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Family fortunes: lessons from family businesses

Tasos Symeonides is finance director of Axios Systems, a family-owned
computer services business with £22m turnover. Symeonides works in the company
alongside his wife and three children and, of course, the 250 staff he employs.
“It’s a privilege to be running a family business,” says Symeonides. “We are
free from external investors. The minute they invest in a company, they want to
find an exit strategy.”

Stephen Pugh is finance director of Adnams, a Suffolk-based brewer with £46m
turnover. It, too, is a family company, handed down the generations since the
Victorian age. Pugh, however, is not a member of either of the two families who
own the business. “I am sure there are different sorts of atmospheres in family
businesses, but I very much enjoy working at Adnams. The company is all about
progress, innovation and wanting to be better. And it does all this without
being aggressively pushy. I think that helps to bring out the best in people.”

Family businesses may sound tight-knit and may, at first, seem to take a
cautious approach – not the sort of place an ambitious FD would ordinarily want
to work. They have developed an image – not helped by the popularity of
behind-the-scenes reality television programmes – of hotbeds of intrigue fuelled
by family feuds, where the best an FD can hope for is not to get a knife in the

What FDs such as Symeonides and Pugh – who already work in family companies –
know, but which FDs outside the sector may not appreciate, is that neither
depiction of life in a family business is accurate. Family firms certainly
provide a different kind of business culture, but they also present FDs with
numerous unique financial and management challenges. Moreover, research suggests
that FDs in family firms oversee the kind of long-term financial performance
their non-family cousins can only dream about.

Research completed last autumn by Panikkos Poutziouris, a visiting fellow at
Manchester Business School and professor of family business at CIIM Business
School in Cyprus, revealed that quoted family companies outperformed their
non-family counterparts on the FTSE-All Share Index by 40% between 1999 and

Poutziouris studied 42 quoted companies that met his criteria of a family
company, where at least 25% of shares are in the hands of family members, with
the remainder dispersed among minority shareholders, and where the business has
experienced a generational change in leadership. The 42 – representing 6.2% of
companies in the All Share Index, including well-known names such as Associated
British Foods, Caledonian Investments, Huntleigh Technologies and Town Centre
Securities – had, at the time of Poutziouris’ research, a combined market cap of
£60bn (3.9% of the All Share’s total capitalisation).

“The superior performance of family business plcs is shaped by strategic
focus in serving their profitable market niches and a tripartite partnership
which involves responsible family owners, loyal investors with a long-term
perspective and faithful, long-serving managers that adopt the dream about the
entrepreneurial odyssey,” explains Poutziouris.

Peter Leach, chairman of the BDO Centre for Family Business, says, “Family
businesses are less worried about short-term performance because they see
themselves more as stewards or custodians, rather than having to perform for the
stock market.” Some US studies also indicate that quoted family companies
outperform non-family ones.

Mark Evans is head of family business and philanthropy at Coutts & Co,
which organises the annual Coutts’ Prize for Family Business. “The fact that
family businesses do not have to constantly demonstrate profitability means they
can focus more on the people who drive financial performance – employees,
customers, suppliers, the community and family,” explains Evans. “Family
businesses are marginally less likely to see having defined commercial goals as
an indicator of success. However, they are more likely to cite low staff
turnover, net worth and social responsibility,” he says.

It’s all relative
Douglas O’Neill, managing director of Inntel, a hotel reservation and event
management agency with £38m turnover, is typical of those family business
leaders who can see beyond the short term. He took over the business from his
father who started it from the sitting room of his Essex home in 1984. Now
Douglas jointly owns the company with his brother, who doesn’t work in it. “My
goal is to provide customer service and make a profit,” says Douglas, “but there
isn’t the great driver to make a profit that would be there if I were answerable
to shareholders. I do think the drive for profit can sometimes over-reach the
drive to provide customer service.

“We’re not in business to make a quick buck and then get out of it. As a
family business, this is my future. If I sacrifice customer service for a couple
of years of good profit, there may not be a future in four years’ time.” Like
most family firms, Inntel is privately owned, but some others choose to involve
outside capital.

Private matters
Grant Gordon, director general of the Institute for Family Business, says,
“Although private ownership is the preferred form of ownership for UK family
firms, the public markets can offer a good environment for well-managed
companies. Those that choose this route get the best of both worlds, accessing a
bigger pool of capital while retaining many of the positive attributes of being
a long-term family business.”

That is precisely the route which Adnams has chosen, explains Pugh. The
company’s capital is divided into 25p ‘A’ shares, held by family and other
members of staff, and £1 ‘B’ shares quoted on the Plus (formerly Ofex) junior
market. Two families have become involved in the company since it was founded in
1872 – the Adnams and the Loftus. Depending on how you define family – down the
generations shares get inherited by distant relatives – the families still
control between 30% and 40% of the voting rights.

Pugh says he has found continuity to be an important feature of the culture
at Adnams. “There’s a feeling you can make a decision properly on its merits and
you’re not being overly influenced by short-term factors,” he says. “You’re not
going to be knocked back because someone says that doesn’t suit our exit plan in
two years, or my incentive scheme pays out in 18 months. You can make the
decision properly, without artificial financial stringencies placed upon you,”
explains Pugh.

