The Challenges and Opportunities of Family Businesses
In the UK, more than 80% of private-sector businesses are family-run with their own unique set of advantages and challenges: stability, commitment, and a long-term outlook on the one side, vs the family dynamic - potential disagreement and divorce, unstructured governance, and often a lack of succession plans on the other.
What is clear, is that family businesses play an important role in the UK economy and are a vital source of employment, hiring more than 40% of employees in the private sector.
The IFB Research Foundation’s article, The State of the Nation: The UK Family Business Sector 2019-2020, highlights the impact of family businesses on the economy. In 2018, there were 5.1 million family businesses who provided:
- £1.9tn+ in revenue, equalling 43.5% of the total turnover for the private sector.
- 43.4% of the private sector’s GDP contribution, a total of £657bn.
- Approximately £196bn in tax, circa 25.7% of total UK Government revenue.
With 390,000 family firms in the arts, entertainment and recreation, accommodation and food services sector, not to mention those in retail, it is expected COVID-19 will have had a huge effect on family-run businesses.
Family businesses have unique challenges
Katherine Thompson, from accountancy firm Stubbs Parkin, identified the four biggest challenges that family businesses face:
For family-run companies, the lines between a healthy work/life balance can begin to blur. It is vital not to let ‘professional disagreements spill into family time’ as well as not permitting ‘key professional decisions’ to be affected by differences in viewpoints and personalities. Not everyone wants to get involved in the family business, but some members feel it is expected of them, leading to ‘apathetic, unengaged employees,’ (Vistage – The Advantages and Disadvantages of Family Business). ‘Deep-seated and long-lasting bitter fights’ affect everyone in the company, resulting in a lack of productivity.
The Generation Game
Older generations can have a hard time letting go of their business, but younger family members can often be in a hurry to change too quickly. A business needs consensus. Each generation needs to recognise the skillset and strengths that the other generations bring to ensure that the business flourishes. The Vistage report also suggests that since the needs of the family are at stake, there is a greater sense of commitment and accountability leading to a better understanding of the crucial aspects of business, which in turn can help overcome generational differences.
Loyalty vs Ambition
It’s no secret that there is an expectation for younger generations to learn the ropes and, eventually, take over, but this can prevent them from pursuing their own experiences and desires, creating a rift. Generally, a member’s position in the family determines who leads the business, leading to longevity., But this can also lead to resentment within the family and future problems for the business.
In Succession Planning for Family Businesses, Vistage included putting off succession planning as one of the six most common mistakes.
According to Thompson, ‘It is crucial that the business owner has a plan in place to cover all sorts of succession scenarios.’ Having a long-term outlook will help you prepare for what’s to come, allowing for good strategy and decision making without causing family disputes.
Nepotism, which may result in the most senior positions given to inexperienced people who may lack skills and appropriate education, is a significant risk. Family businesses can also face governance issues such as internal hierarchies and rules. Putting the right governance in place enables them to move beyond the reliance on trust inherent in family firms.
Family businesses are innovative
In contrast, the ERC research paper Resources and Innovation in family businesses, authors Danny Miller et al list ten constructive ways in which family businesses can facilitate innovation:
- By fostering attitudes favourable to innovation across the generations.
- Because innovation demands significant managerial and often technical and creative human capital, expertise and motivation are essential and this can be helped by formal education or by having family members gain experience in innovative firms outside the family firm – always making sure there is a pathway back into the family firm in the future.
- In recognising that external experts need to be brought in when members of the family lack innovative skills.
- Through developing governance through expertise and independent judgement consistent with delivering the kind of innovation needed for firm survival.
- By being in networks of long-term partners who share their innovative ethos.
- Ensuring the decision making and implementation processes that facilitate innovation are neither so dominated by one thing as to become rampant, nor entrenched in the past.
- Negotiating between owners and managers to resolve conflicts between goals that may compromise the need for innovation.
- Adopting governance and managerial processes that anticipate environmental changes and facilitate changes in resources and capabilities.
- Having prudent financial management to reconcile the need to be innovative and maintain family control of the firm.
- Being vigilant in reconciling family involvement in ‘pet projects’ which may need to be abandoned.
An hgkc case study on TasteTech demonstrates how ‘through workshops and planning, [they] developed an innovation strategy’ that led to an ‘organisational redesign.’ Year on year TasteTech has met their revenue growth targets with various strategic innovation projects focusing on the ‘outcomes, roles and a framework with measures for full evaluation.’
Successful families ensure that they build boundaries between their personal and professional lives, giving senior positions and responsibilities to those who can meet the challenges. Not all family-run companies are multigenerational, having a succession plan builds confidence and security for the business and the people involved. In our Finding your North Start podcast interview with Martin Thatcher, fourth generation Managing Director of Thatcher’s cider, Martin comments how ‘each generation should lead a better business’ and that it is the responsibility of the older generations to ‘inspire and educate and develop the next generation’, training and teaching them what to do to succeed and keep the business growing.
Are you building a team for the future? Are you investing in the capabilities of your next generation? Are you able to exploit opportunities when they arise? Why not get in touch with hgkc for a no-obligation talk about your challenges as a family business. Contact Kim Jones, our family business expert, today.