Spotlight on family businesses

Business buyers looking to make their next purchase may not have considered a family business as their target. Many successful family businesses seem impenetrable from the outside - however, this is not always the case and a large number are leaving themselves exposed through a lack of succession planning.

Taking over a family business is an attractive prospect as they are often relatively unrestricted with regards to long-term investment. Privately and closely owned, they are not shackled by the need to produce positive quarterly results and can take a more balanced view of their success. Unlike public companies they can benefit from ‘patient capital’ and, according to the latest PricewaterhouseCoopers (PwC) ‘The Family Business Sector in 2016’ report, they enjoy an enduring sense of entrepreneurialism and can make decisions faster due to open lines of communication.

In a word, family businesses tend to be resilient. However, that is not to say they are without vulnerabilities that can give you, as a business buyer, an opportunity to do a deal that can be mutually beneficial.

When are family businesses vulnerable to a takeover?
Despite their resilience, family businesses are often challenged by their inability to build successful strategies for between five and ten years in the future. They tend to have clear and effective plans in place for the coming year, and even for the very long term, but they often have a ‘missing middle’.

This missing middle stems from poor succession planning, meaning they haven’t established a clear strategy for handling the business over to the next generation. Some 43 per cent of family firms do not have a succession plan in place, in fact. In an otherwise robust business model, this lack of a clear strategy for business continuity when the current owners want to retire is the most obvious ‘failure factor’ that family businesses face.

There are a number of reasons why this is the case, including the fact that people are having children later in life, resulting in the next generation simply not being ready to take over at the helm at the point at which the current owners wish to step down. Aside from this very practical problem, emotional and interpersonal issues also play a part, as succession planning is often the first point at which family business owners will need to combine the personal with the professional and many may struggle with this juxtaposition.

Failing to fulfil ambition
The lack of a clear strategy for the coming five to ten years is holding back large numbers of thriving family businesses from meeting their potential. Owners in the family business sector tend to be hugely ambitious. Around 12 per cent to 15 per cent of respondents in PwC’s family business surveys carried out since 2012 claim they are aiming for aggressive growth, while few actually achieve this.

The failure to meet ambitious growth targets can be attributed to a number of challenges, each of which is exasperated by the ‘missing middle’. Diversifying into different markets is an ongoing challenge for family business, with 72 per cent seeing themselves with the same business portfolio in five years from now.

Failing to move into international export is another area in which family businesses struggle to compete. While making an average of a quarter of sales abroad, family businesses consistently predict this percentage will grow, with these ambitions rarely coming to fruition.

Finally, innovation and digitalisation are further areas that family businesses struggle with as a result of poor succession planning. They are, at least, very aware of the pressures to innovate, with 64 per cent identifying the need to continually innovate as their biggest challenge in the coming five years.

The point at which a family business hands over the next generation is an ideal time for innovation to take place. Making a case for change can lie on the shoulders of the younger generation within a family business and calls for innovation will often fall on deaf ears. However, once the old guard has stepped down, the new generation can bring in the changes that are essential, not just for success, but often simply for survival. If succession planning is not clearly carried out however, this opportunity will be missed and a business will become vulnerable to failure or takeover.

The above challenges all represent opportunities for anyone looking to buy a family business and identifying firms at the point at which they may be feeling the strain as a result of poor succession planning will enable buyers to reap rewards.

How to go about buying a family business
Buying a family business as a non-family member is not without its challenges, of course. However, there are a number of steps you can take to make the process go more smoothly for all involved.

Developing strong relationships with the family is a great way to reassure them that you are there to help drive growth and help the business fulfil its potential. Forming these relationships can also help you, as the buyer, to gain a greater understanding of the unique culture and values the staff work alongside. Family businesses often have a very powerful sense of identity and to continue to make a success of them without the family, a buyer must understand this identity and nurture it past the point of the deal being made.

As well as forming relationships with the family owners, buyers also need to be aware of how important the family’s relationship with its customers is to the success of the organisation. Getting to know the customers will help you to earn their trust and leave them more open to continuing to work with the business following a deal.

Case Study
The managers who purchased property restoration firm, Forshaw Group, from its second-generation family owners in 2013, have made such a success of the firm following the deal that they were able to repay their funding from Merseyside Special Investment Fund (MDIF) three years earlier than scheduled.

Liam Hanlon and Jay Calvert obtained £500,000 in investment from the MSIF to help fund the takeover of the family business and have since taken the firm from strength to strength. The turnover of the company has doubled in the last three years to £6.3 million and the number of staff employed by the business has risen by 36 members of staff to 50.

At the time of the takeover, Calvert and Hanlon explained that their existing knowledge of how the business works and its customers put them in a strong position to take the company forward.

In conclusion then, buyers who are willing to put the effort into really getting to know those involved with a family business, as well as the ins and outs of how they work, can help them to reach their potential through a careful and considered takeover deal.

Targeting a family business that is struggling to make the transition to a new generation of owners, as a result of poor succession planning, can further increase chances of success.

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