Keeping it in the family

The Succession problems of family-run firms


This article is taken from the April 2023 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

An estimated 70 per cent of family businesses fail when they are handed down from the first generation to the second. The figures become even more alarming when you consider that only one in ten family firms manage to cascade down to a third generation.

Failure here is defined as the loss of important assets and a breakdown in harmony. My brother and I are third-generation owner-managers and both of us strongly feel the conceits of dynastic romance. For us, this concern is imperative. It should also be of societal interest. 

Small- and medium-sized enterprises constitute the great ignored sector of the British economy. They are also the most important, comprising 99 per cent of all businesses. The Institute of Family Businesses estimates three million of them are family-owned, employing 9.4 million people and contributing about a quarter of the country’s GDP. They are, however, a silent majority which does not speak or lobby cohesively. 

The CBI is an organisation for big, mainly public companies and, one suspects, often prefers the status quo and regulation as barriers to market entry. While it could be argued that increasing GDP is of overwhelming importance regardless of who or what owns the businesses, this ignores the myriad benefits of family ownership — which include stability, long-term planning and investment, entrepreneurship and the anti-welfare antidotes of wealth creation. Public companies do this, with larger numbers, but cumulatively family businesses have greater impact. 

Owner-managers are often keen students of the fortunes and misfortunes of their peers, especially since the strategic details of privately-owned companies are very often hard to come by. One pair of brothers owned a medium-sized trading concern in the Midlands. After a couple of decades of success and affluence, they split as acrimoniously as a marital divorce. One is now buying, or has bought out, the other and there had been bad temper and its consequences before an expensively-lawyered settlement. 

Both brothers are popular, gregarious, clever and admired. Most who know them are fascinated as to why their break-up happened. At a partridge shoot last season, the elder brother bemoaned the nastiness of it all but was otherwise discreet. At a pheasant shoot later on, the younger was just as wistful, but gave out a telling detail as to why they separated. (No-one does actual business at a shoot, they just gossip.) 

The impetus, he revealed, was that while the business was successful enough to accommodate the two of them, he felt it was neither large enough nor likely to grow large enough for their children. In his eyes, therefore, a split was inevitable. 

Succession. The never-ending problem of all dynasties. I was the fortunate guest of a billionaire family business owner at another shoot (this time abroad), when he asked, what was this Succession TV show? A former cabinet minister explained before I could that it was loosely based on the Murdoch family (in real life, the 91-year-old Rupert Murdoch seems to have chosen his son, Lachlan, as his corporate heir after years of speculation and manoeuvring). I have seen the first two series and you won’t learn much about running a company from watching it. The backdrop is business, but the story is about internecine family rivalry rather than corporate drama. 

My brother and I have had our grumbles. Our father was still nominally in charge in the chairman’s office drinking tea, reading the pink paper and summoning managers to repeat what they had discussed last week. I felt that my brother was patronising me, and he was not receptive to the brilliant suggestions I gave from the wisdom of my five minutes’ experience. Dad was bewildered as to how the warfare had erupted and clueless as to how to resolve it. 

You have to be blinkered to want it to end on your watch

I can’t remember how we did, but it was emotional. No doubt my brother calmed down, a little, and I grew up, a little. The point is, we were lucky. All enterprises and empires end at some point, but you have to be blinkered to want it to end wilfully on your watch. 

The alternative for the Murdochs and the fictional Roys would be either to sell up and manage the money or let career executives run their businesses for them. While professional managers often do a better job than most family successions, they also have slightly altered priorities — their remuneration is of paramount concern, above the health of the business. 

With family-orientated executives it is usually the other way around. Just pick up the annual report of any public company and note how lengthy and obfuscatory the Remuneration Report is for the executive directors. 

My uncle and father founded a listed property company. After they retired, the pay report for the four executive directors grew to 16 pages and consisted of three elements, each composed of three formulas — nine calculations designed to ratchet-up pay regardless of results. Pay is only part of it. 

Corporate strategy very often becomes distorted with company size, moving away from mere profit and growth. If you know a lender that sweet-talks you into buying money from it in sufficient quantity then the acquisition trail and its slightly less-attractive cousin, the merger, can be very seductive to corporate egos. They also mostly destroy value over the medium term. 

There are, of course, exceptions to this but since the reasons for most of this loss of value is usually as much cultural as economic, it is unsurprising that hired hands are those who most often get it wrong. If a large acquisition seems to have gone well it is interesting to note when the CEO leaves for a bigger job, before any problems caused by the takeover become too pressing. For long-term stewardship, family owners are best — except when they argue among themselves. Given the assets involved and the emotions arising, that often makes for great drama. 

To be an owner-manager is to have to think, continually, about risk and, separately, the future. Maybe my brother and I will split at some point, and amicably. Maybe we are now too indolent and too experienced in governance rather than sales and production to be hands-on enough. Maybe our children are too privileged and feckless for a corporate life. Or perhaps they are instinctively wise enough to find fulfilment elsewhere. There may, however, be another way. 

Family Offices have proliferated in recent years. Usually for the very wealthy (of £200 million plus), there is no reason why they can’t be hubs for lesser fortunes. Family members can choose, for fees cheaper than elsewhere, to have their lives butlered and asset-managed from a centre which is centred on them. 

Combine this with a European-style supervisory board above companies or units run by professional managers and all there should usually be to worry about are dividends, capital allocation and executive pay. If you can’t understand the debate on those issues then sell out to another family member who can. Or have the family sell out. The Elkanns are a good model. None of them run Fiat, Ferrari, The Economist, Juventus or their media interests, yet they are very good owners of them. 

These sort of structures mainly preserve wealth, rather than grow it

These sort of structures mainly preserve wealth, rather than grow it. It is a bit like the aristocrat who gives up managing the estate and hands it all to a firm of land agents. They keep things ticking along and might persuade the owner to have them write a report suggesting change. Like corporate management consultants, they will quiz you to the extent that you virtually write it for them, then charge you for it. Whether for good or ill there is less likely to be change unless there is a motivated yet culture-sensitive actor in charge: a family member. 

I am a capitalist, and billionaires are my heroes. The British ones anyway. There is something about that number that indicates success and liberty. Virtually no one is born a billionaire. Those who are born so are an anomaly. Despite all the advice of wealth managers, if you don’t work you rarely sustain real wealth. 

To be a billionaire is to have made it yourself and paid an awful lot in taxes along the way. That is of huge benefit to society, and every thinking democrat should want more of them. When I was younger and cheekier, I found myself sitting next to one of these heroes at lunch. He had recently sold out, solving a succession issue.

“I see in the papers that you’ve just become a billionaire.”

“Yes?” he answered, slowly.

“Well, what are you going to do with it?”

“No one has ever asked me that before … Johnny, you well know, it’s not all in cash.”


“I’ve a wife and two children. I’ll leave them £100 million each. The rest I’m going to give away, now and in my will.”

I paused and then leaned in to say, “I think that’s pretty cool.”

“Yes, I think that’s pretty cool as well.”

It must have been just in the moment because I have not heard him say “cool” since, or before. He is, praise be for us all, British. 

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