The significance, qualities and longevity of family businesses in the British economy

The Institute for Family Business (IFB) considers that 85% of British businesses in 2017 were family businesses. Family businesses are prominent in the SME sector. The IFB concludes that 99.6% of family businesses had less than 50 employees in the UK in 2017. Family businesses are present in the larger business segment, but in smaller proportions. For the IFB, large means a turnover of at least £500m annually with a family owning at least 25% or more of the share capital. Family businesses are 19.8% of Britain’s larger businesses. This figure is 11.7% if foreign family firms with a British presence are excluded. Of the top 200 businesses, 15.5% are family ones – or 5.5% if the foreign family businesses are excluded.

Collectively, family businesses employ a significant part of the labour force. The IFB reports family businesses employed 13.4 million people in 2017 and constituted 42% of private sector turnover (thus generating £1.7 trillion), with 36% of that being from wholesale and retail. They contributed 28% of GDP and about 25% of taxation receipts.

Family firms are an important part of the British economy. This is particularly so for retail and hotels. In agriculture, 89% of businesses are family ones. This level is common to developed and developing countries. Family firms tend to be underrepresented in manufacturing, growth sectors and financial services. Family ownership prevails where efficient scale and capital intensity is smaller, where monitoring needs are greater and where share turnover is lower, permitting long term investor horizons. Industries that are capital intensive, or become capital intensive, tend to lose family businesses.

Despite the number and variety of family businesses, and the fact each business has its particular characteristics, family firms tend to have particular strengths. Family businesses tend to better align ownership and management using less complex control and incentive mechanisms and have fewer agency conflicts between owners and managers. This does require family owners and managers to have good family relationships. Family leadership results in a parsimonious, cost conscious business administration and an ability to enforce decisions more quickly because of the family’s position in the business with its share goals and values. Within the family lies deep knowledge of the market sector, a loyal shareholder base and a network of business contacts that has evolved over years to serve the business. The family horizon will be long term enabling investment horizons that may appear costly in the short term. Often their focus will be on one objective. Such focus gives the business credibility with stakeholders, which perceive the strategies as more genuinely held and more likely to be achieved through determined effort. The support, harmony and benevolence of a well-run family firm supports the route to achieving its strategy. This ethos pervades family and non-family employees. Such a personal culture may be absent in non-family businesses. The personal and name reputation involved in family business further reinforces the family business intention to succeed. The trust and reputation surrounding the family business ensures more powerful branding and in-depth stakeholder returns. Some family business characteristics reinforce each other; long term perspective can bolster a business’ product or service reputation.

Family businesses have weaknesses too. They are dependent on the effort and talent of the proprietor family who may also abuse their position through nepotism and extract benefit from the firm in a way not accepted outside the family business environment. Not only does nepotism potentially lower the calibre of key managers by appointing family members, it may also deter high quality personnel from joining the firm in other roles or staying with the firm. Families may also be divided and argumentative, impacting a business’ ability to make decision, build strategy and work towards achieving that strategy.

The above hints that succession can be a weak spot for family businesses. It tends to be the larger of the family SMEs that survive to the next generation. Succession tends to be more common in certain sectors, such as agriculture, followed by manufacturing and property some way behind. After three generations the survival rate is lower, but the chances for succession remain reasonable for medium sized businesses.

Family succession requires the availability of family members who are capable and want to take over. It also requires a smooth, usually planned, transition. Family succession can breed frustration within non-family managers who may see a non-family glass ceiling and perhaps less than desirable candidates being appointed to lead the business.

Family financial resources may be insufficient to finance the business’ growth needs. The bulk of the family’s wealth will be in the business so naturally they will be cautious about taking risks concerning it. Related to this, over time the family may lose its appetite to embrace Knightian uncertainty in the squalls and storms of Schumpeter’s creative destruction; the family becomes more concerned to preserve the wealth earned by past generations. Therefore, the business will have a stronger emphasis on harmony and continuity than entrepreneurship.

Strengths can be weaknesses too. Family members may play multiple roles as owners, managers and family members. Their roles may conflict at times. A family may wish to continue an unsuccessful venture out of pride and honour where an owner or manager would try to cut their losses. To be a successful family businessperson, tolerating this ambiguity is necessary. A strength may limit the use of other strong points: pursuing reputation may hinder tolerating the risk of failure as part of being entrepreneurial. Other family business characteristics are double edged: having no owner-manager agency issues brings in agency costs due to altruism.

My colleagues and I at Nexa are available to advise family businesses. We can assist with governance and succession planning. We can also review alignment of the employment terms with the governance structure and the business’ long-term strategy. We can act as counsel for your finance deals and advise on resolving disputes as early and amicably. Finally, we are available more generally to deal with legal matters from corporate, commercial to private client issues as they arise for your business and family.

For more information please contact Henry Clarke using henry.clarke@nexa.law