Family businesses truly are the backbone of the economy. Why do they get overlooked?

One of the paradoxes of our time is the orthodoxy that the British public has fallen out of love with capitalism. Yet this is manifestly not true: ask anyone what they would secretly like to be doing to make a living, and most will admit they want to do their own thing, run own their own company.

Whether this zeal for self-determination is because of the uncertainties of the workplace, a pirate-style insurgency against big corporations, or sheer desperation in finding satisfying work is unclear. Probably a mixture of all three.

What is certain is that, despite their alleged distaste for raw capitalism, more people in the UK than ever before are putting their own skin in the game. Consider this: two thirds of all businesses in the UK today are now family owned, that’s 4.7m of the country’s 5.8m SMEs, and together they employ around 12.2m people.

That’s close to half of the 26.9m people employed in the private sector, which is now at 83% of the total working population, the highest it’s been since records began. (The number employed in the public sector is now down to 5.4m, 16% of total employed).

Even more staggering is that one million new family businesses have been created since 2010, and the number of jobs provided by these family businesses has increased since then by 2.3m. Between 2015 and 2016, there was a 4.3% growth in businesses. It’s also the case that most funding for these businesses comes from the three f’s: friends, families and, as they say, fools.

This is phenomenal stuff. Without overworking a cliche, family businesses truly are the backbone of the economy, generating a quarter of UK GDP. They turn over £1.4 trillion annually, up 7.2% since 2010, and are growing at a much faster than non-family companies.

To put this into perspective, family-owned businesses paid £149bn in tax, a fifth of all UK government tax revenues, equivalent to the annual NHS budget with petty cash left over to fund a few new schools.

These astonishing figures come courtesy of a new report – the State of the Nation – published recently for the Institute for the Family Business Research Foundation, and produced by Oxford Economics. As usual though, when it comes to matters of our small businesses, the report received only a cursory mention in the national press, obsessed as the media is by the more colourful antics of our bigger and more accident prone publicly listed companies.

Nor did the report get any attention from government, members of which should be genuflecting prostrate in gratitude to the small army of businessmen and women who are risking their own skins to create such wealth for the nation.

For the IFB report showed that the gross value added contribution to UK GDP made by family businesses has increased by £100 billion since 2010 – to £519 billion – meaning family firms now provide a quarter of UK GDP.

Elizabeth Bagger, executive director of the IFB, must have been gritting her teeth when she remarked on publication of the report how brilliantly family business were doing “but their incredible contribution is still often underestimated.”

And boy, does she have a point. Their contribution was 36.4 per cent of the private sector’s total gross value added in the year, and grew by 1.5 per cent from 2015 to 2016 in real terms, broadly in line with the 1.6 per cent growth of the UK’s total gross value added.

Unsurprisingly perhaps, but family businesses in real estate, renting and business services provided the biggest proportion, almost £156 billion in gross value added or 30% of the total. Wholesale and retail companies, transport, storage and communication were the next biggest while construction companies created £78 bn.

More than a third of the medium-sized firms were in at least their second generation of family ownership, and they vary substantially according to industry. Multi-generational family businesses were most prevalent in industries that are more fragmented, such as agriculture, with about 77% being in their second generation. Utilities, waste and manufacturing come next.

While the IFB paints a rosy picture of the UK’s Happy Families, the report also revealed that increased competition, succession planning and regulations are their biggest fears for future growth.

What is striking is how the proportion of firms that are family owned declines with size, far more so in the UK than it does in say, Germany’s Mittelstang, where the numbers of medium sized to large businesses are an even more significant chunk of the economy.

Too many family businesses in the UK die out after the third or fourth generation mainly because, in order to grow, or because of succession and inheritance, they go to outside investors. That means they either get badly diluted or pushed out altogether.

Interestingly, an increasing number are looking to employee share ownership models – either through trusts or direct share ownership – as a way around succession problems. According to the Employee Ownership Association, the numbers of family-owned business which are now looking to switch to these models as an alternative to selling out or listing is shooting up. Which is great news as wider share ownership among staff is still one of the most effective ways of driving the wealth and health of a company.

What is comforting is that IFB does not highlight the lack of finance as an huge obstacle to growth, an issue that would have been pertinent only a few decades ago.

Around a third of the firms surveyed say they are considering new investment in their companies,while a tenth said they had financing needs but had not sought funding.

But many firms did say they were put off from applying to external funders for fear of being rejected – more likely to be put off than their non-family peers. Indeed, Bagger says they are less likely to seek outside advice overall so there is much to do still to improve information networks and access to funding circles.

There are other interesting methods of funding which could help some of these mid-market firms, particularly at the stage when family members look to retire and don’t have anyone to pass on the business to. One of these is the ‘search fund’, an investment model pioneered by H. Irving Grosbeak of the Stanford Graduate School of Business. He came up with the idea of the search fund in the 1980s as a vehicle for young, aspiring entrepreneurs to search for, buy, manage and grow a company where the founders are looking for ways out to retire or hand over the reins.

These search funds are growing fast in the US – and in Spain – and are being put together by wannabe entrepreneurs studying MBAs at university on the look-out for real businesses to work with. It’s a novel idea which should be looked at here by some of our business schools as a way of bringing fresh eyes and ears to existing companies.

Yet on the basis of the IFB’s report, entrepreneurial-ism in the UK looks to be doing rather well without help from outsiders or indeed, government interference. Long may that last. To paraphrase ex-President Clinton, it’s the family, stupid.