Family firms are failing Britain

Such obits tell you virtually everything you need to know about why so many of the UK’s small family-owned businesses are inefficient, unproductive and a drag on growth. Let’s face it, what is the chance that the best person to run a business just happens to be the great-grandson of the founder? Vanishingly small. 

As economists often point out, you wouldn’t have picked the UK squad for the 2021 Tokyo Olympics by just taking the grandchildren of the 1964 Tokyo Olympics squad, so why do we think that will work for companies? 

The reasons that many small, family-run firms are low growth are many and varied. Some are little more than hobbies, or part-time operations, others stop making money the second they have to pay any tax. Some are far too cautious because they want to preserve the firm for future generations and many just do not invest anything like enough in their futures.

Of course, there are exceptions. But far from being the “backbone of the British economy”, too many firms who fall into this bracket are beset with bad management, risk-averse and have disastrously low productivity. 

We know that many British small firms are unprofessional, not least from reading those obits. As Gregory Thwaites head of research at the Resolution Foundation think tank told me, “Watch Succession. People want to pass the business on to their kids, but their kids are not necessarily the best people to run the business”.

This also puts a damper on growth for another reason. If you are a dynamic, well qualified and experienced manager, why join a small family firm? It is not like you are ever going to make it to the top.

Thwaites says: “Family firms restrict the pool they can recruit the CEO from, this demotivates junior managers as they know they are never going to run the place.”

In total, it all adds up to a real mess. We have far too many inefficient small firms and far too few larger efficient firms.

The best way to increase growth in this sector is to stop giving tax breaks to firms that just want to hand the firm onto a family member. As Gregory Thwaites puts it, there should be “No tax advantage to passing a business onto your children, any more than you’d get when passing on a bank balance or a house. If your son is the best person to run the firm, why does he need a tax break to encourage him to do it?”

We should not be encouraging family firms to stay in the family but to merge and create bigger firms, if you look at the international comparisons the evidence is overwhelming. We know that more efficient economies have bigger firms, less efficient ones have smaller firms, so the USA is far more productive than the UK, which is ahead of Italy, which is ahead of India.

In Germany and elsewhere, many family-owned firms are not actually run by family members – they employ professionals to do the heavy lifting and just collect the dividends. French and German firms are one-sixth more productive than British firms, and this is one reason why.

To be fair, it is not all the fault of the managers. It is difficult to fund productivity improvements via technology investment when the finance industry here is so focused on short-term gains. Which helps explain why UK business is a chronic under investor by international standards, and at the very bottom of the G7 league table.  

Brexit has also not helped, according to Tina McKenzie, policy chair at the Federation of Small Businesses. She says: “Increasing small firms’ international trading activity would greatly improve productivity levels… the EU is the UK’s largest trading partner, and both parties must look to address the unintended consequences of the TCA on small businesses in the upcoming review in 2026, to remove unnecessary and unintended trade barriers.” 

We know that Brexit has hit small businesses far harder than large ones which can more easily afford all that red tape, but the real loss is that without international competition, some small and family-run businesses can just rest on their laurels and stop trying so hard. This is not a recipe for higher efficiency, productivity, profits or growth.

The whole sector needs a radical shake-up, more competition, easier investment, more risk-taking and a far better tax system. The key to making family-owned firms better is to give them tax breaks to merge and stop being family-owned firms but successful medium-sized ones instead. 

That might even encourage the sector to pay the tax it owes. SMEs (small and medium-sized enterprises) are the largest non-payer of tax, by far. 

The Chartered Institute of Taxation found that in the tax year 2022/3, 60% of the gap between what the state expected to collect and what it actually got was down to small businesses. Or to put it another way, they failed to pay the tax man £24.1 billion, in just one year. 

That is even after the host of tax reliefs aimed just at small and family-run businesses: rates relief, National Insurance relief, lower corporation tax, and investor tax relief to name just a few.  

The chancellor has made a start. From next year, Business Property Relief on Inheritance tax will be slashed, meaning many firms will have to pay some tax when handing their business over to the next generation for the first time.

But the relief is still far too generous, and the obvious next move is to close the tax breaks you get for just giving the company to a relative or friend, for less than it is worth. Instead, the tax breaks you get for selling the business to another firm need to be strengthened, to encourage owners to do the right thing and sell up. 

That would mean far more firms run by professional, expert managers. It would mean larger, more efficient businesses too – ones that could invest, grow more quickly and compete on the international stage. 

Family-run businesses are not the UK’s backbone, they are an Achilles heel. It is time for Tarquin and Tabitha to stop pretending they have worked their way to the top on merit. 

We and probably they, would be far better off if they got out into the real world and tried to make a living there instead of trying to run the family firm and running it into the ground.