That view is being strongly challenged by family businesses themselves and their representative body, the Institute for Family Business (IFB). An IFB report last year found that family-owned enterprises account for two-thirds of all businesses and 31 per cent of UK GDP. That makes these businesses ‘twice as important’ for the economy as private equity-backed companies, said the report.
Kate Murphy runs a medical diagnostics venture with her brother, and is also UK head of family business at J.P. Morgan’s Private Bank. Her view is clear: ‘There’s this idea that family businesses are completely risk-averse. That is wrong because there’s a massive risk in the first place when you are setting the business up. In many cases, the family is banking on the business.’
Because families make such an enormous bet in the first place, Murphy argues, they quite reasonably want to limit further risk. That attitude leads to low leverage, or indeed keeping cash in the bank: an approach which has served them well over the past couple of years as they have taken the opportunity to invest in advertising, recruit high-calibre staff and even make acquisitions.
Right on time
A case in point is watch manufacturer Accurist, perhaps best known for its canny sponsorship of the Speaking Clock from 1986 to 2008. CEO Andrew Loftus is the son of the original founder and owns the company with his two brothers. He says that the family’s determination that Accurist should fund its own expansion, without recourse to external investment, has enabled strategy to be determined ‘through choice rather than necessity’. ‘This year, for example, we are significantly ramping up our marketing budget,’ adds Loftus. ‘We are spending £1.1 million in the three weeks before Christmas on a television campaign, compared with about £300,000 over the same period last year. Now is a good opportunity to purchase advertising space at extremely favourable rates.’
Where things can really go wrong is when family members don’t see eye-to-eye on risk. Richard Farnsworth, tax partner at PricewaterhouseCoopers, explains that as businesses are passed down the generations, there are often tensions between those who see the company as a cash cow and those who want to reinvest in growth.
‘You can quickly get into a conflict where the people running the business need cash to make acquisitions or grow the business overseas, but there is pressure from non-working family members to keep paying out the dividends,’ says Farnsworth.
The threat is of an unsatisfying stalemate where both business prospects and family relations sour. David Whileman, head of the growth capital team at private equity giant 3i, expands on this theme. ‘For many family businesses, there is a danger of them ending up in a no-man’s land. If they remain a regional player and don’t go for growth, the prospect is that they will be consolidated. Then the goal becomes making the business attractive to an acquirer, which goes against the grain for any family business.’
Bringing in outsiders
One possible solution is to accept external investment, which can allow family members who prefer not to be part of an aggressive growth drive to exit gracefully while the others power on. Danny and Mark Schweiger are the directors of Character World, a children’s bedding specialist and former Business XL Rising Star which has grown sales from £7.2 million in 2006 to £20.7 million last year through licensing deals involving popular brands such as Spider-Man. The brothers’ ambitions for the company led them to sell a 52.75 per cent stake to private equity firm RJD Partners in April 2008 as their father exited the business.
‘It was really all about dad coming to the end of his career,’ says Danny Schweiger. ‘We lost a 70-year-old shareholder and gained a professional shareholder with the same ambitions as us. And dad could go off and enjoy life.’
Taking external investment does not have to mean being acquired outright. Whileman says 3i’s growth capital division takes only minority stakes in companies, typically of between 15 and 45 per cent. This allows families to retain overall control as well as getting help to internationalise. The downside is that you’ll need sales of at least £100 million to show up on 3i’s radar.
In any case, many family businesses shrink from accepting external investment almost on principle. Another problem is that investors usually require an exit within a few years, while the horizon of the family business may well be much longer, beyond the lifetime of the current management.
David Kenton, managing director of lingerie company Rigby and Peller, cheerfully admits to having ‘no exit strategy’. Over the past four years he’s embarked on an expansion plan for the business his parents founded, going from two to seven stores while turnover has more than doubled to £14 million. ‘We could have gone to private equity and grown faster, but we are a reasonably conservative business and we’ve preserved control within the family,’ he states.
As with Accurist, conservative does not mean unchanging. ‘Our ultimate goal is to build a bigger business, so I had to go back to college and increase my own skill set,’ Kenton reveals. Another crucial move was to appoint a new chairman from outside the family, a decision that did not go down well with Kenton’s sister, who ‘wanted someone to work for her, rather than with her,’ he relates. She resigned from the business, although she remains a shareholder.
For Kenton, growth is the paramount concern. ‘We have been investing heavily in the business. We haven’t invested elsewhere. We are in the fourth or fifth year of the plan we laid down with our chairman. Yes, the economy has gone against us, but we are still sticking to our plans.’
Clearly this is no time to consider prudent principles of wealth management such as asset diversification. Murphy of J.P. Morgan, speaking from her own business experience, agrees that ‘at times you absolutely have to plough everything you make back into the business because you have the view that it’s where you will make the best return’.
For Accurist, the situation is different. With retail sales of around £35 million and a well-recognised brand, there is a big emphasis on further growth but a recognition too of the importance of spreading risk. Andrew Loftus explains that a decision by his late father to buy his business premises led to what is now ‘a substantial and successful property business’.
‘I think it’s very important not to put all your eggs in one basket,’ says Loftus. ‘My brothers and I are able to dedicate proper time and attention to each of the businesses we’re involved in…Each one specialises in a particular area, which helps smooth out the peaks and troughs of particular business cycles.’
Though Character World has taken a different route, the concerns are similar. While the Schweiger brothers remain fully committed to an ambitious expansion plan for the company, they concede that its runaway success meant that ‘taking some chips off the table’ was among the motivations for the private equity deal that valued the business at £20 million. Mark Schweiger, a trained accountant who focuses on the financial side of the business, says that it has helped the brothers spread the risk to their personal wealth and they are now looking at investments including property and shares.
Murphy states that when family businesses do take cash in a partial exit, they tend not to invest heavily in the stock market. After all, they still have a large ‘single stock holding’ in their business. Bond funds are popular, as are liquidity funds (an equivalent to cash): both are low-risk and provide diversification. At the other end of the scale, business owners may choose to invest in private equity or venture capital trusts, or indeed become business angels, using their skills to pick the right opportunities and help fellow entrepreneurs.
Whatever tools are used to grow and manage the family’s wealth, they will want to find the best solutions for both the business and the family rather than pursue purely financial goals. For Loftus of Accurist, this wider outlook is crucial.
‘[What I achieve] won’t be measured by reaching a certain level of turnover or profit, or me being able to take out a particular sum of money. It is more a question of earning respect from the people I’ve worked with, both inside and outside the business.