By Ian Lavis on behalf of Praxity Global Alliance
Family businesses face a unique set of challenges to survive and prosper in the coming years. Independent accounting firms are helping them navigate a path to success.
Strong yet vulnerable, high-performing yet low on governance, increasingly powerful but often small in size, research suggests family businesses are a mass of contradictions.
But while they may be hard to define, family businesses represent an important and growing force in global business, especially in Asia and emerging countries.
Despite evidence that they consistently outperform non-family owned rivals, family businesses face tough challenges regarding ownership, wealth management and succession planning as well as universal business disruptors such as digitalisation and the growing cyber threat.
Damien Martin, who works with the Family Office and Succession and Continuity Services Practice of US accounting firm BKD, says: “Succession has been appearing on the radar more and more but we are also seeing automation and other disruption happening, and we are starting to see multi-generational management issues. Navigating some of these things is challenging as those in current leadership positions may not have the same impetus for change as others within the business.”
Independent accounting and consulting firms are often ideally placed to help family enterprises overcome these challenges thanks to first-hand experience dealing with exactly the same issues.
Jeremy Oliver, Partner at UK accounting firm Garbutt + Elliott, a member of the International Centre for Families in Business, says specialist, local expertise can play an important part in helping family businesses navigate family and business challenges.
Commenting on Garbutt + Elliott’s family business expertise, he says: “As a small group of Partners running a business, we can relate to family business owners and there is probably more correlation with the day-to-day running of the business itself.”
He adds: “The skillsets of an independent firm make a difference as well as a joined-up approach to consultancy services. It’s about the ability to have the ‘helicopter view’ to deal with topics such as ownership, the retirement of senior people, planning and reform, wealth creation and inheritance.”
Damien Martin, who is also a BKD National Tax Assistant Director, says the key is “finding the right fit” between accounting firm and family business. He explains: “It’s like when you go to the gym and you want to find a trainer that fits your needs and your lifestyle. At BKD, we have a great cyber security and technology group, so we can provide expertise in those areas, as well as family governance. It’s also the approach; the discovery process to find out what a family business needs, how to tackle the issues, and set and reach goals.”
He adds: “Sometimes there are more pressing issues like wealth transition. In the US, we have had the biggest tax reform in 30 years and we are looking at how this impacts family businesses. This really depends on what they do and what their long-term plans are.”
Before examining in more details how accounting firms are helping family businesses address specific challenges and threats, we need to debunk some common misconceptions.
The term family business typically means a business owned or managed by one or more members of the same family but definitions vary.
Commonly perceived to be small enterprises, family businesses are in fact incredibly diverse, ranging from dynamic two-person partnerships to huge, publicly-listed companies.
Credit Suisse, which defines family businesses as those whose founders or descendants hold at least 20% in direct shares or voting rights, says family enterprises have consistently outperformed non-family owned businesses since 2006.
They are also growing in number. In a report on the success of family businesses in emerging countries, global consulting firm McKinsey predicts the family sector will represent nearly 40 percent of the world’s large enterprises in 2025, up from roughly 15 percent in 2010.
While the global growth and performance of family businesses is impressive, many family enterprises are having to make difficult decisions to deal with internal issues and new business disruptors.
If you own a family business, the chances are you worry more than the average entrepreneur about ensuring your company not only survives, but also remains true to its family heritage.
Typically, family businesses often have poor governance and more conservative attitude to risk-taking, according to research by Credit Suisse. They are also prone to operational and succession vulnerabilities that can seriously impact the direction the business takes.
On top of this, family enterprises are having to deal with economic uncertainty, technological change and other external threats. This is placing mounting pressure on family business owners and managers.
Jeremy says: “In times of uncertainty you can have a conflict between what is in the interests of the business and what is in the interest of the family. Consequently, some family businesses are run on a family first principle while others are run on a business first principle.”
One of the biggest challenges is how to address succession planning, or more specifically, how to transfer knowledge and relationships from one generation to another. This is complicated by the fact new generations may need to learn different skillsets to take the business forward.
“It puts a strain on the management of your resources,” Jeremy explains. “If it’s a family business you have the extra dynamic of whether you want a member of the family to be involved or not. Sometimes owners send family members off to learn new skills and bring them back.”
Another big challenge is how to embrace technological change. However, many are not prepared, according to a new survey by Praxity participant firm, Mazars.
In a study conducted in partnership with Family Business United, Mazars found that 41% of family businesses surveyed were reluctant to embrace digital change, with 28% believing that it’s the responsibility of the next generation.
Margaret Laidlaw, Head of Mazars UK Entrepreneurial Business, comments: “With digital evolving at a considerable pace, family businesses who do not embrace innovation, technologies and digital marketing strategies could be left behind, finding it harder to compete in regional, national and international markets.”
In the UK, family businesses are among those impacted by Making Tax Digital, a government initiative to digitalise the submission of VAT returns. This means, from April 2019, businesses can no longer keep and submit manual records.
Margaret adds: “Making Tax Digital has pushed many businesses to adopt digital solutions but there is still scope for further digitisation. Family businesses who embrace these solutions will generate operating efficiencies which will enhance business value and lead the way on further digitisation as technology develops.”
As well as digital change, philanthropy is also increasingly important for family firms, particularly in the US where changes to business structure may be required to benefit from new tax reductions.
The challenge facing family firms is aligning digital requirements with succession planning, philanthropy and other elements to maximise future growth opportunities.
To help companies manage these elements, independent accounting firms often have specialist family business teams in place to provide expertise in key areas. They have also developed family constitutions or charters to help family businesses develop a strategy to manage key issues such as addressing areas of conflict, educating the next generation; improving communication, and ensuring fair returns to all family members.
Garbutt + Elliott’s charter helps family businesses develop a set of guiding principles that “provide family members with a sense of identity and mission that transcends their role as managers and their rights as owners”.
The charter includes:
• Setting a family policy governing behaviour, actions or decisions.
• Articulating family vision and mission
• Setting a framework that enables the family to learn together, share decisions and communicate.
• Agreeing the principles that guide business culture, goals and capital allocation, and rights and responsibilities of shareholders.
Support is also being provided across international boundaries. Mazars, BKD and Garbutt + Elliott, share international expertise on family business practice through Praxity Global Alliance, the world’s largest alliance of independent accounting and consulting firms.
More than 100 participant firms in the Alliance work together to develop best practice and provide global expertise at local level.
Jeremy states: “Being part of Praxity puts us in touch with associates around the world. We sometimes get calls from the US or Germany, for example, and we get involved at local level by providing support in areas such as compliance, audit and tax.”
Damien adds: “We have a strong international practice and a lot of that is driven by working with Praxity and with other participant firms. This enables us to offer services to businesses that are starting to look into global operations.”
He adds “With all the tax changes we have had to advise on, having conversations with other firms in the Alliance has been very instrumental in developing a better understanding of what’s happening for the benefit of our clients.” BKD regularly communicates this expertise with its “Simply Tax” podcast via its website.