Benefits and Implications of Family Owned Businesses in UK and US - Example

Benefits and Implications of Family Owned Businesses in UK and US Student’s name: Instructor’s Affiliations Course code: Date: Introduction Family owned business is a corporation which is run and managed by two or more family members. Every member of the family contributes in the management of the business and has more voting power of the business. This type of business has been there for a while and therefore it is considered one of the oldest forms of business ownership. Current family owned business is seen to contribute significantly towards the growth of the Global economy and for that matter they should be taken seriously (Burnham, 2004). In UK and US family owned businesses covers more than 90% of all businesses and they are controlled by two or more family members. Their contribution towards GDP is almost half the national GDP and therefore they provide more benefits than drawbacks towards economic development and growth. The benefits they have are bestowed on long term focus and commitment to quality (Chandler, 2007). The only problem of family owned business are based on only management challenges and slightly overlap on family and business issues (Danco, 2007). These family owned businesses cannot be quoted in any stock exchange and therefore cannot enjoy benefits which quoted companies enjoy but they take advantages of the disadvantages of being quoted in stock exchange. 1.0 Benefits of Family owned Business Stability Family owned businesses are more stable than public corporations. This is because the position of a family member determines who run and manage the business which leads to longevity in leadership. This kind of leadership is only replaced by serious illness or death and as a result there is no conflict on who should run the business. In family owned business there are no profit sharing issues as the profits of the business is used to solve the general family problems. Commitment Family owned businesses ensure that the needs of every family member are satisfied. This therefore introduces a sense of commitment and accountability on family members on business affairs since they entirely depend on the profit of the business (Danco, 2007). This high commitment which cannot be found in non family owned businesses introduce other benefits like better understanding of family members and the organization, increase the relationship between customers and the company which in return lead to high sales revenues and marketing in general. Flexibility In family owned business there is high level of flexibility. This is because family members who run and manage the business can spare some time to do something outside the business to generate more cash. But non family owned businesses, employees are fixed and must ensure that they concentrate their attention only on the company they are working for and therefore they lack time and an opportunity to do other job outside their work description (Burnham, 2004). This increase personal growth and income which cannot be experienced in non family owned businesses. Family owned businesses are also not fixed on the type of business they do but have the opportunity to enter into a different type of business which tends to be more profitable. Long-term Outlook Family owned businesses have their business focused on long term goals which can be either decades or annually while non family owned business think a bout short term goals (Danco, 2007). This long term view helps in the formulation of strategic development and decision making. There is no loss of secretes Family owned businesses cannot be quoted in stock exchange and therefore they cannot lose their important information to competitors which they may use to compete against the company. Family owned businesses therefore have secrets since they do not publish the financial information in the books of accounts annually. This allows them to compete effectively as non family owned businesses cannot access their secrets to use against them. There is no Loss of Control to Incoming Shareholders Family owned businesses do not allow the sale of its shares to the general public which could gain more voting power to control the business (Danco, 2007). Loss of control can change management and leadership style which may have negative effect on the business performance. This retention of control does not lead to alteration of company policies which may endanger the operation and reduce the vulnerability of take over bids of the company. Decline in Profit cannot lower the Share price The decline in family owned businesses profits are not revealed to the public and this will not reduce the share price of the company since the public do not know the financial status of the company. This will also not reduce its goodwill which may be used against the company. There is no payment of Prominent Cost in the form of ordinary dividend Family owned businesses are not entitled to pay prominent cost in the form of ordinary dividends which is not tax allowable expense thus compounding the cost (Danco, 2007). There is also not payment of quotation costs which increase the operating expenses of the company which may reduce the overall performance of the company. There is no Following strict Quotation Rules Family owned businesses are not allowed to become a member of stock exchange. This prevents them from following strict quotation rules which may hinder the business organization from enjoying some privileges in the industry. Ease of formation These types of corporations are very easy to form as it does not need many people to constitute membership