Family businesses aim for solid growth, slam payroll tax

A new survey of family-run businesses reveals they are confident about solid revenue growth in the year ahead, but also shows that payroll tax is preventing them from hiring new staff.

KPMG’s annual Family Business Survey for 2009 highlighted the sector’s resilience through the downturn. While 28% of respondents reported cancelling a project and 46% said they had been forced to defer a project, more than half maintained employee numbers and 13% actually added to their headcount.

Bill Noye, a partner in the firm’s middle market advisory division, says the resilience of family businesses may have something to do with the more conservative approach that many take.

“Their balance sheets tend to be more conservative and they tend to take a longer-term view to profit and sales growth.”

One particular benefit of the conservative approach concerned the companies’ funding arrangements. Because family businesses tend to operate with less debt than non-family companies, it appears they received a much better run from lenders during the downturn – two thirds said they had no change in their lending terms and conditions. Of the companies that did have their bank change their arrangements, 25% of these actually had their interest rates reduced.

Looking ahead, family businesses appear confident about the prospects for the Australian economy, with 60% believing the economy has hit the bottom and is recovering.

Just over a third expect revenue growth of 0-5% in the year ahead, while 27.4% are tipping growth of 6-10%. Just over 10% are predicting growth above 20%. The manufacturing and retail sectors were among the most optimistic, while companies from the construction sector is predicting a bleak year ahead.

Respondents appear relatively upbeat about employment prospects, with 16% saying they will hire new staff.

However, the number could have been much higher but for payroll tax, which is seen as a major impediment to growth by many companies – 35% of respondents claimed they would add at least one full-time employee, and 22% said they would add at least one part-timer or casual employee if payroll tax was abolished.

While many family businesses appear to have come through the downturn in good shape, tougher economic times have led to one major change in terms of succession planning and timing.

One in five respondents said the downturn had forced them to change their succession plans, with almost 65% of those surveyed saying they now have no plans to pass on the business in the next five years.

“This global financial crisis has deferred succession plans,” Noye says. Comments from KPMG’s focus groups run in conjunction with the survey indicate this deferral is being driven by an unwillingness to hand the business over to a younger generation that has not experienced bad times.

“You do see reluctance of some patriarchs or matriarchs to let go for a whole lot of reasons. But this does give them a chance to put in some governance structure to better manage succession when it does occur.”

Family companies need all the time they can get to put better succession and corporate governance structure in place.

While 90% say they have a business or strategic plan in place, and a third have a board of directors, the vast majority of family companies are struggling with formal family management processes.

Just 15% have a formal succession plan in place, while 88% do not have a family constitution – a sort of shareholders agreement which sets out a family’s rules on employment of family members and spouses, remuneration of family members, succession processes, granting of shares and the role of non-family members.

On top of this, only 28% have a formal family council which would meet to discuss these matters.

“This is an area where family business has a real opportunity to lift its game,” Noye says. “These mechanisms are all about giving families an opportunity to communicate. If there are open channels of communication families tend to resolve problems far easier.”