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KIth and kin

2 Jun 09

Family businesses are the backbone of most economies and yet there is limited understanding of the sector and its needs and challenges

by Robert Outram

George Stevenson married into the fourth generation of the Mathiesons bakery business in Falkirk and now the fifth generation is involved. He said: “I look back on it and wonder sometimes how we ever made it to the fourth generation, let alone the fifth.”

He added: “We learned the hard way. We did everything wrong because we did not know any other way to do it, and neither did our advisers.”

Stevenson, with the support of Ken McCracken, was the founder of the Scottish Family Business Association (SFBA), of which Martin Stepek – chair for CA Magazine’s round table event – is now chief executive.

But do family businesses constitute a separate sector? Yes, according to David Hughes, a partner with Saffery Champness. “I certainly see family businesses as being in a separate sector and requiring different advice,” he said.

Martin Stepek worked in the business started by his father, who came to the UK from Poland at the end of the Second World War. Stepek was one of ten siblings, all with a stake in the business, but the family had not been well advised and what was supposed to be an equitable distribution descended into acrimony.

Stepek said: “We were also hit by a banking crisis and a major tax problem. The business ‘lost the will to live’ and went into administration in 2002. That galvanised me into wanting to help others not to have to go through the same thing.”

So what makes a family business different? Mark Sim, of Lloyds TSB Scotland, said: “In general, they are less highly geared than other businesses. Sometimes it’s a veiled criticism to say they are not as aggressive or as debt-hungry as other businesses, but I see that as a benefit.”

David Hughes agreed: “You always have to think one generation ahead with a family business.”

Bruce Mickel, chairman of Mactaggart & Mickel Homes, stressed: “A family business regards everyone in the business as a member of the family. There is a cultural difference.”

This was also Martin Stepek’s experience. He recalled: “After we went into administration, some of our former employees said, ‘We didn’t have a clue how lucky we were working in a family business.’ They had to find work elsewhere and the culture shift was a real shock.”

“Patient capital” was the term Andrew Godfrey of Grant Thornton used to describe the family business perspective. He said: “They are there for the long term. They don’t hire and fire unless they really need to, and they are very loyal to their employees. To me, it’s culture, more than business structure, that defines a family business.”

“They see themselves as custodians rather than owners,” added George Stevenson. “We feel we’re part of the community in Falkirk. It’s just what we do. Plcs tend to look at it [community involvement] and ask, ‘what’s the return on investment?’”

“What about conflicts? What usually causes conflict within a family business?” asked Martin Stepek.

As director, members services at ICAS, Patricia Gallacher is well aware of the issues CAs are likely to face with family businesses. She said: “There are always conflicts within families and this can be difficult for professional advisers. This becomes more apparent when there is a falling out, and a CA must be careful about who they are speaking to, and ensure that everybody involved is kept appropriately informed.”

George Stevenson said that a reluctance to raise difficult issues had been a problem for his family’s business. He said: “For us, the older generation didn’t retire although they said they would. That led to a stalemate; difficult decisions had to be made, but there was so much respect for the older generation that those issues just did not get raised.

“We knew that certain decisions that had to be made were going to be very upsetting for them. For example, there was a restaurant where my in-laws went for lunch every day. I knew we had to close that restaurant and sell the building, and that was going to be damaging to relationships within the family.

“Meanwhile, the value of the building had fallen from £1.25m to the point when we sold it, for just £800k.”

“It’s not so much conflicts as the unspoken things that don’t get resolved,” suggested Stepek. “That leads to a sort of paralysis and tends eventually to lead to a crisis in the business or a crisis in the family.”

“The most difficult thing with successful entrepreneurs,” Andrew Godfrey said, “is that they are not very good at discussing when they are going to pass their business on to their children. The number of times I’ve heard people say, ‘They can sort it out when I’m dead!’

“And that is a recipe for disaster. We have a saying at the firm – ‘bequeath your wealth, not your problems’.”

Martin Stepek argued: “The problem is that in too many cases neither the family nor their advisers know how to deal with these issues. The advisers have all too often been trained to treat the family business as though it was a ‘standard model’ of business.”

As James Barnes explained, the history of his company, Dobbies Garden Centres, illustrates how a “clean break” approach can help resolve potential conflicts.

Barnes said: “My father bought out the Dobbies family business from my maternal grandparents. Initially, I had no desire to go anywhere near the family business or garden centres in general. My career took me to the City in the mid-1980s, but within a few years I realised that the family business could be exciting, creative and more interesting than the stocks and shares that I was involved with.”

“Funnily enough, the catalyst was Wyevale [a competitor, now owned by West Coast Capital], which was a very acquisitive plc at the time. I thought, Dobbies has got a very good brand name and maybe we can do something with that.”

Barnes recalled: “My father had really taken it forward but I think he was managing it as an asset, with his retirement in mind. My vision was a little less risk-averse. I wanted to turn it into something bigger and more exciting, which led to a healthy debate for three or four years. The only solution was to buy the business out, and that’s what we did in 1994.”

For Barnes it was the ideal solution: his father had a secure retirement, Barnes himself had a measure of ownership and control, and it allowed him to move the business forward.

Bruce Mickel said: “My family used to say that I had the brick dust in my veins and in a way that’s true, but the third generation in the business, my cousin and I, did not put our children under pressure to join as the fourth generation.

