Features
3 Jun 2015 10:22am

How to maintain a family business

In uncertain financial times, keeping it in the family would seem to be a strong business model. So why, asks Xenia Taliotis, do so few family firms make it into the hands of the third generation?

Family businesses are a good thing, right? When we see those two little words – family business – on a shop, or a decorator’s van, or on anything at all – we’re reassured, seeing them as endorsements of quality and care. We expect the owners of a family concern to look after us, their customers, because we believe we are their lifeblood. Without us, there is no them, and we expect every person we meet within that business to have a vested interest in its survival.

But in reality, a family business can be anything from a micro firm – a mother and son combo – to a Sainsbury’s, Morrisons or Wilko. “There are three million family-run businesses in the UK. More than 50% of all medium-sized businesses are family-owned, and 12% of the largest firms, which employ more than 250 people, are still in family control,” says Mark Hastings, director general of the Institute of Family Business (IFB), a not-for-profit organisation that supports the sector. “It’s a very successful business model the world over.” Hastings is right – 19% of companies in last year’s Fortune Global 100, which tracks the world’s largest firms by sales, are family-controlled. And in the UK, family firms contribute £1.1trn to the economy, make up 25% of the GDP and employ more than 9.5m people.

Six out of 10 UK businesses are family-owned, but percentages in other countries are even higher. According to the Perspective from the Gulf report by Chartered Accountants’ Worldwide, 80% of non-oil businesses are family-run. “More than $1trn (£658bn) in assets in the region is expected to be handed over by the second generation within the next 10 years, yet globally only 15% of family-run businesses survive to the third generation,” it says. “Professionalisation through increased emphasis on best practice corporate governance and transparency is critical.”

What’s notable about family businesses is how few survive beyond the working life of the original owner, and this is true wherever they’re based. While there are certainly more first generation firms than you can shake a stick at, you’d be waving your twig at a rapidly dwindling number if you asked the first and second generations to stand aside. Figures released by the IFB show that in the UK only about 30% survive into the second generation, only 12% make it through to the third generation and only 3% go to the fourth generation. Stats for many other countries are in the same ballpark: only 13% of Indian family businesses and between 10% and 15% of those in Malaysia reach the grandchildren, for example.

But why is this? Why should such a thriving sector be littered with so many casualties? The answer, says Hastings, is largely down to two big, multi-faceted and connected issues – succession and governance; together they have many weapons at their disposal with which to curtail longevity, among them family loyalties/squabbles, owners not knowing when to let go, not having the right team in place to take over, and/or having an insularity of mind that resists letting in talented outsiders. Richard Kleiner, CEO at City accountants Gerald Edelman, who looks after many family concerns, raises another point. “The companies that succeed and prosper through the generations are those that put the business first.

“Those that fail are those that put the family first. It really is that simple. The key to survival is being able to stand back and look at your firm objectively. The decisions you need to make as a business owner may differ wildly from the decisions you want to make as a parent. Everyone wants to hand over something they’ve built to their son or daughter, but if that son or daughter has insufficient interest or ability, and you want to keep your firm going, then you have to bring in talent from outside the family.”

This is precisely what happened at Booths, the high-end supermarket that has 30 stores in the north-west. The retailer, established in 1847 by Edwin Booth, appointed Chris Dee as its first non-family CEO in February. “Booths is now a sixth generation business,” says current chairman Edwin Booth, great-great-grandson of the founder, “and until recently both the family and the operational boards were populated with family members – latterly by me, my cousin and my brother. But serious and widening cracks began to appear – so much so that customers were contacting me over Christmas to complain that new services were just not working. Clearly, we had to make immediate changes – the first and most important of which was to appoint Chris as chief executive, and to ask family members to accept non-executive positions.”

Dee may not be part of the Booth family, but he’s certainly part of the Booth business. He’s worked for them for 20 years and was chief operating officer before his promotion. In other words, he is totally embedded in its culture and has a complete understanding of its values.

“It wouldn’t work otherwise,” says Booth, who remains executive chairman. “Chris knows what we want to achieve and what our core principles are. At the heart of any and every family firm there is a strong, passionate individual who brought his values to bear when he started the business, however long ago that was. Whoever takes on the firm also takes on that legacy and that responsibility but does, of course, have to adapt and modernise it so that it remains relevant and profitable. We’ve evolved but I would hope that if my great, great grandfather were to pay us a visit today, he would still find much to recognise in the way we’re running Booths.”

