Lessons for long-term growth? Ask the family
Growth – and more specifically the UK economy’s need for more of it – is the persistent clarion call of politicians (of whatever flavour), economists, business leaders, trades unionists and news editors. We are all agreed: the UK needs more economic growth.
As businesses of all sizes try to strive for growth under the current challenging economic conditions, what lessons can SMEs learn from family-owned businesses?
At first glance, perhaps not that much. After all, there is a common perception that family-owned firms are less dynamic than non-family-owned SMEs, with their dial set more towards managing risk than pursuing reward. However, if we take a closer look, we might see that well-run family businesses can build sustained growth over the longer term and could provide interesting lessons for SMEs:
It is sometimes said that family businesses cannot offer the sort of attractive equity packages that the best managers look for. As a result, they miss out on the best talent. But that is not necessarily true. A family business can still offer tax-efficient equity schemes (growth shares, company share option schemes) which gives management a share in growing profits, whilst allowing the company to buy-back management shares and so retain family control.
Family businesses tend to be more loyal to their employees, which can help with retaining talent, particularly compared to fast-moving, smaller businesses. A workplace which nurtures a team-orientated culture, invests in training and promotes from within is popular and inspires loyalty. Pay may not always be at the top end, but who wants to work for Glengarry Glen Ross anyway?
Capping CAPEX (capital expenditure)
Family firms like to keep CAPEX under control and tend not to spend more than they have. This may seem counter-intuitive, after all, doesn’t investment deliver growth? Well, yes, hopefully. But sensible, long-term investment intended to deliver steady, long-term returns won’t risk the business if borrowing costs go up or if investments turn sour. Managing down-side risk might mean there is a business to hand on to the next generation.
Don’t bite off more than you can chew
Family businesses are sometimes accused of lacking vision, eschewing risk and missing out on opportunities. But betting the farm on a transformative acquisition should come with a big health warning. Integrating a new business can be difficult, disruptive and will challenge the prevailing corporate culture. Cost-saving synergies are often illusory, as could be promised profit if the integration goes wrong. Strategic, rational, deliverable bolt-on acquisitions may be unspectacular, but they are easier to make work.
Waste not, want not
The company’s money is family money, so it makes sense to keep overheads under control. Better to reinvest retained profit than spend it on a flashier head office or expensive team-building trips.
Avoiding attention-deficit disorder
For many business owners, achieving a successful business sale is the ultimate goal. A sale can be transformative and exciting, but achieving one can be distracting, is almost always stressful and can have an adverse impact on business performance. If a family is not looking to sell its business, it can avoid the time, cost, stress and distraction that comes with a sale process. That said, family-owned businesses do have to think about succession planning – which is not always a walk in the park.
To draw parallels with the story of the tortoise and the hare is, of course, a crude generalisation. There are plenty of family-owned businesses that have taken big risks, just as there are plenty of SMEs and which are characterised by frugality and conservative growth. However, the more cautious, longer-term perspective of a family firm can deliver sustainable success over the longer term, while managing downside risk. It’s hardly a get rich quick strategy but there is something to be said for it.
This article was written for SME Magazine and published on 13 March 2023.