Considering the fact that the ‘think small first’ concept has never quite taken off in Malta, one wonders about the relevance of the recent initiative by economic affairs minister Chris Cardona to launch the concept of the Family Business Act, ostensibly to help ensure a secure and trouble free succession in family owed businesses.
The minister explained that the law would facilitate the transfer of businesses between family members as these constitute a high proportion of local companies (about 75% or 31,000 entities) and as a general rule tend to ignore succession plans with the result that as an average only 30% are transferred to a second generation, while a mere 10% make it to the third generation.
The minister feels this is an important albeit disadvantaged sector employing more than 38,000 persons, with some firms employing up to 500 persons who contribute so much to society and to the economy. They are the backbone of SME's and due to their family ownership structure tend to work harder, contributing to higher social stability, commerce, jobs and economic growth.
It is a discerning initiative of the newly elected government now in its 100th day in power which desires to accelerate the rhythm of growth and consolidation within such an important sub-group. By oversight, the issue of succession planning among family businesses has been left out in the legislation promulgated by the PN government when minister Jason Azzopardi piloted the Small Business Act in 2011.
Dr Cardona stated that the government is studying what incentives should be implemented to ensure that the transition path in the transfer of family business from one generation to the next is smooth as a lot needs to be done to ensure that succession of family is not hampered by ambiguity in laws. Some of the most common mistakes made by family businesses at the point of succession lead to a break-up contrary to misconception that family ties tend to be strong and some argue this bond acts as the best guarantee that the parties never fall out.
Studies show that disagreements are common and some tend to be acrimonious, leading to breaking-up of the business relationship. Again the common fallacy is to assume that when the parents retire the children will automatically take over but children may have different ambitions or may simply not possess the required skills so the business will founder.
Another pitfall for the continuity of family business is that there is often a temptation for a parent to stay involved beyond the stage when a handover to siblings had occurred. This can lead to problems where – particularly if there are changes in the customer or supply chain – businesses can fall behind competitors because the children, eager not to upset their parents, refrain from adopting new technologies or change age-old market practices. One practical solution to facilitate a smooth handover from one generation to another is the drafting of a comprehensive agreement.
One anticipates that the proposed Family Business Act will act as a catalyst for the promotion of such agreements and to inculcate the notion that these should be seen as a safety net, preventing the business from falling off a cliff. One may argue that if everyone in the family agrees on how to deal with an issue then there is no need to draft such agreement yet in practice disagreements surface in unexpected moments and conveniently the agreement introduces mechanisms dealing with the management, regulating who can vote, when and who will be given a casting vote in case of a tie. This can avoid potential family disputes for example about whether or not one cousin is to be elected to serve on the management board. One also hopes that the new Act paves the way for drafting exit arrangements, dealing with situations where a founding member of the family becomes sick, unable to work or dies. Often these risks can be hedged by taking adequate insurance cover with appropriate trust and option arrangements to provide a buy back mechanism for business ownership rights, in case a family member retires or dies.
Back to the agreement - this need not be expensive to draft, but can provide invaluable comfort and peace of mind – and help avoid problems arising when assumptions that have been made turn out to be incorrect.
It is interesting to refer to a report commissioned by the IFB Research Foundation and prepared by Oxford Economics in 2010, to provide a comprehensive evaluation of the UK family business sector as these account for two-thirds of firms in the UK private sector or two in three of all private sector firms, and are predominantly Small and Medium-sized Enterprises (SMEs). They provided 9.2 million jobs, 40% of total private sector employment, or two in five private sector jobs, which generated revenues of £1.1 trillion in 2010, or 35% of private sector turnover.
Family firms are concentrated most strongly in agriculture and extraction, hotels and restaurants, and in wholesale and retail . The sectors with the highest absolute number of firms were business services, including real estate and construction. According to survey data, the proportion of SME family businesses in UK, that applied for finance over the previous year rose from 18% in 2008 to 30% in 2010 and family businesses appeared less vulnerable to corporate dissolutions even though insolvency rates rose in family firms, but they were lower for family firms across all size bands than for their non-family counterparts, possibly a reflection of stronger balance-sheet fundamentals prior to the onset of recession in 2008/9.
Back to Malta, at this juncture, one may ask why all this fuss to protect family business when two years ago the PN administration had come out with much fanfare introducing the Small Business Act?
The answer is that the philosophy of political parties has always favoured big business and by definition political leaders preferred to brush shoulders with the barons of mega business that rule the roost in the island with SMEs seen as the Cinderella of the business community as both the PN and PL in the past often preferred to be associated with established businesses and this mindset indirectly discourages the small business entrepreneur striving to expand.
It is useful to remember the classical example of the PN 's grand policy of creating a Smart city consisting of multiple luxury offices, residential quarters, a hotel set around a large lagoon financed by the Gulf Arabs in a deal which saw the exchange of a large tract of derelict land at Ricasoli. Smart City aims to create 6,000 new ICT jobs. This dream has been ricocheting in the minds of entrepreneurs who are impressed yet discouraged by the hype and grandeur of such a massive investment as it invariably dwarfs private initiatives particularly those taken by family businesses.
This mentality goes contrary to the concept of Think Small First and in this era of globalisation and ardent competition one needs to provide assistance to family businesses by encouraging them to make necessary changes to boost innovation. It was in July of 2011, that the PN administration launched a noteworthy legislation styled Small Business Act (SBA) to give a transformational role to local entrepreneurship, thus giving more weight and provide direct assistance by Malta Enterprise via new initiatives. Since the promulgation of SBA tangible progress was registered by SME and family businesses but unfortunately surveys show the rate of successful start ups is not very encouraging, regardless of the political mileage claimed by the PN administration which claimed that hundreds of new jobs were created via the use of the two schemes:- micro tax credits, micro loans and the attractive Jerime bank scheme. Since time immemorial PN leaders have promised the setting up of a venture capital bank to provide easy access to credit for family business but such an institution never succeeded to start functioning. Ongoing efforts by Malta Enterprise to introduce schemes aimed to assist family businesses such as on the job training, funding schemes and the broadening of international markets are all very commendable however these are not enough.
Definitely attention has to be given to educating young entrepreneurs and channelling their needs through the organs of the Enterprise Consultative Council which was set up as an integral part of the SBA to reflect the ideas of a broad cross section of government departments and NGO's together with the College of Regulators which was intended to vigorously streamline laws and regulations which incessantly pile up during successive legislatures.
The SBA had a noble aim to remove any ambiguities which unresolved tend to hamper growth. One may well ask what progress was registered on the operation of such a College as no press comments surfaced to report on its function based on the positive aspect that the College of Regulators was meant to collaborate and work closely with the Enterprise Consultative Council to issue guidelines on how to best comply with new laws and regulations particularly those targeting small businesses. To conclude the combination of the anticipated Family Businesses Act and the SBA if properly monitored can provide a much needed safety net.
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The writer is a partner in PKF, an audit and business advisory firm.