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Opem-minded sceptics

Scott Mcculloch is editor of Families in Business.

What UK family firms think about corporate finance

Risk-averse and dominated by close-knit management, the UK's family business sector could become a victim of its own success if left unchallenged, a new report on corporate finance and family businesses suggests.
Mergermarket, the M&A analyst, said if left unchallenged the positive attributes of UK family businesses could easily become weaknesses and stifle lucrative opportunities for expansion and success. The report – commissioned by advisory and private equity firms for Mergermarket – said one of the most persistent findings was that respondents "prided close personal relationships" with advisers: tax, finance or otherwise.

Among the report's more noteworthy findings were that 21% of family businesses have considered using private equity as a source of expansion capital and far fewer expressing an interest in a stockmarket listing.
The report, which questioned directors of 30 mid-market family businesses, said respondents were both positive towards and sceptical of private equity. Although 28% of respond­ents agreed private equity could act a fast-track towards financ­­ing growth, 28% feared the option would dilute their shareholding. One in four respondents believed using private equity could lead to a 'loss of family feel' or 'company culture'.
The report said family businesses with a turnover of £10–100m and seeking funding for expansion were the most likely candidates for private equity. Meanwhile, listing as a means to expand is heavily frowned upon. The report found that only 10% of UK families businesses had ever considered an initial public offering. Positive attributes cited for listing included access to capital and capital markets and increased liquidity.

Of the 90% of respondents against a stockmarket floatation, Mergermarket said a number of respondents expressed hostility towards listing with one stating there were "no disadvantages" and "all options looked like a hassle". Looking forward, 78% of respondents reported that over the past three years floatation looked neither more nor less attractive as an option for raising cash.
"It may well be the case that for many family businesses the interest in, or hostility to, the prospect of an IPO is well-founded, reflecting a thorough analysis of the needs of the business and the appropriateness of an IPO as a means of meeting those needs," said Richard Lee of legal firm Addleshaw Goddard. "However, for some family businesses an IPO may represent a positive step which meets the objectives of the family business at a particular stage in its development."
Whereas most UK family business were deeply reluctant to ever float their company, the report found that 38% of respondents have considered selling up. "It implies that although some owners would sell their company privately, they would not do so publicly," the report said. "This highlights the misconceptions about the effects of publicly listing a business."

Howard Leigh of Cavendish Corporate Finance said there is a perception that, because of their size and level of resources, UK family business tend to have fewer overseas investments. This is because of their risk-averse nature. There is an assumption that, just because it is a family business, it is at the smaller end of the enterprise value range, Leigh said.
"The true position of UK family businesses, however, are that a significant and growing number of sub-£50m deals are now cross-border," said Leigh. "The expansion of the EU and greater competition from overseas players in the UK domestic market has meant there is a need for family businesses to internationalise, either through forming trading relationships or acquisitions.

"As the Mergermarket survey shows, whilst some 62% of the respondents believe their business could be of interest to foreign buyers, there is a natural assumption that family business are by their very nature mainly oriented towards the domestic market," he said.

The report also covered attitudes towards exit strategies, inheritance and capital gains tax, as well as plans for wealth management and succession.

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