Keeping it in the family

More than two-thirds of all private businesses in Britain are family-owned. Most seem to fail once they are passed on to the next generation. Where are they going wrong?

When Giovanni Alberto Agnelli died four years ago at the age of 33, it looked as if car maker Fiat might finally pass out of the hands of Italy’s uncrowned royal family.

The current chairman, Gianni Agnelli, had chosen his nephew to succeed him, but Giovanni’s death left a void. The role of heir was instead filled by Agnelli’s grandson, John Elkann, who was elected to Fiat’s board soon after, at the age of just 22.

Family firms may seem an outmoded concept, a relic of the 19th century where sons and nephews were promoted to the top ranks not for their business acumen, but for their family connections.

But the majority of the UK’s small private firms have all decided to keep it in the family. So have a handful of major international players, including household names such as construction equipment manufacturer JCB, or Ford, where Bill Ford is the latest member of the dynasty to take an executive role.

So does the family firm make sense as a business model in the globaleconomy? Or does the very rarity of household names among their ranks confirm that the concept is flawed?

Many would find the prospect of running a company with their father constantly looking over their shoulder, judging and potentially criticising their every move, impossible to bear. But maintaining mutual respect for each other, while establishing clear lines of responsibility, can make it work, says Charles Morgan, joint managing director of sports car maker Morgan Motors, and grandson of the firm’s late founder HFS Morgan.

As his fellow joint managing director, Morgan’s 81-year-old father Peter still has ties with the company. While ill-health has kept him from playing a particularly hands-on role since last July, his son keeps him informed of all strategic and day-to-day decisions.

Charles Morgan maintains that despite this, the company is run as a conventional business. But he still feels a certain pressure to live up to the standards of his father and grandfather. ‘I have to prove to myself that as the third generation of the Morgan family I can contribute as much as the other two.’

The eldest of his own three children is just 16, so the question of whether or not they will follow in their father’s footsteps is still a little premature. But he is adamant that when the time comes there will be no pressure for any to join the family firm, and each will have to make their own way in the world first. ‘I don’t think it helps if you can’t prove yourself outside the family firm. You’ve got to have confidence that you’ve got something to offer, rather than joining because you can’t go anywhere else.’

State of independence

Being an independent company can be an advantage, says Morgan. ‘One of the main reasons we’re in a powerful position is that we’re independent of a large conglomerate, and that allows us to deal with more than one group.’ The company has close links with both BMW and Ford, which provide engines to the firm. Both these companies give Morgan a degree of access to their technology that would be virtually impossible if Morgan were owned by a large rival organisation.

Established in 1910, Morgan is the oldest privately-owned car business in the world, and while such a heritage is obviously something to be proud of, it can also prove a bind, leading people to see it as old-fashioned and out of touch. Since 1997, Charles has been the driving force behind a transformation of the production process at the factory. Cars now take an average of 17 days to build, a lifetime by volume car production standards, but significantly shorter than the three months each car used to take. And with a new model, the Aero 8, recently launched, the factory will be doubling in size by the end of this year.

The company is now at a turning point, says Charles Morgan. ‘We’ve got a huge opportunity as a company to change our image and be seen as a leader, as well as for that wonderful 90 years of history, which I never want to lose.’

With family firms making up between 65 and 75% of all private businesses in the UK, Morgan is far from unique. It is unusual, though, in having been successful for three generations. Less than a third make it to the second generation, and only around 14% of once-successful companies continue in the same family for more than a few generations.

Few grow particularly large. Even Morgan, after 90 years, only employs about 150 people. But that in itself is not bad, considering that most family firms either go bust or are sold before they get to the second generation. So what goes wrong?

‘There are a whole plethora of reasons,’ says Peter Leach, chairman of UK family business consultant, the Stoy Centre for Family Business. ‘It can be the difference between family and business objectives, and the fact that you have very different people running the company from generation to generation.’

People often end up working for the family firm for the wrong reasons, he says: either their hearts are not in it, or they don’t have the training or outside experience, and are not the best people to be running the company. The most successful firms bring in external directors to provide a new perspective, and ensure family members gain outside experience before joining.

‘Nobody should go into a family business without spending five years in an unrelated business first. If you go off, you’ve got to really want to come back, because having seen the big wide world it can be a real leap of faith to come back again, and some might not want to.’

Charles Morgan is a case in point, having worked as an ITN cameraman before joining the firm as production manager in 1985.

Conversely, admitting you are not interested in joining the family firm can be a minefield in itself. In a family business sensitivities and loyalties reign supreme, and can get in the way of clear-headed career decisions. so keeping an open dialogue and sharing expectations and goals is crucial, says Leach: ‘We’re talking about different cultures. You know your father as your father but you don’t know him as your boss. The relationship is intensified: sometimes it works fabulously, sometimes it can be a disaster.’