As family companies grow, they face two conundrums: how much control should
they retain of both ownership and day-to-day management? As a business passes
down the generations, shares may be inherited by some family members who want to
work in the business and others who don’t. Second, if the business is growing,
family members need to work out ways of attracting talented management who might
feel their ultimate ambitions are blocked by family members.

English Lakes Hotels is a £14m turnover company now onto its second
generation with what family business gurus call a cousin consortium. Chairman
Simon Berry and his brother Tim, who work at the company, share ownership with
two cousins who don’t. The formula works, says Berry, “Because we have a
properly argued and sensibly debated decision-making process.”

Simon and Tim, of course, draw salaries which reflect their responsibility.
And it helps that the cousins aren’t financially reliant on their dividends from
the business. “There was a time in the early 1990s when we didn’t pay any
dividends for about four years. We’d just spent £11m on two properties and it
was a difficult time.”

In addition to Simon and Tim, the board includes three non-family executive
directors, including FD Michael Doyle. The key to getting family and non-family
directors working well together, says Simon, is “complete openness, honesty and
integrity in the decision-making process”. He adds, “It comes down to having
good communication and properly structured meetings, flows of information and
systems in place. All directors have complete access to everything.”

Family businesses face their biggest challenge when the company is handed on
from one generation to the next. This is partly because, when that happens,
ownership can fragment in a way that becomes unhelpful to the good governance of
the business. It’s partly because the next generation (or at least some of them)
may have no interest in working in the business, although few will turn down the
opportunity to continue receiving dividends from it.

At Axios Systems, Symeonides already has the family’s two generations
involved and there’s not yet a third to worry about. A decision about whether to
float the company at some unspecified time in future is still open. “For the
moment, we are happy to stay as we are because we are quite profitable and there
is so much growth to be had in the company,” explains Symeonides.

Adnams has rolled down successively through several generations of the Adnams
and Loftus families and the capital structure should serve the company well for
succeeding generations.

Hand-me-down plan
At English Lakes Hotels, however, “the succession is something we’re working
through at the moment”, explains Simon Berry. The Berry family is facing a
challenge as ownership moves from the existing four shareholders to their
children. “I think it is probably the most critical time in a family business,”
he says.

“My cousins have children, but not as many, and they are not actively
involved. You have either got to get to the stage where there are a lot of
shareholders and, maybe, one or two involved in running the business – which is
usually four or five generations down the line – or you have one or two s
hareholders. I think there are successful models of how you can make it work
with different voting rights, but there has to be an acceptance from all parties
that it is the way to go.”

Whose business is it anyway?
One of the most imaginative ways of handing down a family business has been
devised by Tim Watts at Pertemps. His mother, Constance, started the employment
services company in 1961. Since then, Pertemps has grown into a group of five
companies, with a turnover of more than £300m.

Family trusts currently control four of the companies, but the largest
company – which runs the mainstream business – has been handed over to an
employee benefit trust similar in structure to that run by the John Lewis
Partnership. “Having worked in the business for nearly 40 years, I consider the
people I work with more like family than employees,” says Watts.

There are plans to float two of the other companies on AIM later this year.
“We’re doing it so the companies can have an independent life and raise their
own money in the future rather than rely on the family trusts,” says Watts.

Generation game
Keeping a business in the family isn’t quite as simple as it sounds. The next
generation may have little interest in the money-making schemes that their
parents devised. They may have different ambitions, or there may be sibling
rivalry that causes obstacles.

When a business is passed to the third, fourth or fifth generation, matters
become even more complicated as ownership fractures between an army of uncles,
aunts and cousins. Yet this has always been an aspect of family business that
has received little study.

A new book, Ready, Willing and Able? The next generation in family
, by Nigel Nicholson, professor at the London Business School, and
Asa Bjornberg, a researcher in family business in the department of
organisational behaviour at the LBS, addresses this very issue. At the heart of
the book lie eight detailed case studies of family businesses, ranging from a
modest services company, run as a sibling partnership with just 10 employees and
a £600,000 turnover, to a £500m turnover financial services firm, with 2,800
employees and also run as a sibling partnership.

Family ties
The book really brings to light how entwined business and family life can become
when you’re working in your own company. For example, here’s an extract from a
sixth-generation family member of a £3.5m vehicle part manufacturer (founded in
1850), commenting on how she was treated when she worked at the family firm over
the summer holiday.

“My brothers were expected to cycle to the factory. I was not, I was a girl.
I went to work with my father, in the car… frustrated back then… couldn’t really
see the difference… I was allowed to cycle around the countryside, but not to

”Trivial perhaps? Possibly. But it illustrates how even small incidents can
colour the way family members come to look at their role in a business in
relation to other relatives.

Common themes
Nicholson and Bjornberg have done a good job of talking to dozens of people,
then drawing out common themes. They group these under three main headings: ties
between next-generation members and the company; family relationships; and
decision-making styles and process.

The authors argue that ‘emotional ownership’ is a critical factor that gets
next-generation family members motivated to come to the fore and take over the
running of the company when the older generation steps down. Those who buy in
reap more than money, they say.

In a family business, there is also an ‘emotional dividend’ – loyalty, pride,
gratitude and the symbolic value of association with the family name.

Ready, Willing and Able? The next generation in family business

Institute of Family Business
020 7630 6250

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