required to form it (Burnham, 2004). These companies only need two members to be incorporated. Once it has been incorporated, they are allowed to start business immediately before receiving incorporation certificate. Public companies have to wait for incorporation certificate to commence business. Quick decisions It is easy top make decision in private or family owned businesses (Danco, 2007). This is because few people are involved in decision making process. More decision makers may raise more conflicting issues which may paralyze the decision making process. Long Term Planning These companies only create long term plans as there is needless to develop short term plans. This is because they do not have to please shareholders by maintaining prices of shares high like public companies. The exemption that family owned businesses to produce quarterly financial results helps these kinds of business organization to produce long term developments which it manage effectively. Financing Options Family owned businesses have several options which they can use to raise their finances. Public companies only have one main option of raising finance which is sale of share capital. These business organizations can raise money using venture capitalists, use joint venture or other sources of finance (Burnham, 2004). This makes it to be able to have adequate source of finance to finance its investment projects. Avoid Public Scrutiny Private companies are not allowed to face public scrutiny annually. This is because there are few incidences of financial frauds which is common in public companies. They are also not required by companies act to produce their financial statement annually for auditing. This will reveal the secrets of the company which others may use against it (Danco, 2007). Through this the company has the opportunity to keep its information private and run away from intense scrutiny. These family owned businesses are also able to face less public pressure from customers and environmental watchdogs. 2.0 Drawbacks of Family owned Businesses Family owned businesses are not allowed to go public in stock exchange. This makes them to face some challenges which quoted companies enjoy. It cannot raise permanent finance Family owned companies cannot raise permanent finance by way of selling such securities to the general public as ordinary shares, irredeemable preference shares and convertible preference shares. It therefore not able to finance some of its investment projects using this king of source of finance. It cannot enjoy Government Privileges There are some privileges given by the Government which family owned businesses are not allowed to enjoy. This limits the family owned businesses from competing effectively with public limited companies. The privileges include provision of tax allowances and allocation of low foreign exchange rates. Difficulties in share transfer Since family owned businesses are not quoted in stock exchange, they are not able to transfer their shares easily and this can lead to low capital (Danco, 2007). It also leads to no change in ownership of the company since the shares is only divided among the family members only. Difficult to determine guidelines and qualifications for family members to participate in the business Family businesses face many challenges in finding guidelines and qualification of family members to run the business (Chandler, 2007). Large private or family owned companies attempts to ignore the involvement of family members in the running of the business to ensure that they reduce the level of conflicts in the organization. This is because family owned businesses are always having problems of recruiting relatives or friends who have no required proficiencies and talents. This is because once they have been given a chance to participate in the running of the company they tend to be difficult to fire even if they have gross misconduct issues (Danco, 2007). It also leads to employing relatives who cannot produce required results and therefore the company may face a reduction in overall performance. Cannot Obtain Underwriting Facilities These companies lack the privilege of getting underwriting facilities such as pension food scheme because they lack the capacity to negotiate with strengths for good underwriters as its shares are not likely to be sold to the public. Difficulties in paying salaries to and dividing the profits among the family members who participate in the firm It is difficult to pay salaries and share profits among all the family members who participated in the running and management of the business (Coase, 2007). To influence growth of family business firm, it is important to save part of the profit but some members may not see the need of reducing their income. This is likely to create potential conflict which may be very difficult to solve. To solve these kinds of problems it is important to involve non family members to collect facts and suggestions to support the argument which creates tensions so that the value of investment can be known by other family members (Burnham, 2004). The equal payment of salaries can be done using industrial guidelines which matches each employee job description with qualification. Family Conflict Family conflicts can also affect the performance of the company (Chandler, 2007). This may results from historical conflicts which may reduce strengths of relationship between family members who run the business. Family conflicts can lead to non cooperation of family members and this can cause negative attitude towards work since some members can believe that their effort is being enjoyed by one person. Less Capital