures. For instance, diverse companies can be structured on a group basis with a family-owned ‘holding company’ retaining control of divisions which can borrow or seek investment independently.
Sometimes growth finance isn’t required. "Family businesses tend to reinvest cash in the business," says Jack Neill-Hall: a strategy that means projects can often be funded internally.
And there is scope for seeking alternatives to investment of debt. For instance, Bishops Move – a family-owned company dating from the 19th century – is expanding its furniture removals business by a franchise scheme, which provides the company with more trucks using its colours without the need to make acquisitions.
However, when finance is required, family businesses should carefully consider what the source of finance will mean for the way the company is run.
The management team
All successful entrepreneurial businesses reach the point when it is necessary to bring in new management. Often, it's simply a case of a strong founder "letting go" and accepting that he or she can’t do everything and that’s time to have a specialist marketing or operations director.
In the case of family firms, there are special concerns. When a new CEO arrives at a business that has previously been run exclusively by family members, he or she won’t necessarily have the freedom to make decisions without regard to the prevailing culture. What’s more, the custodians of that culture will be present at every board meeting. So, for the new CEO, the challenge is to fit in. For the family firm, it’s a question of striking the balance between allowing the newcomer the freedom to make a difference while also preserving the culture.
Neill-Hall says this is another issue that has to be addressed up front. "You have to make sure that the people you hire share the vision of the company," he says.
In the longer term, family members may retire to the sidelines, with others taking the key management role. Neill-Hall says the culture can then be preserved by “constitutions defining the relationship between family and company.”
Raising finance and bringing in new people can have a transformative impact on family firms, but it's important that families understand the implications of external funding and personnel and take action to preserve the values at the core of the business.
When you’re an established business, recruiting top talent in all the areas you need can seem like a never-ending challenge.
If you’re a start-up or small business, how can you put together an attractive employee package to appeal to top talent – graduate and…
More than one million incidents of financial fraud occurred in the first six months of 2016, according to official figures released by…
Santander’s Head of SME International Mark Collings discusses why exporting to new global markets may provide businesses with new and…