Comment: Family firms have their own challenges

Kristy Dorsey. Picture: Robert Perry
Kristy Dorsey. Picture: Robert Perry
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LOOKING across the landscape of Scottish business, it is clear that this is a nation of people who prefer to keep it in the family. Four out of five of the country’s top 250 firms by turnover are family-controlled, led by Arnold Clark Automobiles with £2.9 billion in sales last year.

Cumbernauld’s Farmfoods, City Refrigeration Holdings and Mackays Stores, the clothing retailer behind the M&Co chain, are but a few of the other well-known names owned by a band of relatives.

But the Scottish predilection for keeping control amongst the kin extends far beyond the big players – the vast majority of this country’s 200,000-plus family-owned firms are small and medium-sized businesses. Together they generate 45 per cent of the country’s gross domestic product (GDP), compared with 25 per cent for the UK overall.

Family-owned firms face particular challenges in addition to the vagaries of the economy, with succession the most common and oft-quoted obstacle to survival. Although some such as Walkers Shortbread or food group Baxters have been trading for more than 100 years, only 30 per cent make it to the second generation, and just 3 per cent will last four generations or beyond.

Other pitfalls loom. The temptation to slip into patronage based on a common last name can seriously undermine operations, and on the flipside there is always a risk of dragging household conflicts into the workplace.

That said, family-owned firms tend to be more patient and less beholden to external pressures. They are also conservative when it comes to the balance sheet, tending to carry relatively little debt.

Those two factors can make it extra-difficult for a family-owned business to raise money when it is time to expand.

Recent research suggests that more than half of the UK’s family firms are actively seeking funding for growth. However, there is a serious mismatch between their expectations and those of would-be investors.

Bank loans remain in restricted supply, but the drive to maintain family control can limit other established routes to financing. Private, venture and corporate capital all involve giving up equity or commercially confidential information, or both – an unattractive proposition for most family firms.

One largely overlooked group with money and advice to offer is high net worth individuals. Consultants at KPMG have suggested that linking up with these wealthy people could release untapped potential, as many have first-hand experience of running a family business and understand the unique challenges.

Not all firms can or should remain in the hands of their founders’ descendants – some outgrow that structure, others run out of heirs, and a number will fall prey to the commercial realities that force any firm to go bust. Yet with such a large proportion of Scotland’s economy rooted in family businesses, helping the rest to expand is critical. «