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Bloodlines and the new UK economy

Grant Gordon is director general of the Institute for Family Business (UK). www.ifb.org.uk.

Family firms represent around half the output of the UK's privately-held economy. Even so, Grant Gordon believes there's scope for improvement

Family firms are an important part of the backbone of the UK economy and the primary constituency where they are represented is in the small business sector. A Barclay's Bank survey carried out in 2002 noted that three in five firms with turnover of £5m or less are owned or managed by related family members.

One example within the small firms sector where family firms are dominant is the franchising industry. A separate survey by NatWest and the British Franchising Association found that 81% of UK franchises involved married partners. The majority of franchises are now being run as family businesses and many next-generation family members see the franchise business as a good opportunity to gain practical work experience.
 
Family firms are also a common form of ownership within the SME sector, although reliable statistics are rare in terms of identifying their precise scope and magnitude. More data is available with regard to both large private firms and the quoted sector. Indeed, family firms represent over one-third of the UK's leading private firms listed in the Sunday Times Top Track 100 survey. In the quoted sector, 7% of the companies in the FTSE All-Share index are family businesses, according to a Manchester Business School report. The UK, however, stands out in terms of international comparison with the smallest percentage of listed family companies relative to the quoted sector overall.

Meanwhile, the family business sector in the UK continues to have a thriving and long-standing commitment to this form of enterprise. Family firms are the dominant form of ownership of companies representing around half of the output of the UK private economy. When aggregated, family firms account for the same share of the private sector as all widely held quoted firms and private equity-backed companies combined. Mainstream media reserves little attention for the family business sector, allowing the companies to retain low profiles. Out of the spotlight they can run their businesses for the benefit of customers, employees, other stakeholders and family shareholders alike.
 
The desire to keep control means that family firms are reluctant to seek finance from external sources. For example, private equity players are financing only a small fraction – about 1% – of family firms, according to Manchester Business School and private equity funders SandAire. Preferred sources of funding continue to be bank loans and overdrafts or funding from private sources such as their own families. Another dimension to the ownership debate is that some families are opening their equity to their senior management and employees. But this is far from a universal trend, although progressive UK family firms have devised strategies for creating rewards and incentives for management that assist in retaining the high quality of human resources they require to succeed.

At the top end of the spectrum in terms of size, large family firms businesses that stand out in terms of success are companies such as Arcadia Group, Associated British Foods, John Swire & Sons, Daily Mail & General Trust, JC Bamford and Clark's Shoes. Clark's has received JPMorgan's Family Business Honour for family governance.

Larger family firms divide broadly into two groups: earlier stage family enterprises in the hands of one or more founders or the longer standing multi-generational firms that rely on ownership support from a wider constituency of relatives. The UK has good examples of success stories in both the younger and older categories of family firms.

Casualties
No summary of trends would be complete without mentioning the casualties that are as much part of the reality of the family firm sector as of the wider economy. Recent examples of failure include the Cohen family's furniture company Courts that was recently put into receivership. Another case of decline was Littlewood's, where the second generation struggled to take the lead and the family finally disappeared from the shareholder register. Another dynamic and entrepreneurial family, the Barclay Brothers, saw the value of the assets and acquired the business. These cases are only the tip of the iceberg with many unnamed families in manufacturing, and other industries, who were too late to spot the winds of change in the economy and whose fortunes declined or died under the forces of competition.

Lowering the failure rate in family firms is an issue that came to the surface last year in a DTI report that found that some 30% of small firms that died did so because of a lack of succession planning. This finding mirrors the Barclays Bank survey where six out of 10 family business owners did not know what would happen to their business when they retire. The survey pointed to what may be the greatest point of vulnerability for family firms – the senior generation not addressing management continuity in their family firms and putting their futures at risk. But the same survey highlighted some positive aspects. For one, women are increasingly likely to head up family businesses. In addition, productivity measured in terms of sales per employee is higher than in UK non-family firms, even if the average company is typically smaller than its non-family counterpart.

New challenges
UK families have been forced to adjust their business activities in order to continue to create wealth. The disappearance of a significant proportion of Britain's manufacturing industry has forced families to evaluate new business opportunities including the development of the service industry. Examples of some recent successes of families investing in non-manufacturing sectors include Wilkinson Hardware (retail), Bowmer & Kirkland (property development), SAGA (services) that sit alongside many other such cases of positive entrepreneurial development.

The under-funding of pension schemes is another issue which has had wide repercussions across the whole spectrum of the British economy, putting firms under unexpected pressure. For a family firm facing a persion shortfall the consequence can mean that investment projects may have to be put on hold while a funding gap is addressed. Succession decisions may also be affected if a shortfall means that the senior generation has to work longer in the absence of a pension funded in line with their financial needs and aspirations.

Next generation
Perhaps the greatest challenge of all for UK family firms is to develop in the next generation an objective understanding and positive attitude towards the family firm. Without commitment from the younger generation to play active roles, family firms are at risk of either ceasing to exist or being sold. A survey commissioned by Sage, the software firm, and compiled by YouGov, found that in a sample of 3,000 companies there was disillusionment with owners of family firms. Among the second generation, or beyond, 46% of owners were prepared to dissuade their children from setting up in business.

A separate study, commissioned by the UK's Institute for Family Business and conducted by Professor Nigel Nicholson of London Business School on leadership in family firms, found a low level of preparation in family firms in terms of planning for succession. 39% of firms expect the CEO to retire within five years but at the most 43% have a succession plan in place.

The Irish business guru Sir Gerry Robinson who presented a BBC TV series I'll Show Them Who's Boss questioned whether the next generation should be involved in the family business at all. He suggested that family firms would benefit in some cases if the family were not there. However, the desire to maintain longevity is still robust, as the latest IFB survey found that the majority of firms wish to retain ownership although 26% believe that management may no longer be in family hands in five years time. The good news is that a stronger ownership culture among UK family firms is now emerging.

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