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February 5, 2014updated 11 Jan 2016 5:59pm

What the UK could learn from Germany’s family business-driven success

By Spear's


Speaking in front of some of the country’s most important family business leaders, the chancellor praises their contribution to the national economy and promises that the government will keep supporting the sector: ‘Family businesses are one of our most valuable assets. This is why they need to be backed by a supportive political framework that enables them to unfold their full potential… Our success depends in large part on you.’ At the end, Angela Merkel thanks her guests and tells them she looks forward to seeing them the following year.

If only this had been our chancellor, scion of his own family business (Osborne & Little wallpapers), vowing to help other such enterprises. No, we have to look to Germany for a chancellor who regularly, seriously, publicly acknowledges family businesses’ contribution to the country’s economy and often attends the national meetings of the industry’s main associations and lobby groups.

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Merkel has been a regular at both the Family Business Day organised by Stiftung Familienunternehmen (Foundation for Family Businesses) and at the annual conference of Die Stimme der Familienunternehmer (Voice of Family Businesses).

Efficient machine

Merkel has reason to listen to and celebrate these firms as Germany’s success depends very much on that of its family business sector, which includes some of Europe’s largest companies, such as the Volkswagen Group and BMW, and popular household names like Robert Bosch and Oetker. There are 2.6 million family-controlled businesses in Germany, according to Stiftung Familienunternehmen, representing 92 per cent of all private companies in the country. Their revenues account for 51 per cent of all companies’ sales and they employ 60 per cent of Germany’s workforce.

German family firms know they can count on Merkel. ‘We are certain she understands the conditions and challenges Germany’s companies are facing in a globally competitive environment,’ says Professor Brun-Hagen Hennerkes, chairman of Stiftung Familienunternehmen. ‘She had ruled out tax increases during the election campaign and acts as a guardian of economic freedom.’

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Since 2008, German family businesses have also benefited from an inheritance tax break if the next generation decides to keep the business for at least ten years after succession. This encourages family businesses to plan succession in advance and supports long-term stability.

Celebrating family businesses is important to Merkel, and so should it be for George Osborne and David Cameron. According to research by UK lobby group the Institute for Family Business, there are three million family businesses in the UK, accounting for two-thirds of firms in the country’s private sector. They provide 40 per cent of total private sector employment and 35 per cent of its turnover.

‘Family businesses are one of the hidden gems of the UK economy but have flown under the radar of the government for a considerable length of time,’ says Mark Hastings, the IFB’s director general.

The IFB recently called for the government to review the tax system, which favours debt financing as opposed to equity financing. Companies can receive a tax deduction on the debt they take on to invest, while businesses like family firms that tend to reinvest their equity and profits don’t receive such treatment, even though their investment model is more prudent.

That is not to say the government doesn’t support the family business model at all. John Major introduced business property relief on inheritance tax in the early 1990s which, similarly to Germany’s inheritance tax break, exempts the transfer of certain business assets from inheritance tax at a rate of 50 or 100 per cent, ensuring that the family doesn’t have to pay a huge amount of money when the business is handed over. The relief has been maintained by governments since.

Despite any impetus or inspiration from the chancellor’s family business, co-founded by his father Sir Peter Osborne in 1968, the government could be more proactive and learn from its German counterpart how to praise family businesses, just as it already does with other types of companies. ‘While lots of other businesses — such as IT, hi-tech, manufacturing and entrepreneurial businesses — are celebrated by the government, family businesses don’t get a mention that often and yet they are the backbone of the UK economy,’ says the IFB’s Hastings.

He wants to see family businesses mentioned more often in speeches and at Budget times, and officials visiting family firms more often: ‘The government has become increasingly aware of the positive contributions that family businesses make to the UK economy and of what having a thriving family business sector could bring to the country. Now it’s about turning that awareness into more of a support to the sector.’

Urban myths

Common misconceptions about family businesses may explain why the government has been a little shy about them. Family firms are often mistaken for small businesses, even though some of the country’s leading companies are family-controlled — such as multi-billion-pound Associated British Foods and JCB — and so are some of the most iconic British brands, including Clarks and Barbour (which won Family Business of the Year at the Spear’s Wealth Management Awards 2013).

Family businesses are also accused of not being professionally run and of not being able to attract top external managers because they don’t give the same career opportunities to non-family staff. But the presence of a shareholder in it for the foreseeable future explains family firms’ long-term view and the reason why they tend to perform better than their non-family counterparts during economic downturns. (They can take decisions quickly and have access to more capital, thanks to their low debt-to-equity ratio.)

Opening the 2013 National Business Awards with a video message back in November, David Cameron said: ‘A strong private sector is exactly what Britain needs to get back on its feet… I’m determined that Britain becomes the best place in the world to start a business, to grow a business and to do business.’ Isn’t it about time he and his government gave credit where credit is due?

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