Are Irish family businesses set up to scale?

Irish family businesses are demonstrating financial resilience and are well set up to scale, says PwC’s Mairead Harbron.

Family businesses in Ireland are a mixed bag. They are ahead of the curve globally in some areas like finance, but behind in others, most notably sustainability and digital transformation.

A recent PwC study found that family businesses have weathered the pandemic relatively well, all things considered, with less than half (46pc) expecting sales to fall but 86pc optimistic about their ability to grow.

“For scaling and larger family businesses, it is essential to invest in cultivating a strong management team and culture”

According to Mairead Harbron, director of PwC Ireland’s Entrepreneurial & Private Business Practice, family businesses are an essential and necessary part of the Irish business landscape.

Scaling and succession

Harbron told ThinkBusiness that these businesses in Ireland need to plan for the future. She pointed out how family harmony should never be taken for granted and issues like succession need to be worked on and planned for with the same focus and professionalism that’s applied to business strategy and operational decisions.

With growing concerns from regulators around the world about family business succession, especially with a third of 1st, 2nd and 3rd generation businesses expecting the next generation to become majority shareholders in the next five years, businesses must have formal processes in place to ensure stability and continuity in the long run.

What is particularly clear about Irish family businesses is their sheer volume in the Irish economy and the fact that there is plenty of room to scale up.

“According to CSO data 64pc of Irish businesses are family businesses. And almost all family businesses are either micro enterprises employing between one and nine people or SMEs employing between 10 and 249 people.

“These businesses are the very heart of the SME community in Ireland. In terms of succession, we are seeing trends towards greater continuity.”

Harbron said that when PwC conducts its biannual surveys of family firms, she is seeing greater input from first and second generation businesses compared with economies like the UK or Scandinavia where there are many more third and fourth generation businesses by proportion.

“In Ireland what we have seen is there is enough wealth to be passed on down through the generations. And if you’re building businesses of scale there is a shift in the right direction. But it’s going to take time before we start seeing those really long-term, sustainable businesses. A lot more work needs to be done to prepare for future generations and instilling a culture of doing that.”

When it comes to financial resilience, Harbron believes Irish family businesses are well placed to scale.

“The majority of family businesses we have surveyed worldwide need access to extra capital. There’s around $3.6trn of capital being raised by corporate investors to ensure liquidity. I think family businesses have shown themselves to have financial resilience.

“Less than a third have had to take a cut in dividends and 30pc have taken salary cuts. So I think many are set up well to scale.”

Cultivating governance and management culture

But to scale into the future Harbron believes businesses of all kinds, and especially family businesses, need to take a strategic approach to ESG (Environmental, Social and Governance) matters.

“Any business that wants to scale or to be seen as a serious player in their respective markets will increasingly need to be able to demonstrate their ESG credentials. It is only a matter of time before consumers, investors, lenders and governments will punish those that don’t. Irish family businesses are behind the curve in this area and this can impact their scaling journey.”

Even though PwC’s research indicated that 80pc of global family businesses adapted to the challenges of the Covid-19 pandemic by enabling home working for employees, there are also concerns about their overall strength when it comes to digital transformation. 62pc of respondents described their digital capabilities as ‘not strong,’ with a further 19pc describing it as a work in progress.

Another area where family businesses are struggling with scale is in the area of evolved HR practices.

“Many family businesses have enabled staff to work from home and have worked very hard to retain as much staff as possible. The majority of those surveyed have also provided the right emotional and mental support to their staff. But there are inconsistencies. Many robust HR functions and disciplines are missing.

“On the one hand family businesses are providing a fantastic opportunity for key management because they’re not siloed, there’s a flatter management structure than in corporates. And so staff get a breadth of experience outside of their own area of specialism.

“But family businesses are struggling to keep up to speed in terms of professional development opportunities, many using outsourced courses and seminars. But the inconsistencies are where smaller family businesses don’t have those formalised processes in place.”

From a digital perspective, Harbron said many Irish family businesses are at the start of their digital journeys but have embraced the changes forced on them by the pandemic, especially working remotely.

“It’s not just about having the right digital tools, however, it is about having a digital mindset and embracing opportunities to bring greater efficiencies. It would be interesting to see where we are in 18-to-24 months’ time.”

To ensure the survival of family businesses into future generations, Harbron said owners need to ensure they are preparing the next layer of management to take the reins, be they family or non-family. Ultimately professionalism and capability are what will carry the business forward.

“I often tell clients that investing in key management is a win-win. You are either going to exit at some point or you are likely to sell the business, perhaps as a management buyout. You will get a higher price if you’ve got a strong management team that can go with that business.

“Or, if you are keeping it within the family and the next generation are taking over, you also want them to be surrounded by a strong team. So, for scaling and larger family businesses, it is essential to invest in cultivating a strong management team and culture.”

By John Kennedy (john.kennedy3@boi.com)

Published: 24 March 2021