Big Business Could Learn Survival Lessons From Family Businesses

Three million businesses in the UK are family owned. They account for two thirds of all private sector firms. Think JCB, Clarks, Warburtons, Dyson, Swire, Virgin, Yorkshire Tea, McAlpine, Reed, Ginsters and Speedo. Many of us will recognise these big names, but there are hundreds of thousands of others.

According to the Institute for Family Business, these types of firm provide an impressive 9.2 million jobs, amounting to 40% of total private sector employment. In 2010 they generated revenues of £1.1 trillion which is 35% of private sector turnover. In terms of taxes they are estimated to have contributed £81.7 billion in tax receipts to the UK Exchequer, or 14% of total government revenues in 2010. Clearly, family businesses are an important part of our economy.

Family businesses are less likely to fail than big business because they are usually made up of a well functioning and diverse board of directors who are able to advise effectively, claims a new report.

Research carried out by Professor Nick Wilson, Director of Credit Management Research Centre at Leeds University, Professor Mike Wright, Director of the Centre for Management Buyout Research at Imperial College Business School and Dr Louise Scholes, Reader in Entrepreneurship at Loughborough University London has shown that family businesses are less likely to go bankrupt because they are able to recruit and maintain an experienced, diverse and knowledgeable board of directors.

The team also found that 80 per cent of family owned businesses are more gender balanced, having at least one female director.

The researchers found that the diversity of the boards of family businesses means that they are more stable. Surprisingly, the team found that this diversity limits conflict between board members and also means that board members have a wider skill set making them more able to address potential threats to the survival of family businesses. This is in comparison to other private firms where board turnover is higher.

The team found that these boards also ensure that family firms, which often have to rely on internal sources for financing of projects, are more frugal in their spending. They scrutinise business opportunities with greater intensity and take fewer business risks than private firms.

The study highlighted the fact that family-orientated goals such as preserving unity, wealth and providing employment for family members may also contribute to their survival.

To carry out their research, the team analysed data of over 700,000 medium and large private family and non-family firms with an annual sales turnover of at least £6.5 million, a balance sheet total of at least £3.26 million and at least 50 employees.

They analysed the filing accounts of private companies from 2007-2010, which contained information on a company’s directors, secretary (where one has been appointed), registered office address, shareholders and share capital. The data was collected from Companies’ House, the national database on limited companies and the Insolvency Service from 2007-2010.

Professor Mike Wright, director of the Centre for Management Buyout Research (CMBOR) at Imperial College Business School, and one of the report’s authors, commented: “Running a successful business of any size is no easy task and this year we have already seen some high-profile businesses such as Comet being forced to close. Family businesses could provide lessons to larger firms, as our findings show that a more diverse and experienced board of directors, which are prevalent in family firms, could be related to reducing failures in businesses.”

Private Equity in Family Firms - A report on private equity in family firms across Europe

The Impact of Private Equity-backed Buyouts on Employee Relations - Research paper conducted by CMBOR, December 2008

UK Family Businesses: Industrial and geographical context, governance and performance

The UK Family Business Sector - Working to grow the UK economy