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by Steven Scarlett, Partner at Lovewell Blake
Wednesday, February 1, 2012
Family businesses make up about two-thirds of the all businesses in this country and are often well placed to cope with a harsh economic climate – but they do face particular issues.
They tend to be focused on longer term aims rather than short-term profits. They generally rely less on bank and other external funding – indeed one of the family businesses we profile on the facing page, Colorcote, has traded successfully for more than 25 years without the need for any overdraft or bank borrowings.
They take fewer risks, but are quicker at decision-making without the bureaucracy associated with big business.
Their close, long standing relationships with employees, customers and suppliers can be a source of strength in difficult times.
Against these positive attributes there are issues that can make life difficult. Certainly separating what happens at work and at home can be one issue, bringing added pressure to both business and family life.
Decisions can be made for emotional rather than commercial reasons.
Yet the biggest concern is planning for succession. Only 30pc of family businesses continue successfully to the second generation and fewer than 10pc to the third – supporting the adage “rags to riches, and riches to rags, in three generations”.
Interestingly, if they get beyond the third generation, they often carry on for many more – as we see in the case of Start-rite Shoes: founded in 1792, the start of two centuries of shoe-making in Norwich and now headed by a member of the eighth generation of the business.
In a business progressing to the next generation, it can be difficult to strike the right balance. The next generation can have it too easy but equally can be treated too harshly, to the extent they are never allowed to reach their full potential.
Each case needs a different approach as there is no “one size fits all” solution.
Invariably though, honest, open communication among the family is important, so everyone understands each other’s objectives, hopes and fears.
The family needs to agree on their preferred destination – we can then discuss the various routes open to them and help them decide which they’d like to take, providing financial and tax planning advice to achieve their objectives cost-effectively.
Communication among family members is often overlooked – yet is probably the most important single element. There needs to be good “buy-in” to the plans from all parties.
They should also plan for the financial independence of the retiring generation. Ideally, they should ensure they can afford to retire without creating a financial drain on the company, as Steve Baker has done at Colorcote.
Some family businesses continue to pay one or even two generations during retirement, which may not be sustainable in tough economic times and restricts funding for future business opportunities and financial rewards for subsequent generations.
Where there is a large number of shareholders – Start-rite has more than 50 scattered around the UK and abroad – good communication and management of expectation are important to avoid conflict.
The appointment of non- family board members and experienced non-executive directors can help.
There is a huge range of different sizes of family businesses in our region, varying from first to second generation businesses such as Colorcote to much larger, more mature family businesses such as the eight-generation Start-rite.
These businesses will face different issues at different stages of their development.
They will need to evolve their communication and governance from informal systems typically adopted by owner-managed businesses, to structured formal systems more akin to listed Plcs, especially where there is a significant number of shareholders not working in the business.
These issues were covered in a survey carried out by the International Centre for Families in Business in conjunction with Lovewell Blake.
The survey demonstrated that the majority of family businesses are still run on a very informal basis, which is wholly appropriate in the early stages – the successful ones recognise the need to change as they grow.
These and other issues particularly relevant to family business will be the focus of this ongoing project between our firm and the Eastern Daily Press.
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