The importance of family businesses to the UK economy should not be underestimated. In every town and city, family-owned firms are making an impact on wealth creation and employment in their local communities.
The contribution of this important sector is highlighted in the latest “State of the Nation” report from the Institute of Family Business (IFB) Research Foundation. Undertaken in partnership with Oxford Economics, the study presents key insights into the characteristics and challenges facing the family business sector in the UK in 2019, just prior to the Covid pandemic.
So what the report tell us? First of all, family owned firms - defined as those companies where a family owns over 25 per cent of equity - made up 86% of the 5.2 million businesses in the UK in 2019, a slight decline on the previous year.
Despite this, they remain a key source of jobs accounting for 40 per cent of all employment in the UK economy (or 14.2 million people) and whilst overall private sector employment fell slightly from 2018 to 2019, the numbers employed by family businesses rose by about 46,000 over the same period.
In terms of their impact on economic prosperity, it is estimated that family businesses contributed £637 billion to UK’s Gross Domestic Product (GDP) in 2019. Whilst this was equivalent to 29% of the nation’s economic output, it represented a reduction on the previous year. They also paid £205 billion in tax receipts which is equivalent to 26% of all the money collected by the UK government.
Whilst they play an important role in all sectors of the UK economy, over four out of ten family firms were to be found in construction, the professional, scientific and technical activities sector, and wholesale and retail. In contrast, financial services, real estate, accommodation and food accounted for only 7% of all family firms.
Not surprisingly, multi-generational family firms tend to be larger and there is a clear
relationship between the size of family SMEs and the number of the generations that the business had been in control of the same family.
Whilst 79% of all family firms were in their first generation, 27% of medium-sized family SMEs were in their second generation of ownership and a further 15% in their third and fourth generation.
With research showing that medium-sized firms make a disproportionate contribution to the UK economy, it is important that policymakers consider the effect of family on business performance if their impact is to be maximised.
And what about their geographical influence across the nations and regions of the UK? Not surprisingly, the study shows that the sector is more important in some parts of the UK than others.
For example, whilst family businesses accounted for 52% of private sector employment for the whole of the UK, this increased to 63% for Wales (or 538,000 people). Wales also had the second highest proportion of family firms as a share of private sector firms after the East Midlands.
This is an important finding regarding the Welsh economy and yet there seems to be no specific support available to family firms in Wales through the Welsh Government’s Business Wales service despite research showing that the sector has specific issues, such as succession planning, that need focused help to address.
Policymakers may also wish to learn about how to increase gender diversity given that family-owned SMEs had a higher number of women in leadership roles as compared to non-family firms (78% vs 50%) and a higher proportion of family-owned SMEs were also led by women.
Finally, when examining the major obstacles to achieving business success, it would seem that the main differences between family and non-family firms are related to fiscal issues.
For example, there was a large difference between the percentage reporting taxation as an obstacle with half of small family firms citing this as an issue as compared to only a third of non-family firms. In contrast, a greater proportion of non-family firms viewed access to finance as an obstacle to growth as compared with family firms.
Therefore, this report provides a useful snapshot of the state of family businesses in the UK in 2019. It shows, yet again, that family firms not only create wealth and jobs but there may be specific policies that are needed to support the sector.
Whilst the report does show that family firms were still performing well and remained optimistic about the future at the time of the study, the impact of the Covid-19 pandemic is likely to have been considerable especially as some of the sectors that were affected the most in the last 20 months have a high proportion of family-owned firms.
Given this, the next research report from the IFB Research Foundation will be critical in not only assessing the impact of the pandemic of the sector but, more importantly, the resilience of family firms at a time of crisis.