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Family firms face numerous challenges

They are the economic and social bedrock of Irish society and it is essential that measures are put in place to greater support indigenous family businesses

‘Integration of the next generation and succession planning is something family businesses are not always good at, mainly because they don’t do it that often.’ Photograph: iStock

‘Integration of the next generation and succession planning is something family businesses are not always good at, mainly because they don’t do it that often.’ Photograph: iStock

 

With heavy focus often placed on foreign direct investment, it’s sometimes forgotten that family firms are the economic and social bedrock of Irish society, with in excess of 75 per cent of them contributing to more than 50 per cent of Ireland’s GDP, while employing 50 per cent of workers across the country.

They are also present in towns, villages and cities, and in all sectors including retail, farming, animation, food production, engineering, manufacturing, logistics, financial services and technology.

But they face numerous challenges. Due to the current global, political and business environment, there is more uncertainty in the international business and international tax landscape. Therefore, the Irish economy needs to ensure measures are put in place to greater support Irish indigenous family businesses.

Robert Murphy, tax associate director at Grant Thornton explains a number of the challenges.

“The attraction and retention of key staff in a near full-employment economy is a significant challenge. Family businesses are having to look at new and innovative ways to attract and retain staff. The advent of Brexit is another major challenge. This has renewed the focus for family businesses to seek and develop new markets overseas or diversify product offerings, as well as supply chain inputs. However, finding and growing these markets involves a certain lead time and investment, as often supply chains can take time to adapt and be developed. The introduction of new regulations such as GDPR also impacts family businesses by adding additional compliance obligations to smaller companies which have less resources to deal with the often complex issues which can arise,” he says.

Meanwhile, given the pace of change, family businesses need to ensure they are being proactive in the digitalisation of their businesses, for example, in online sales platforms or automation.

“Digital transformation of the world of work, product/services offerings and IT security are significant challenges for family businesses in order to stay competitive and relevant. If implemented effectively and if fit for purpose, they can have positive impacts for family businesses by reducing inefficiencies and potentially labour costs. In order to achieve this, the technology must be relevant to the business and embraced by those who work there,” Murphy says.

For a number of family firms, imitation of brand is a major issue, according to Dr Eric Clinton, associate professor of entrepreneurship at DCU National Centre for Family Business.

“If an Irish family business has a certain brand image, colour or wording and is imitated by a big international competitor, this can cause problems for the smaller business.

“As well as this, appetite for risk within a family business may vary, with a young, well-educated professional having a greater appetite for risk than the current generation, who may not share that appetite.

‘Succession planning’

“Integration of the next generation and succession planning is something family businesses are not always good at, mainly because they don’t do it that often. The tenure as CEO in a non-family business is three to four years; in a family business that is 23 years. It’s usually the elephant in the room that nobody wants to talk about,” Clinton says.

Indeed, succession seems to be a key issue impacting on family businesses, with a focus on capital gains tax, Olivia Lynch, partner at KPMG Private Enterprise, says.

“The timing and execution of this decision is significant to maintain and build on a successful family business long-term. Tax policy acknowledges that without relief, the cost of passing on a family business to the next generation could be prohibitive. ‘Retirement Relief’ provides relief from CGT on the passing of a family business to the next generation. This relief can be availed by someone who has reached the age of 55 and meets the necessary conditions.

“Once a person reaches the age of 66, this relief is capped where the market value of the business exceeds €3 million. While there is no requirement for someone to actually retire in order to avail of Retirement Relief, the age-related conditions could lead families to consider the decision either too early, if they want to do so before the age of 66. The decision is unique to each family and their business, and adjustments to the current restrictions in tax policy in this area could greatly assist families when they come to making it,” she says.

There are numerous Government initiatives that can help family businesses, as well as tax policy improvements which could be made to improve the tax environment for family businesses and would also encourage entrepreneurial spirit.

“Improvements could be made to certain tax reliefs such as Capital Gains Tax Entrepreneur Relief to increase the lifetime threshold from €1 million, given our UK counterparts offer a limit of £10 million. Improvements could also be made to CGT Retirement Relief, which is having a limiting factor on some business transfers, or Capital Acquisition Tax Business Asset Relief to aid succession of family businesses,” Robert Murphy says.

Meanwhile, a large number of State and EU supports are available but State agencies need to be more engaged with family businesses at a local level to make the best use of these resources and to promote entrepreneurship within communities, he adds.

Skillnet Ireland is one Government initiative that can help family firms with their staffing needs.

“For success, all businesses need a highly skilled and motivated talent base to thrive and remain competitive. However, skills are highly dynamic and subject to obsolescence, meaning a persistent focus must be maintained by family businesses on the development of their workforce,” Tracey Donnery, executive director at Skillnet Ireland says.

“There is a need to ensure the skills base reflects not just the current business demands but the challenges of future growth in existing and new markets. In practical terms, businesses could engage with one of the Skillnet Ireland networks and seek their support in identifying the knowledge, skills, abilities and other competencies their company requires, and how to develop their team or any new-role profiles that a digitised workplace demands,” she adds.