Family businesses under pressure and looking for certainty

This is concerning – but it is in tune with the mood music that myself and my colleagues pick up in our daily interactions with family business leaders. At the heart of the problem is a lack of certainty in tax and regulatory policy, making it unclear where things are heading. The changes to Inheritance Tax (IHT) that took effect from April will hit many businesses hard when it comes to handing the business on to the next generation, despite the government raising the threshold from £1m to £2.5m at the last minute. That was a welcome change, but it still leaves numerous family firms facing a hefty bill. The problem is that many businesses are asset rich but cash poor, so finding the funds to pay their liabilities is a complex challenge.

On top of IHT, increases to employer’s national insurance contributions as well as to business rates have placed a further strain. At a time when the economy is in low-growth mode and consumers are reining in spending due to cost of living concerns (none of which has been helped by the conflict in Iran and consequent increases to fuel and energy prices), the going has got steadily tougher.

That is not to say there aren’t some family businesses performing strongly. But it is a very mixed market, and family enterprises on the whole feel more impacted than their privately owned counterparts.

We see further reflections of this in our Pulse survey results. Some family businesses are intent on pursuing growth through diversification, launching new products and services (52%) or entering new markets (35%) – but this is significantly lower than private businesses (63% in both cases). Only 9% of family leaders say acquisitions could be on the cards as a route to growth, compared to 24% of non-family firms.

At least many family enterprises have strong balance sheets – over half (51%) say they will finance any growth plans through their own funds. Private equity is another notable source of funding (29%) although again this is markedly lower than amongst their privately owned cousins (46%). This reflect is a trend we have been seeing in the market of family businesses bringing in private equity to take a minority stake, which helps derisk the business and allows family shareholders to take some cash off the table. However, it also means giving up full control in the boardroom – something that takes some getting used to. A few family teams have cashed out completely, with PE taking full ownership. Most family firms are open to, and looking for, sources of patient capital (10 years plus) that will support their longer-term futures and growth plans.

In addition, our Pulse survey showed that family businesses are taking a cautious approach to investment. Whereas 68% of private enterprises say investing in technology and AI is a priority, this is the case for only 40% of family firm respondents. However, they are placing a higher priority on investing in the workforce (47% compared to 36%). This isn’t so much about large scale recruitment as finding top leadership talent. There is a growing trend of bringing non-family members into the C-suite, which is happening both because it enables senior family members to retire if that is their wish and because having diverse leadership experience and perspectives helps the business stay competitive. As a result, there is something of a war for executive talent between family businesses.