Base Family owned businesses have low capital base since only family members contributes their finances towards the company (Coase, 2007). This limits the company from getting finances from other investors who may be willing to finance the business investment project. Poor Capital structure The capital structure of family owned businesses are only composed of debt but there is less equity capital. This is because they are no allowed to subscribe their shares to the public for purchase and therefore the shares are only held by family members only. Unstructured Governance Family owned businesses take internal hierarchies, rules and ability to adhere to corporate laws less seriously. This is influenced by the degree of trust which is bestowed to family members who participates in the running of family firm (Danco, 2007). This dearly affects the internal management structure since every family member can be seen as a boss. This problem affects the flow of authority and division of labor since every family member would wish to be the manager. Lack of Succession Planning Family owned business do not have well structure succession plan (Coase, 2007). This is because the family member who runs the business lacks the desire to accept that one time he or she will retire. Lack of succession plan may lead to poor leadership and constant family conflicts and legal problems for the company. Smaller resources Family owned businesses are not allowed by law to have more than fifty members. This makes its credit standing to be low and therefore it has fewer resources than public limited companies. This makes its managerial and financial resources to be less since their aim is to maximize profits through using little resources to get high investment returns (Paisner, 2008). Lack of transferability of shares Family owned businesses lack the opportunity to transfer its shares freely. There are some restrictions which hinder these kinds of companies from issuing its shares to the public but they are only allowed to share shares between the family members or relatives (Chandler, 2007). The owners of these companies are also restricted from leaving the business easily since there is a contract binding the private owners. Poor protection to members There are several exemptions which family owned businesses enjoy as provided by the provisions of the company’s act (Coase, 2007). This may make the minority members to face some difficulties caused by majority members. Members who are not satisfied with the actions of majority members are not allowed to leave but can only do so at a loss. Members of these business organizations are also not protected effectively as the decisions made depend on the discretion of members. No valuation of investments The shares of these kinds of companies are not listed in the stock exchange. Therefore there are no regular followed when dealing in the shares of family owned businesses (Chandler, 2007). This provides the shareholders not to know the value of his or her investment as shares are not valued for any private investment of the company. Transfer of Shares These companies are not free to transfer their shares freely to those who have no shares in the same company without the request of existing shareholders. This has the possibility of creating inefficiencies because any investment decision must be made in the correct time to allow sale of shares without requesting others (Burnham, 2004). This prevents shareholders of private companies from disposing their shares even if they know that the company is likely to make a loss. Issue of Shares Family owned businesses are not allowed to issue shares to the public easily. This prevents them from gathering large capital through the use of shares (Coase, 2007). This cannot happen because the company is restricted by the number of membership who is allowed to hold shares in these kinds of corporations. These therefore limit them only to the amount of capital which they can raise only. Access to Credit These companies cannot easily access credit facilities since financial institutions believe that the existence of these companies depends on the life and wealth of shareholders (Chandler, 2007). This makes few financial institutions to offer credit to them but can only happen when there is a stable financial guarantors (Paisner, 2008). When the shareholders have limited wealth, the company is unlikely to receive less financial assistance. Lack of public confidence This business owned companies lose public confidence. This is because they do not reveal their affairs to the general public. It is not subject to strict control of the company’s act which allows companies to be audited and the audited results published. 3.0 Implication of family owned Businesses on share price maximization in US and UK firms The stock market of London has a capitalization of approximately US$3.266 trillion. The transfer of shares has significant economic implication on the economy and the citizen of different countries (Coase, 2007). A reduction in the price of shares can influence great economic disruption which is able to cause depression when there is a crash in stock market. Since movement of shares has both positive and negative implication, the existence of family owned businesses will also have some potential implication on economy and people. Family owned businesses are not allowed to trade in stock exchange and therefore the Economic Implication Wealth Implication The most important implication of family owned businesses on share prices is that people with shares experience a reduction in their wealth. When there is a significant reduction it can affect the financial