Nigel Atkinson, formerly chief executive of heritage family business Gales, was also brought in as an “outsider” but in this case it was to fill a generational gap. Atkinson, who is currently chairman of two and NED at three family businesses, helped the family to transform the brewery over a period of 16 years from a £20m to £100m business when the fourth generation showed no interest in taking the reigns. “I was the first non-family CEO they’d had [since 1847] and we transformed it so much the family received an unsolicited offer to sell,” explains Atkinson. “It was an extremely good offer and an elegant deal and I advised them to take it,” he says. “But that’s not always the case, which is why you need particular skills to take on an outsider family business role. You need to be tactful, understand the rules of the game and know that yes, you are there to advise but at the end of the day it’s their train set,” he says.

Another company that has tackled succession and governance head on is Wadi Group, an Egypt-based agri-business with subsidiaries and interests in the Middle East. Jointly founded by Philip Nasrallah and Musa Freiji in the 1960s, the two-family owned group recently worked with the International Finance Corporation (IFC), which helps companies build sustainable operations, to establish new structures for its future prosperity.

Speaking to the Financial Times last October, Ramzi Nasrallah, vice president and chief financial officer, identified some of the specific problems that can hamper family businesses, including a false sense of entitlement to join the firm. “We were growing fast and we knew it would become more challenging to survive as we moved into a second and third generation. We sought advice because something needed to be done about organising the family, working on the succession and addressing our employment policy. People thought they were entitled to join simply because they were family, and that mindset had to change.”

Under the guidance of the IFC, Wadi set up an elected family council, brought non-family members onto its board and introduced a new employment directive whereby younger members of the family could only join the group if they had worked elsewhere for at least two years, there was a job going, and they had the relevant skills and experience to fill that job.

Nasrallah admits that implementing the changes was a challenge, a point acknowledged by Amalia Brightley-Gillott, who, with her mother, runs Family Business Place (FBP), supporting owners with every aspect of running a family concern, including mediation when conflict arises.

“Getting family members to accept change can be a big problem,” says Brightley-Gillott. “We find ourselves acting as a kind of counsellor, helping business owners accept that their organisation needs to evolve if it is to survive and prosper. We’ve seen some very tricky situations – ones where the founder doesn’t want to stand down, or else does stand down but then won’t let his successors get on with the job; situations where he wants to overlook his son or daughter and hand the business over to a niece or nephew. We’ve seen it all. Entrepreneurs are dynamic, passionate people who have given their all to their business. It can be very, very hard for them to disengage.”

Though IFB and FBP exist to help family firms survive and thrive, there are times when the only way forward is for founders to sell up; in a recent survey by FBP and law firm Charles Russell Speechlys of 500 business owners, 65% of those questioned said they would cash out if the price was right. “In cases where there’s no one from the family who is willing or able to take over the reins, then selling can be a very attractive exit strategy,” says David Petrie, head of corporate finance at ICAEW, “particularly when you consider that they’ll probably only have to pay 10% tax on capital gains of up to £10m, under the Entrepreneurs’ Relief scheme. Assuming there is still value in the company, then new ownership can be enormously beneficial both to the founder and to the business itself.”

An outright sale is undoubtedly the easiest way of exiting a business, but there are other options for those who want to retain some involvement, including, for example, setting up various employee incentive arrangements such as an Employee Stock Ownership Plan (ESOP) or an Enterprise Management Incentive plan, both of which enable an owner to remain with the company, and often in control, while still taking money out of it. “There are all sorts of structures we can set up to enable them to keep their foot in the door,” says Petrie. “However, I like to encourage my clients to go off and enjoy a good retirement. If they manage to sell at the right time, when the business is still on a growth trajectory, they could do so well out of it. There’s nothing sadder in my book then seeing people who’ve worked like Trojans all their lives leave themselves no time to enjoy the fruits of their labour.”

Case study:

McMillan & Co LLP

McMillan & Co is a family practice in Lancashire. Started by former KPMG partners Douglas McMillan and Bernard McLaughlin in 1995, the firm provides audit, tax, business advisory, company secretarial and payroll services for small- to medium-sized companies. In 2010, McMillan’s son Neil joined the firm as partner. “Neil had been a senior manager at KPMG before joining us,” says McMillan, “so he’d already proved himself elsewhere. I think that’s an important consideration for anyone going into any family firm – they’ve got to show they can cut the mustard in the ‘real’ business world before joining mum’s or dad’s company. It’s working very well for us, but then McMillan is pretty non-hierarchical; I like to think of everyone who works for us as extended family.

“Since Neil joined, a natural division of labour has developed – I work with our older clients, and Neil takes on their sons and daughters. That’s important, too, in a family firm, giving the new generation distinct roles so that they’re not treading on toes – or eggshells.

“I like to think that my exit from the firm will be painless – Neil is nurturing the next generation of clients, but aside from that, he’s already been working with McMillan for several years, so our staff and clients should have the reassurance of continuity.”

Xenia Taliotis

 

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