THE ROLE OF FAMILY FIRMS IN THE UK ECONOMY

Whilst politicians are often fond of saying that small firms are the backbone of the economy, it is fair to say that family businesses are the backbone of the small firm sector in this country.
According to the most recent data available, family businesses constitute 66 per cent of firms in the UK and account for 41 per cent of private sector employment.

As with all firms in the economy, the financial crisis has had an impact on this type of business, although recent research from Barclays Bank suggests that family firms are recovering from the worst recession in a generation.

This growth is not limited only to older multi-generational family businesses such as Warburtons and Brains Breweries and there is a trend for many new firms to be started and managed by people who are related to each other. In fact, these so called first generation family businesses are poised to make a significant contribution to the economy in the next few years.

The report “Family Affair: Spotlight on UK Family SMEs” shows that there are currently 2.42 million first generation family firms currently active in the UK, the highest number since the recession of 2008. However, their contribution does vary by sector and whilst 85 per cent of firms within the business and financial services sector are first generation family run firms, only 18 per cent are based within real estate.

As a result, their economic value is substantial with first generation family businesses having total revenues of £540 billion in 2014 (which is higher than the entire UK manufacturing sector) and contributing £180 billion in gross value added to the economy.

They also employ 5.5 million people in the UK, which is roughly equivalent to the number of jobs in the construction and production sectors combined. More importantly, it is estimated that the numbers employed has increased by 150,000 since 2011.

The majority of these family firms (i.e. those with no employees) provide jobs for just one or two working proprietors or partners, although this means that they are contributing a total of 2.1 million jobs to the sector. In addition, small family firms employing less than fifty people have created 2.7 million jobs and it is worth noting that whilst there are only 6,500 medium-sized family SMEs, they provide employment for 620,000 workers.

The impact of family firms should not be too surprising given that various research studies have shown that they tend to be more profitable and exhibit faster growth than the industry average. Indeed, the Wales Fast Growth 50 project has seen two family businesses – Afonwen Laundry and Village Bakery – top the list in 2011 and 2013.

Often, the success of family firms is down to a range of unique factors such as focusing on critical governance issues such as stewardship and creating wealth for future generations, which gives businesses a longer-term view of success that is not dependent on solely providing a return to shareholders.

Family firms tend to be non-bureaucratic as everyone associated with the business  knows who is in charge and therefore instant decisions can be made. They also treat employees fairly and with a loyalty that is usually reciprocated as many employees may come from families that have supplied workers for the business for several generations.

The reputation of the business is important as it is tied up in the reputation of the family. As a result, many such firms have a strong sense of responsibility to society that is often reflected in the contribution of time and money to worthwhile community projects. Indeed, reputational risk at a personal and business level means that many family firms will emphasise both value for money and quality as the family’s good name depends on the product or service.

However, there are also several disadvantages to family businesses including a failure to find funding because the family is usually unwilling to dilute its equity to outsiders, and an unwillingness of the older generation to let go of management when this is required.

Perhaps the biggest issue that many of first generation family firms will have to address as they mature is that of succession planning, where the business is to be passed down from the parent to the son or daughter.

In some cases, this can result in considerable issues for the family as the parent is unable to take funding out of a declining business that they have spent years in building up.  Other parents may be reluctant to hand control over to their children who then, out of frustration, leave to find another job, leaving the owner with no option but to sell the business on.

Given these challenges, it is therefore critical that the right support structure is put into place to ensure that family firms continue to grow and create wealth and employment. Certainly, very few of the business and management support services provided by both the private and public sector are geared towards helping with specific issues such as funding or succession planning.

And with the Barclays study showing that the number of first generation family run SMEs will to grow to 2.65 million firms by 2018, employing over 6 million people and generating £661 billion of turnover, the sooner such support can be put into place to help these businesses, the better it will be for the economic health of the nation.

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