outlook of the investors but when they loose money on the purchase shares they will not be willing to spend their money (Chandler, 2007). This has a great potential in the reduction in consumer spending. The effect of this is slight when family owned businesses dominate the economy since they do not use money to purchase shares and therefore they are able to spend more on the purchase of other commodities. The effect of this is that people who buy shares at high prices are able to loose money and this makes their spending pattern to depend on the price of shares. This effect is more in the housing market that outside. Implication on Pensions People with private investment trust are greatly affected by the stock market. Pension funds use a lot of their cash outlay on stock market and therefore any reduction in share prices will eventually reduce the value of investment trust funds (Coase, 2007). This will reduce future pension payouts and also lead to struggling of the pension schemes to meet their financial obligations. The most significant thing is the long term share price movement as any fall in share prices for a long duration of time has a negative effect on the pension funds and even projected future payouts. Confidence Movement in shares prices show what is happening in the Economy. Reduction in share prices can be caused by fear f recession and global slowdown and therefore the stock market can reduce the confidence of consumers (Chandler, 2007). In the case of family owned businesses which dominate US and UK, the fall in share prices does not discourage people from spending. Investment The reduction in share prices discourages people from investing since they cannot raise more finance to fund their investment. Since family owned businesses do not involve in the purchase of shares, they may not be able to raise sufficient capital outlay to finance their investment project (Burnham, 2004). This will therefore makes these companies to use high cost sources of finance such as debt to finance their investment projects instead of depending on cheap means of borrowing. But when there is a fall in share price it becomes more difficult to invest. Bond Market When there is a collapse in the stock market, other investments become more attractive because most people will now depend on Government bonds to finance their investment (Coase, 2007). The benefits of this kind of investment are that they are able to produce high returns during uncertainties. Since family owned businesses do not sell their shares to the general public, they therefore depend entirely on the bond market which will prevent most people from buying shares from the public and this reduces the share prices in the stock exchange (Aronoff and John, 2006). These leads to the increase of the number of people who do not have shares and therefore they are not affected by short term movements in the stock market. Tax-free Rollover of Shares Family owned businesses only allow the movement of shares between family members and relatives only without paying any tax (Chandler, 2007). They use rollover provisions which are explained in section 73(1) of the income tax act. This act can be used by family members to transfer share between them pursuant to fulfillment of marriage rights. Through this provision, the transferor is deemed to have transferred shares at proceeds exactly equivalent to the value of shares. When this provision is used when there is marriage between the spouses, any income that arises from the investment is attributable back to the spouse (Coase, 2007). This rule is meant to reduce chances of income that comes from the investment from splitting between spouses. This provision only works when the spouses are living together and only a part by some reasonable reason. This reduces the burden which shares bought through stock exchange faces in the market. Transfer of Shares at Fair Market Value Family owned businesses transfer their shares at fair market prices. This takes place when the family members have decided to transfer shares at a fair market value when the transferors have unused capital losses or gain exceptions (Chandler, 2007). The rollover provision will be selected which allow the transferor to get shares at an adjusted cost base which is equivalent to fair market value. This therefore prevents the application of attribution rule which does not provide a provision of structure sale of shares. Conclusion Family owned businesses are very important in the economic development of UK and US. This is because they dominate the market and ensure that there is effective competition which enhances the quality of products sold to different consumers. It also leads to privatization of most of the thinks in these countries. There are several benefits which private companies have over public limited companies and this provides the need for UK and US government to provide incentives to private limited companies to encourage privatization of most companies. Bibliography Aronoff, B and John L 2006. Family Business Governance: Maximizing Family and Business Potential. 2nd ed. Marietta, GA: Business Owner Resources Burnham, J. 2004.The Managerial Revolution: What is Happening in the World?,New York: John Day. Chandler, A. 2007. The Visible Hand: The Managerial Revolution in America, Cambridge, M.A.: Harvard University Press. Coase, R. 2007. The nature of the firm’, Economica, 4(16): 386–405. Danco, L 2007. Beyond Survival: A Guide for the Business Owner and His Family. Cleveland, OH: Center for Family Business Paisner, M 2008. Sustaining the Family Business: An Insider's Guide to Managing across Generations. NP: Perseus Books Read More