With family businesses contributing so much to the Irish economy, our Private Enterprise experts, Ken McCracken, Olivia Lynch and Ryan McCarthy, discuss the issues impacting family business in Ireland with The Irish Times.
“The senior generation in family business will, on average, live longer than at any time in history, so what effect will this have on the transfer of ownership and leadership from the senior generation to the next generation? Allied to this is what the senior generation will do if they ever retire in order to have a meaningful life. What roles could they have in their own family business – possibly as an ambassador, or in the wider family business community as a mentor, perhaps?” Ken McCracken, Family Business, KPMG in Ireland.
Olivia Lynch, Partner, KPMG Private Enterprise: “A significant challenge that can face many family businesses in Ireland as they experience successful growth is the ability to attract and retain executive and managerial talent. It can be extremely challenging for family businesses to compete with public companies, which tend to have more options available to them to offer equity participation. The KEEP [Key Employee Engagement Programme], a share-option scheme for SMEs, was a welcome introduction to assist SMEs and family businesses in addressing this challenge. However, the qualifying conditions for the relief are restrictive in its current form. It has been acknowledged that the uptake of the relief was much less than expected and following the recent public consultation, we would be hopeful that this relief would become more accessible for family businesses.”
KPMG’s most recent European Family Business Barometer shows that Irish respondents identify the war for talent as their second greatest concern after political uncertainty. That speaks volumes about the importance Ireland’s family businesses place on diversity today, suggests Ryan McCarthy, Partner, KPMG Private Enterprise.
Ryan continues saying that “Family businesses are ambitious and have growth plans that often require additional expertise. They are very aware of the need to attract the best people with a working environment that values diversity of thought and diversity of background.”
Passing the baton in a family business can be a complex and contentious issue, but whether a business is growing in scale or planning for the next generation, the question of leadership is one that needs to be addressed.
Recent findings from our Family Business Barometer, reveals the majority (76 per cent) of Irish family firms intend passing the business to the next generation.
“Leadership is a vital aspect of any business, however, the added dimension in a family business is whether they feel it is necessary to have a family member in a leadership role,” says Ken McCracken, Family Business at KPMG.
“If so, how do the family balance this desire with the needs of the business? Especially if the talent in the gene pool does not exactly match the needs of the business,” he says. Keeping it in the family is certainly not a given, with 29 per cent of Irish family businesses consulted in the Family Business Barometer saying they are considering the appointment of a non-family CEO.
Whether choosing a family member, or looking outside the family, businesses facing this decision can expect to face a unique set of challenges.
Another finding of our Family Business Barometer report was the potential for inter-generational clashing in family businesses, as senior generations are living and working longer, and younger generations struggle to establish their positions. The longer working life of the senior generation in the firm can result in a beneficial, gradual exchange of leadership roles if structured well. But if unstructured it can also lead to conflict and complications.
Succession seems to be a key issue impacting on family businesses, with a focus on capital gains tax, Olivia Lynch, Partner, 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.
“Internal boardroom governance matters to family businesses as it does to any business,” adds Ken McCracken, Family Business with KPMG in Ireland.
But family businesses can face particular challenges when it comes to governance. Among these is the need for clarity in relation to what family members want from the business. “The board, especially non-family, must be clear about what success means for the family; or to put this another way, the overall return on investment that the family want,” says McCracken. “This is likely to be a combination of economic returns and other, non-financial, returns on investment to which the family attribute value. The family shareholders need to clarify what they mean by success and the board then has to help the company achieve it. This is very different from other types of business that tend to focus only on economic returns.”
McCracken advises family firms to research what other successful business families have done. “Work out what works for you, based in your family’s traditions and your aspirations for the future,” he says. “This takes time because each family will need a bespoke solution. There are no best practices. In fact, beware best practices – best-practice statements are most often excessive generalisations from selected examples leading to complex family businesses being reduced to facile slogans that are falsely presented as universal laws.”
An abridged version of this article originally appeared in the Irish Times, and is reproduced here with their kind permission.