In today's City A.M feature, Phil Harris, Executive Director of the Business Research Institute, talks about family-owned businesses and how the estimated 4.6 million need to be supported more.
Family businesses are rarely mentioned in the debate about how best to support Britain’s smaller companies, and yet they make up a sizeable proportion of SMEs. According to the Institute for Family Business (IFB), of the 4.6m family-owned firms in the UK, 99.6 per cent are small.
To find out more, professor Phil Harris, executive director of the Business Research Institute and Westminster professor of marketing and public affairs at the University of Chester. Harris is an internationally regarded expert in the family business sector and has been working with us on a number of projects, as a means to further develop a comprehensive understanding of UK SMEs, in turn helping to develop the right products and tools to support the growth of the sector.
What does the typical family business look like?
While they’re all companies in which the equity is controlled by a family, there is no typical family business. At the top end in the UK are the likes of Bibby, which has extensive interests in shipping and financial services, and Warburtons, which has been in the same family since the nineteenth century. Historically family businesses have been dominant in industries like brewing and even banking, and more recently, they have grown internationally in countries like China and India. Worldwide, more people work in family businesses than in multinational corporations or limited companies.
That said, most family businesses are small. They are also a significant contributor to the UK economy: in 2014, family businesses employed an estimated 11.9m people, 47 per cent of all private sector employment, and generated £1.3 trillion in turnover.
How long do these companies tend to stay in the family?
Many family businesses will get up to the third generation. Then it becomes more exceptional, but a lot depends on the part of the country and how the economy is performing. You’ll tend to find that family businesses are more common where the economy is doing quite well. Coinciding with the rise in the number of start-ups, for example, we’ve seen strong growth in their number in recent years.
What advantages do family businesses have compared to others?
They are able to think much more long term, and a lot of them will argue that this is about stewardship. They may not do certain things, because they find it immoral or not of good service to the people they employ, and this has advantages in terms of customer loyalty towards their brand over time.
Consumers like family businesses because they can relate to and give feedback to them. Their word is their reputation. They’re not going to be sold or bought out, or change their name. In a rapidly evolving society, consistency like this matters to people.
What about the disadvantages?
Unless they’re able to afford a top-notch external management team, a great deal depends on the pool of talent in the family: do they have the skills required to keep the business going both as it passes between generations and as the market itself changes? At the smaller end of the scale, this can be particularly problematic. While they will generally be able to retain some level of customer loyalty, this does not insulate them from the wider trends in the market. This is especially obvious for smaller retail businesses.
How do family businesses tend to fund their growth?
Many family businesses will still choose to finance growth in-house through retained profits, in a bid to keep control of their assets. This can, however, place limitations on cash flow and reduce overall liquidity. There has been a notable rise in businesses seeking external assistance, through banks and other non-traditional business finance providers. Awareness of finance options available to small businesses is certainly an area that requires significant attention, with many business owners still uncertain as to what options they have to finance investment and better harness growth opportunities.