Though not of their making, family firms will play a vital role in the economic recovery from the current recession – they are major contributors of new job and wealth creation. Innovative, resilient and adaptable, succession is not always right or practicable for a family firm. Where a sale is the best route, they represent, in terms of potential, some of the most attractive opportunities for acquirers.
How did we get where we are?
The current recession is the culmination of one of the most distorting decades. World Wars excepted of man-made folly in memorable history. In the last decade governments – most notably in the West – kept interest rates too low for too long, chasing conveniently skewed inflation targets which were set too high in light of price deflation being imported from India, China and other low cost economies.
There has been lax control over the supply of money leading to a boom of easy [personal and corporate] credit causing asset bubbles. In the absence of effective regulatory oversight, reckless speculation by Banks was permitted, dealing in complex financial derivatives which no one, not even the bankers, really understood. Business models became distorted by relying on excessive debt, the perception of management competence has subsequently been exposed in many such firms, salary levels, job and wealth creation in some firms and sectors have proven to be unsustainable.
The numbers
Family businesses though largely didn’t succumb to these distorting conditions, most continued to practice traditional good governance, running sound profitable businesses with low debt. Thankfully, family businesses are generally more risk averse and likely to take a patient approach to growth and as such provide, in many cases, a solid platform for future growth.
BCMS Corporate is itself an award winning family business and many of our clients are founders, second or third generation family business owners, so it is right that we declare an interest here when championing family businesses. Surveys from a range of independent sources though do confirm that family businesses are fundamental to innovation, job and wealth creation – in fact, according to The International Family Enterprise Research Academy (IFERA) there is a very close correlation between the number of family businesses in an economy and entrepreneurial activity. The Global Entrepreneurship Monitor also asserts that most entrepreneurial start-ups usually begin as family businesses.
A report compiled by Capital Economics, commissioned by the Institute for Family Business * - titled ‘The UK Family Business Sector’ – aggregated evidence from a wide range of surveys of family firms. Statistical highlights revealed that family firms are estimated to account for a remarkable 3 million of the total 4.6 million private sector enterprises in the UK economy and, 41% of all firms employing 10 people or more.
Further, family firms account for 38% of turnover in the private sector and contribute twice as much to the economy as private equity-backed firms (when compared with British Venture Capital Association estimates for the performance of Private Equity-backed firms). Family businesses account for around 42% of private sector employment, providing employment for 9.5 million people.
Family values
Impressive as the statistics are, it is perhaps the behaviour of owners which really reveals the true nature and relative strengths of family businesses. Particularly pertinent to the current economic circumstances are findings in the Coutts 2005 Family Business Survey which revealed that family firms are more likely to invest for the long-term and focus on long-run returns, rather than quarterly results.
There is evidence that families tend to draw smaller salaries and dividends, allowing more profits to be reinvested back into the business. In a further survey “Trust as a competitive advantage: why family firms have an edge in the global marketplace,” by Baskin, it is argued that family businesses are more prepared than other firms to continue investing during downturns, giving them an advantage over other quoted and Private Equity-owned firms where investment tends to follow cash flow more closely. Other findings across a range of surveys suggest that in family firms, managers and owners interests are better aligned, staff loyalty is higher, working practices are more flexible, corporate social responsibility is taken more seriously and the management approach is
more flexible with quicker decision making.
There are also well documented disadvantages such as the danger of nepotism; a reluctance to bring in outsiders or Non-Executive Directors in larger firms; family conflicts, such as divorce and infighting, all of which might disrupt the business and hamper growth. There is good evidence however that the advantages outweigh the disadvantages. Manchester Business School created a
Family Business Index of publicly quoted family run firms, which outperformed the FTSE All-Share by an impressive 40% over a ten year period 1995 to 2005.
Succession or sell
Despite their many strengths, family firms do struggle in much the same way as any other private firm with the issue of succession or exits. An annual survey by the Department for Trade and Industry (DTI, now part of the Department for Business Enterprise and Regulatory Reform DBERR) found that 77% of family
firms in the SME sector are controlled by the first generation, 10% by the second generation and 6% by the first and second generation. Further, a Barclays survey of family firms, “A Family Affair; Today’s Family Businesses,” suggests that most have no definitive plans about what to do with the firm in the future, with 61% of owners saying they had made no decision about what would happen when they stepped down from the helm. Of the remainder, 16% had already decided on a successor, 13% planned to sell the business, while 10% planned to close down.
Where owners of family firms no longer see generational transfer as viable or desirable, they provide some of the most compelling opportunities for acquisitive trade or Private Equity buyers; these firms have significant potential for growth. It is clearly vital that the potential of such a significant contributor [Family Firms] to the Nations’ economic well-being is maximised. A ‘knowledge gap’ clearly exists, preventing owners of family businesses making definitive plans.
Going some way to addressing this ‘knowledge gap’, BCMS Corporate runs around 60 free seminars each year in the UK and its senior managers and directors are invited to speak at numerous events in the UK and overseas on the subject of selling for maximum value. For those 84% of family business owners who have either no clear plans about succession or selling or who may even be considering closing down, the BCMS seminars may well be helpful in deciding what the right course of action might be, providing a valuable perspective before crystallizing plans.
Their own words
Via our website, bcmscorporate.com, you can also access video recordings of interviews with a small selection of BCMS Corporate clients. One recording features Stuart and Gail Shreeve, a husband and wife team who established their family business Somers Refrigeration Ltd in 1990, a business supplying temperature controlled vehicles predominantly to the food industry.
Stuart and Gail originally attended one of our seminars and compared what we had to say with what was offered by ‘competitors’. In Stuart’s words, “BCMS Corporate was the most expensive of all those we considered but we believed they had the resources to undertake the sale. I can highly recommend BCMS Corporate.”
Typical of many family businesses, Stuart and Gail were very close to their staff and the successful buyer had to offer stability and continuity for them. One prospective buyer had plans to close the existing site and consolidate operations which would have threatened jobs – this was rejected immediately by Stuart and
Gail. Ultimately the sale of the business was concluded with the ‘right’ purchaser (culture could be maintained) at the ‘right’ price for Stuart, Gail and the staff. Stuart and Gail’s expertise has not been lost to the business, they have continued to provide consultancy services and have set up a joint venture with the new owners.
*The Institute for Family Business was established in 2001 as an independent, not-for-profit organisation. The UK Family Business Sector report can be viewed at www.ifb.org.uk
