Practice focus: Keeping it in the family

It is not an encouraging picture. Profit margins have declined for the second year in succession and there is a real danger the company may slip into loss in the coming year unless action is taken.

You recommend the company cuts costs by reducing staff and identify certain posts that could go. Your client looks at you, horrified. One of the positions you have nominated for the chop is occupied by his wife.

‘If I take that action to save my business, I may wreck my marriage,’ he tells you. Suddenly, you feel uncomfortable. What looked like a problem delineated with cold facts and numbers has just turned into an emotional minefield inhabited by people. You feel less like an accountant, more like a marriage guidance counsellor.

Many accountants are not well equipped to deal with the special problems of family businesses, says Dr Barbara Murray, director of the Centre for Family Enterprise at Glasgow’s Caledonian University and a partner in a new consultancy called Family Business Solutions. It’s not that the advice they give is technically deficient. Usually, it’s very good.

The problem is that not enough accountants understand the emotional dynamics that drive family businesses. As a result, the people who run the businesses too often don’t take the advice because it fails to match personal but unstated needs. And the accountants end up frustrated because they think their advice is being ignored.

‘When you’re dealing with a family firm, you’re involved with a Bermuda triangle of money, power and love,’ says Murray. ‘The training you get in business schools or when you become a chartered accountant doesn’t even begin to address the kind of interpersonal and listening skills that you need to have.’

Murray spent five years studying 20 family businesses, selected from an initial survey of more than 7,000. She used the research to write a PhD thesis, which explores the inter-generational and succession issues that affect family firms. Unusual among MBAs, she has also trained as a counsellor and family therapist.

Murray says that one key point to grasp is that people are putting money into their own family enterprises often for reasons other than traditional return on investment thinking. ‘Every family has a sometimes unspoken philosophy about why they are doing it,’ says Murray. ‘Perhaps they want to give members of the family a preferential start in life or to reward them with the hard work of previous generations.’ They are more likely to accept the need for ‘patient capital’ in their business. They are not necessarily looking for a dividend next quarter.

But, critically, not all family firms are the same and those all-important emotional dynamics can operate in dramatically different ways. A good starting point, Murray suggests, is to think of family firms operating at some point along a spectrum. At one end of the spectrum are firms that put family first – decisions will always be taken to serve the interests of the family, with the business consequences secondary. At the other end of the spectrum are firms that put business first – decisions will serve the interest of the company even though the firm operates as a family business.

Family businesses can move along that spectrum as they develop. Often, the very fact of growing larger means they start to move from the family first to the business first end of the spectrum. Murray cites the case of a family firm launched by a father who had 10 sons and daughters. ‘This man had set up his company in order to give his family the best start and chance in life he could. That is what his return on investment was.’ At one point, nine of the siblings plus some of their spouses were working for the company.

The problem with that was that some of the spouses were better at their jobs than others. At one point, one of the spouses was sacked. The siblings decided that it wasn’t equitable to have some spouses working for the company and not others, so they decided that none would have jobs. It was the firms’ initial move along the spectrum from family first to business first.

The second move came when the siblings started to look at the third generation, which consisted of 20 grandchildren. They realised there couldn’t be jobs for all of them. So they adopted a four-point employment policy which stated that grandchildren could only have a job if (1) there was a job available, (2) if the applicant had an appropriate qualification, (3) had worked five years elsewhere and (4) had had a promotion in that job.

‘That was an overt signal that the company was shifting from family first to business first,’ says Murray.

Every family firm that wants to be around in the long term should have a family constitution, Murray says. The constitution can deal with employment, financial management including shareholder returns, succession and decision-taking, among other issues. It’s possible that some elements of the family constitution could be written into the company’s memorandum and articles of association.

A constitution helps to avoid disputes among members of the family about how a particular situation should be handled. Equally important, it provides important guidance for professionals, such as accountants, when they come to advise the firm.

One of the key problems for accountants advising family firms, says Murray, is that too often they do not engage widely with enough members of the family. Thus, they take as read that the views expressed by the person sitting in front of them are shared by other members of the family. That may not be the case.

For example, take the example of a company run by two brothers. The first brother wanted to take the company upmarket introducing classy design and posh packaging. The second brother favoured and pile ’em high and sell ’em cheap approach. Unfortunately, only the first brother discussed his ambitions with his accountant. As a result, the accountant didn’t realise that the advice he was giving was based on a policy that was still undecided.

Another classic area where accountants provide advice that fails to match the realities of the situation for a family business is in succession planning. Murray cites the case of a father who wanted to pass the firm on to his son and asked his accountant to plan on that basis. But the accountant didn’t know that the son was not keen on taking on a business of which he would only own half (the other half was owned by a sister who took no active interest).

‘The succession plan had no chance of being implemented because nobody asked the next generation whether this was what they wanted,’ says Murray.

‘The key lesson is that when you only deal with one family member, you may only be getting a fraction of the data you need in order to provide advice that will be generally acceptable. Have a go at engaging the wider family,’ advises Murray. ‘It helps you understand what’s driving the company.’

So what can accountants do to become more family friendly? First, they need to become much better listeners, says Murray. ‘Ask more questions and listen harder to the answers. Start to understand what kind of return on investment the clients are looking for from their company.’ As Murray points out, it may not be only a financial return.

Where your point of contact is just one member of the family, try to engage more. If you can build up a picture of how the family dynamics work and what the ambitions of different family members are, it will be easier to provide advice that stands more chance of being implemented.

Be aware that people in family businesses are not always good at asking for advice, especially when the issue touches family relationships as well as the affairs of the business. They may not want to wash ‘dirty linen’ in public or they may, simply, be embarrassed about bringing an outside adviser into the inner counsels of the family. Address this by becoming more sensitive to the emotional issues that may overlay a business problem.

Murray also cautions accountants about allowing themselves to get boxed into a situation where they are, in effect, saying: ‘This is my professional advice – take it or leave it.’ She says: ‘Try to provide alternative options, even if it is only to discuss the advice with other members of the family.’

Murray also says there are times when there is a case for bringing in a specialist experienced in dealing with family firms. ‘We are trained to go wading into the family mud with our wellies and help members of a family figure out what exactly it is that they want.’ When there’s a problem, keeping it in the family is not always the best idea.

10 THINGS YOU DIDN’T KNOW ABOUT FAMILY FIRMS

– More than half the jobs in the UK private sector are created by family businesses

– More than three-quarters of the UK’s largest 8,000 companies are family businesses

– In the US, an estimated one-third of the companies in the Fortune 500 are family controlled

– Most family businesses are small or medium-sized enterprises

– But family businesses that are multinational global players include Ford, News International and Marriott Hotels

– Only 30% of family businesses survive from the first generation to the next and only 13% to the third generation

– More than four out of ten family businesses do not have a succession plan in place

– More than half of family businesses will go through a leadership change between 1995 and 2005

– Many families consider the most important investment in their business is not their money but their ‘sweat equity’ – the work they put in

– Most parts of the UK rely on family businesses to provide employment opportunities and wealth creation.