Most family-controlled manufacturing firms are located at the commodity end of the market, according to a survey by Dr Panikkos Poutziouris, fellow of small and medium-sized enterprises at Manchester Business School. The research found only 19% of family businesses rate themselves as high-tech, compared with 33% in non-family companies. ‘Family firms tend to proliferate in low-tech, labour intensive activities, and do not often make large investments in technology and research and development,’ he says.

The majority of family-owned businesses are small, deliberately so according to the survey, which found only 20% of family firms were growth-oriented. ‘Family firms tend to be small manufacturers, because they have decided to stay small and beautiful. The majority of family firms are not in the business to grow it, they don’t take too much risk, and they serve a local niche.’

Because many family businesses are bound by tradition they find change difficult. So a rapidly changing market and increased need for external capital can create great pressure on these companies, says John Ward, professor of family enterprise at the Kellogg Graduate School of Management, and co-author of the recently published book Strategic Planning for the Family Business.

But a faster-moving economy can also offer greater opportunities for family firms to play to their strengths, he says. ‘These companies can benefit from taking a long-term view and not getting caught up in fads, while public corporations find it very difficult to go against the conventional wisdom of the time.’

The conservative nature of most family firms can also prove to be an advantage, says Ward, as most tend to be more cautious in their use of cash, reducing the need for external funding.

One issue that can undoubtedly cause major problems is that of succession. Where the owner has more than one child, choosing who should take over the company can become more than a purely business issue, and risks splitting a family. ‘It’s a very difficult topic to broach, which is one of the reasons people put it off. But if you look at it early, you can get the independent board of directors involved, and they can take some of the pressure off the parents,’ says Ward.

The ability to focus entirely on making the business a long-term success for future generations, rather than going for a short-term gain, can give family firms a genuine advantage over the competition, says Lord Paul, who founded the Caparo Group in 1968. ‘You can concentrate on making the business a success, not just in your lifetime but for generations to come, so that makes your focus much clearer.’

Resisting temptation

Around five years ago Lord Paul took a back seat from the day-to-day running of the company, which manufactures steel and engineering products, and handed the reins to his three sons. The company employs over 3,000 staff and has a turnover of £425m. But having run the business for over 25 years, how easy has it been to resist the temptation to interfere?

‘Everybody used to ask me that, and even I wondered whether I would be able to take a back seat. But I haven’t had any problems, perhaps because about that time I went to the Lords and that gave me something to do.

‘Sometimes you start to think that you could do better, but then everybody thinks that, and it is not necessarily true. It’s a pleasure to see the next generation carrying things on.’

Family firms are by no means a dying breed. To many, the ability to pass on a thriving business to their children remains their primary goal. And to the beneficiaries, family businesses can potentially offer a challenging role and guaranteed income for the rest of their lives.

But today’s tough economic climate can make it hard enough for any small manufacturer to survive, without the added difficulties of family in-fighting, or an unwilling or totally unsuitable heir being chosen to take over the reins. So the words ‘one day my son, all this could be yours’, might not be exactly what your offspring – and your accountant – want to hear.

Sidebar: Karrimor: home truths.

After 72 years in the family, Karrimor ran into problems and brought in outside investors. Then the real trouble started.

Many businesses simply fall out of family ownership for the same reasons non-family firms are sold or go bust – bad business decisions or a tough economic climate.

In 1996 Italian investment company 21 Invest bought a controlling stake in UK sports equipment maker Karrimor. This came despite an earlier pledge by the controlling Parsons family, who had established the company in 1924, that it was not for sale.

There is nothing inherently wrong with family firms, says Mike Parsons, former chairman of Karrimor and son of the company’s founder, but neither are they immune to the setbacks other businesses face. By 1996 Karrimor employed 320 people and had a turnover of £20m. But, says Parsons, ‘we made two acquisitions that went wrong, and we were caught in a desperate situation. So we found some backers (21 Invest), and they continued with the company, but it didn’t work satisfactorily.’

Survival of the fittest

Parsons and 21 Invest disagreed over the future direction of the company, with the venture capitalists attempting to turn its products into a fashion range, and in early 1998 Parsons was forced out. ‘We had very severe problems at the end. But there were no successors and we had already taken venture capital in, so once you’ve done that you’re one step closer to selling the business anyway.’

It is much harder for private businesses to survive in the UK than in other parts of the world, Parsons believes. ‘If a company is in a difficult position and has to go to the wall, in every other country in the world there is some protection from creditors.’ In the UK, however, bankers can move in quickly and repossess everything, he says. ‘The problem is not a shortage of capital, that’s an age-old myth. It’s a shortage of the right kind of capital: there is too much financing through overdrafts in the UK.’