Family business minister would promote growth

The relationship between family business and government is crucial if potential economic growth is to be realised, writes Jake Rigg

For a sector with a turnover equivalent to the EU’s trade with India, family business is too often overlooked by government.

That may be partly because it is unclear whether or not family business is a sufficiently unique form of capitalism to deserve its own political agenda. It is also sometimes difficult to identify what makes the sector homogenous.

Perhaps the problem is that, to paraphrase Tolstoy’s quote from the novel Anna Karenina: “Successful family businesses are all alike; every unsuccessful family business is unsuccessful in its own way.”

Yet a sector with names such as JCB, Clarks, Ginsters, Robert Wiseman and William Grant & Sons will always deserve attention. Leading firms such as Warburtons are increasingly grounding their brands in their family ownership; being family-owned is clearly seen as paying a wider reputational dividend. A sector that constitutes nearly two-thirds of all private sector firms, according to the Institute for Family Business (IFB) 2011 report The UK Family Business Sector, will always need a focus in government.

So why does government, both in the UK and the European Union, not pay more attention to the needs of family business? One difficulty is that the issues that affect family business are around ownership and therefore cross-departmental. But there is much that the government could do to help family businesses.

Given that more than half of the 10,000 medium-sized businesses in the UK are family owned, it is important for the government to get it right. Politicians need to understand better how pronouncements on seemingly unrelated aspects of policy can affect family businesses.

For example, in the recent discussion on a “wealth tax”, there has been no comment on its impact on the ownership or succession planning of family businesses and, while politicians Vince Cable and Chuka Umunna rightly talk about the need for a diverse ownership structure in UK companies, they overlook family businesses in that mix. Government also needs to examine how family businesses can access arrangements such as employee ownership without damaging the ownership structure or ethos of the firm.

Government estimates suggest that 100,000 businesses in the UK may be affected by business transfer failure, either closing or becoming less effective. When businesses fail because of ownership transfer problems, economic capital such as knowledge, established contacts and other intangible assets are destroyed, jobs are lost and economic growth is reduced.

It is crucial that the government understands the nature, scale and impact of business transfer failure more fully. Research shows that those who are made redundant due to firm closure find it more difficult to gain re-employment than those who are let go through cutbacks. In some parts of the country, business transfer failure could have dramatic consequences for large numbers of workers.

This needs to be understood in the context of changes to the tax system. Too often decisions are made on personal taxation without thinking of family business. Given that trusts and foundations can so often be used to help business transfer, more should be done to make decisions about succession planning tax-neutral.

Access to growth capital is a key problem for many medium-sized firms and, while the government has been working on promoting credit access for mid-sized business (notably through its Funding for Lending scheme), little has been done to explore the possibility of longer-term capital holding (so called “patient capital”). Since this is a strength of family business, it is disappointing that shareholders are not encouraged to hold shares or debt for longer.

A sector that constitutes nearly two-thirds of all private sector firms will always need a focus in government

This particularly affects family businesses. While debt interest deductibility benefits firms with bank lending or larger firms with bond issues, most mid-sized firms are caught between these two stools. As the IFB has explained to HM Treasury, family businesses cannot benefit from investments under the Enterprise Investment Scheme when made by family members.

All in all, it is clear that the tax system is not aligned with the major features of mid-sized family businesses and acts as a break on their growth.

But that’s not the only area for government consideration. Many on the backbenches of the Coalition are discussing the need for supply-side reforms. According to the Confederation of British Industry (CBI) report Future Champions, added productivity in UK medium-sized businesses, many of which are family-owned, could account for up to £50 billion in growth by 2020.

The report says there is particular scope to close the productivity gap between medium-sized and large firms: between 2002 and 2009, the productivity of medium-sized firms grew by an average of 5 per cent, a rate that is nearer to that of small firms (4.8 per cent) than larger firms (5.6 per cent). If this gap can be closed, medium-sized firms can take advantage of strong tailwinds for further expansion as a larger proportion of them are found in sectors with high productivity growth.

Government should look at skills and technology partnerships between the private and public sector, and in making them useful from a business point of view.

Demand-side reforms could also be utilised; government procurement could be redesigned to promote mid-sized company growth. Alarmingly, according to the CBI, between 2002 and 2007, about 6 per cent of the UK’s medium-sized firms accounted for more than 60 per cent of job creation. The flip side is that many are struggling to grow at all: about 65 per cent of mid-sized firms experienced less than 1 per cent a year employment growth from 2004 to 2007 and more than half had reduced employment by more than 1 per cent a year over this period. Well-run family firms in this size bracket tend to perform well and should be at the heart of the recovery.

Government should take its role as a buyer of services more seriously. Procurement is so often only seen as a narrow means of outsourcing, but government could take a leadership role. Too often it is looking for the safe option; innovation cannot be expanded overseas without some demand. Overly prescriptive procurement does not encourage firms to “challenge the brief”.

On the export side, the CBI has argued that more medium-sized firms should be invited on trade delegations. Indeed, this could be very useful, but much work needs to be done to understand the needs of medium-sized outfits over their bigger competitors. Government needs to further its understanding of the family business brand and the role of medium-sized firms in the supply chain.

It would be a great help to have a minister or an official who was responsible for promoting family business and gauging the views of the sector when new plans were announced. Balanced growth, across sectors and across the regions will come if, and only if, the government and family businesses are able to work effectively together.