Make a success of your succession

Family businesses will only prosper if the next generation inherits sound commercial instincts.

The popular view of siblings feuding over control of the family business, as exemplified in the bitter rivalry between Bobby and JR Ewing in popular Eighties soap Dallas, does not seem to translate to the real world. Some 300,000 jobs are lost each year across the European Union through small businesses that have no effective succession arrangements, according to research conducted for the European Commission. Traditionally, this would have been solved by entrepreneurs handing over the business to their children, but a new study published by accountants Grant Thornton suggests that family businesses may be on the way out.

The problem of business succession is likely to worsen, says the European Commission, because almost 20 per cent of business owners are over 55. That figure rises to nearly 22 per cent in the UK, suggesting we have a potentially major problem with short-life businesses.

The significance of this issue is underlined by the priority placed on it by the Commission, leading to the creation of the long-term Best project for the Transfer of Business, which is responsible for the latest EC research. It reports that it is not merely that succession arrangements are not put in place, but that in too many cases those that are agreed do not work. Transfers often fail because of the psychological and emotional attachment of the owner to the business, which leads them to resist an effective handover. This undermines the ongoing viability of the firm, especially if ill-health or an unplanned retirement forces speedy completion of the deal.

Several EU countries have initiated tax schemes to make transfers more attractive, with specific tax breaks for transfers to employees. In the UK, taper relief dramatically reduces the level of capital gains tax payable on the sale of business assets to just 25 per cent where the holding has been held for more than four years.

There are specific support schemes operating in the UK to assist transfers to the workforce. One successful project is run by the Wales Co-operative Centre (029 2055 4955), which operates a support programme to make transfers to employees more effective. This includes assistance for the workforce in helping them raise money to buy the business. The Baxi Partnership (01334 479 101) has a dedicated fund to support employee takeovers.

Grant Thornton is also treating family business succession as a key issue and has just launched a free website, www.familybizz.net, to assist entrepreneurs tackle issues including succession and sale. The site contains up-to-date advice, case studies, reports, an open discussion forum, interviews with successful entrepreneurs and an online publications sales point – run with Amazon – for ordering relevant business books.

To mark the launch of the website, Grant Thornton has published a comprehensive study on attitudes held within family businesses around the world. This found that fewer than 10 per cent of family businesses survive to their third generation. The impact of failed succession on the lead entrepreneur can be profound – fewer than one in 10 family business owners are financially independent from their firms when they retire.

Grant Thornton's research suggests that increasingly the owners of family firms are less worried about ensuring that sons and daughters take over the business, while being more concerned that the enterprise will continue without them and will provide a decent pay-off.

According to the study – conducted across 26 countries – some 40 per cent of business owners are worried that their wealth is tied-up in the business. About 15 per cent are concerned about the value of the business if they need to sell it.

Andrew Godfrey at Grant Thornton says: "The results of the survey are surprising in that some issues which we would expect to cause worry to owner-managers do not seem to concern them, such as how to provide for children if they prefer to work elsewhere, or whether to bring the children into the business at all. Owner-managers across the world seem to be increasingly concerned about the long-term challenges of keeping the business in good health rather than short-term problems.

"The biggest challenge facing today's family business may well be ensuring they have the right expertise to grow their business in an increasingly cut-throat business world."

This is illustrated by entrepreneurs pushing their firms into a greater focus on profit maximisation. Children are more likely to have to force their way into the company and on to the boardroom, getting there largely on merit.

There is also a more relaxed view about whether the children should be expected to join the firm. In the UK, 73 per cent of family business owners said their children should only join if they want to do so. Working with parents in the family venture is challenging, and 68 per cent of owners believe that children who join the business should start at the bottom.

"Children who wish to be involved in the family business can no longer count it as their right to have a guaranteed place on the board," says Paul Andrews at Grant Thornton. "They will have to prepare for it and earn it."

Andrew Godfrey argues that familybizz.net will prove genuinely valuable. "Seventy per cent of the world's privately owned businesses are family-run and they also make up a high proportion of businesses in this country," he says. "These businesses experience particular concerns which are not addressed on a worldwide basis.

"Our forum aims to address the needs of family businesses of all sizes and stages of maturity. Many new companies are family-run in the early stages, but the family connections can continue as the business grows and expands internationally. Some of the best-known companies in the world still have members of the founding family running the business."

There is a clear message here. Family businesses are facing sharp challenges. Those that evolve and adapt can succeed; those that cannot may be better selling-off for a good price than struggling on in the hands of unenthusiastic relatives.