“They themselves did want to join when they felt it appropriate and when, more importantly, they felt they had skills learned elsewhere that they could usefully bring to the business. This has resulted in three very successful additions to the family’s control of the business.”

The discussion then turned to what structures are appropriate for a family business. Andrew Godfrey said: “There’s an argument that you can continue to have a family business with 90 per cent of the family owning a stake but inactive in the business – but it’s very difficult to make that model work.

The governance has to be very strong.”“We had no idea about the possibility of alternative structures back in the 1980s,” Martin Stepek recalled. “When we went to the Centre for Family Business at Glasgow Caledonian University, it was a revelation that we could actually talk to each other.”

“It is a bit like having an embarrassing illness,” argued Bruce Mickel. “You think when you go to a doctor that no one else has ever had a boil on their nose. And then he says, ‘You’re the 33rd person to come in with that.’

“So it seems to me that every other family business has the same problems. Fortunately, we got the right people in from outside early on. Up until now, we’ve generally had non-family chairmen, for example. And you could have a row with them, which you couldn’t with your father or uncle.”

As well as being managing partner, Edinburgh with Johnston Carmichael, Andrew Shepherd is a third generation farmer. As he explained, farming avoids some of the complexity of some other family concerns because the business tends to pass on to just one person in each generation.

He warned, however: “The equalisation of assets usually turns out to be the biggest problem, because capital values are out of all proportion to the ability of the business to generate cash.”

Indeed, succession planning is one of the biggest challenges for a family business.

Tods Murray’s John Biggar said: “That’s one of the important roles that an adviser can play. You can help to tease these issues out.

“For example, if it’s clear there isn’t going to be a succession, you have to ask, ‘Is this their retirement plan? Why are mum and dad soldiering on and is there a better exit route for them?”

Mark Sim agreed: “One question we ask is, does the family have a succession plan? Many don’t.”

“Whose responsibility is it to raise thesuccession issue with the business?” asked George Stevenson.

According to David Hughes, an adviser will or should take the lead when the time comes, whether a lawyer, accountant or whoever. He added: “But when everyone says ‘not me guv’, problems happen.”

Bruce Mickel said: “Only an adviser or banker who has established a relationship with the client over a long period of time has earned the right to give that kind of advice.”

But John Biggar stressed: “It is your  professional responsibility to make sure that these things get onto the table, even if the client may not want to talk about it.”

Mark Sim suggested a “multidisciplinary” approach. He said: “It’s all too rare that bankers, lawyers and accountants meet together to discuss their client. We need a different mindset.”

For ICAS, Patricia Gallacher, stressed, members are expected to keep their skills and knowledge up to date and ensure they are relevant to what they do. So for CAs working with family businesses they must ensure that their continuing professional development (CPD) reflects that need.

Andrew Shepherd agreed but added that the syllabus for the CA qualification itself does not explicitly include a family business element.

For the Scottish Government, Jim Mather said: “We’re interested in sustainable growth in Scotland and we’ve been assiduous in talking to sectors and communities, including the family business sector.

“We’re trying to address the 70 per cent failure rate at the point of generational change [the percentage of family businesses that do not successfully pass from one generation to the next].”

“Even if there’s not a succession plan,” the minister said, “we have to ask what can we do to help the business make the transition, through a management or employee buyout, for example, or through becoming a social enterprise.”

He added that the Scottish Government was pioneering a series of initiatives, starting in Argyll & Bute, bringing together the local authority, Highlands and Islands Enterprise and local businesses across a range of sectors to see how they could help each other.

“We ask,” Mather said, “who are your customers and beneficiaries and how would they define your purpose? And what needs to change to make things better?

“There’s clearly a role for government as a catalyst. We now have local government included in economic development and, if we can get the professions more involved and comfortable with the idea of mentoring businesses for growth, that will be good news.”

The minister added that he was interested in getting improved data on family businesses – and had been discussing that with the Scottish Government’s chief statistician – but in terms of existing data there was very little in the public domain, in the UK or elsewhere.

Martin Stepek said the exercise would be worthwhile: “Whatever emerges from the statistics, they will lead to people thinking about family businesses.”

Mark Sim suggested that the tax system does not incentivise passing a business on to the next generation and suggested that some sort of tax “wrapper” to preserve business assets within a family could help.

So how does the future look for the family business? Overall, the panel was positive, with varying degrees of caution. Andrew Shepherd said: “I am a ‘glass half full’ person but it’s a pretty tough environment. That said, family businesses are probably more likely to fare better than others, because they tend to take a low-risk, long-term view.”

“I’m optimistic overall,” James Barnes said, “but what’s happening at present here in Scotland is very limited. And every single day I come across barriers to wealth creation that could so easily be overcome with the right political determination.”

John Biggar said: “I’m very positive, but also I hear people say that we are in a ‘tick box’ culture – ‘You have to do it this way or it can’t be done.’”

Patricia Gallacher agreed and added: “I think many businesses and their advisers are focused on compliance issues rather than doing other things that in the long term would be better for the business.”

Jim Mather promised: “We have the ‘tick box’ culture firmly in our sights. Regulators are beginning to recognise the need to be enablers, not just policemen.

“Increasing sustainable growth is our North Star and family businesses are part of that. It won’t be overnight and I want to hear about it when things are blocking your progress.”  

Thanks to Tods Murray and Lloyds TSB Scotland, and to the Bonham Hotel.

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