Three ways to boost family businesses

Research shows that keeping a business in the family is good for profits. Matthew Lynn explains how to encourage more of it.

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Research shows that keeping a business in the family is good for profits. Here's how to encourage more of it.

Entrepreneurs do a great job of creating new businesses. But after the original founder has retired, companies should be handed over to professional managers who know what they are doing. That, at least, is the conventional wisdom. But family-run companies don't deserve their reputation.

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According to a report by Credit Suisse, family-dominated quoted companies consistently outperform the wider market, generating 34% more cash than non-family-owned equivalents. Revenue growth is stronger, margins higher, cashflow superior and gearing and overall debts lower. A study in the Harvard Business Review last year had similar results. Family firms spend less on R&D than publicly quoted ones, the study found, yet they get better results and end up being more productive and innovative. Why? They are usually more frugal it is the owner's money at stake, and the bosses are more informal, more receptive to new ideas and more willing totake risks.

Some of Britain's most successful private businesses are family run take JCB, with its world-beating earth-moving kit, for example. But the Credit Suisse survey also found that the best-performing family-owned businesses were in Italy, Germany, India and China. France and Germany had more than twice as many family firms in its top 1,000, and in terms of market value ours ranked only sixth in Europe even though we are the continent's second-largest economy. That is a real weakness. We should be encouraging more family businesses. Here's how.

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1. Change the tax system

Make sure the tax system makes it relatively easy to keep a firm in the family. In Germany, home to thousands of Mittelstand firms, family business are largely exempt from inheritance tax. We could do the same here. There are some reliefs available on business assets, but they are fiddly, complex and the taxman is constantly clamping down on them to raise more revenue. It is surely crazy that the son or daughter of an entrepreneur has to pay 40% tax if the family firm is passed down to them. It is even more bonkers that the same person could pay 10% capital-gains tax if they simply sold the firm and passed on the cash to their heirs seven years before they died. Instead, we could simply make family businesses exempt from inheritance tax. While we are at it, we could make transferring shares to a son or daughter exempt from capital-gains tax as well.

2. Create a government agency

We have agencies for developing regions, or technology, or lots of other types of companies. Why not create a Family Business Agency as well to encourage the sector, and provide support and advice to the successors? There is plenty it could be doing, from tax and succession planning to help with outside advice, and resolving the inevitable disputes that are likely to burst into the open between sisters and brothers. Family-controlled businesses could even get their own minister to give them a voice in government.

3. Give them a knighthood

Finally, we could give family firms more public recognition. The founders of a great business often get a knighthood, but the third-generation daughter usually doesn't. The UK's largest family-controlled businesses include a couple of well-known names such as Swire and Dyson, but the sector is mostly composed of huge but relatively obscure groups such as Euro Garages, Arnold Clark Automobiles and Bestway Group. We should celebrate them a bit more often than we do.

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