Long-standing family businesses will be no stranger to the impact of a pandemic what with the 1918 Spanish Influenza recording more deaths than COVID-19 has so far. Though there’s no denying that COVID-19, along with government response measures, have had a large impact on many aspects of people’s lives, including attitudes to risk and bold decision making.
After some broad swings, GDP is on the road to recovery, but the evidence of economic scarring from the pandemic remains. Data from the Office of National Statistics indicate that average wages seem to be on a 3.5-4.9% growth trajectory even after allowing for COVID-19-related distortions, with some sectors seeing more than this. UK decision makers who lead in family and owner-managed businesses need to consider how their businesses remains fit for purpose.
There seems little doubt that the pandemic has reshaped the lives of individuals beyond a resurgence to today’s normality after ‘Freedom Day’. In terms of demand for personal living space, estate agents have spoken of families looking to leave cities such as London and take larger £1 million plus properties in towns in the home-counties. These can satisfy an increased demand for home offices for work, periodic home-schooling and gardens for children. This view was supported by Land Registry data for transactions in the first half of 2021 which showed more such homes were sold outside London than in it. For those who cannot easily move, perhaps due to Stamp Duty Land Tax - a tax on moving home - there has been a resurgence in ’home improvements’ as families look to make better use of available space.
As anyone who lives near a railway station knows, remarkably few individuals appear willing to travel on public transport into the main conurbations. It has been widely reported in the press that certain sectors, such as banking for example, were the first to encourage their employees to return to the office but hesitancy still remains a factor Employers have been obliged to rapidly implement major technological change allowing their employees to deliver skills in ways which are much more agile in terms of when and where work is performed. People have adjusted wardrobes accordingly and the traditional suit ‘which formed the basis of the office uniform is an increasingly rare sight. The real test of where the balance of power lies will come in the autumn as holidays come to an end and schools return.
There is a sense that we may be on the cusp of further major technological or societal disruption and this brings fresh business challenges. Businesses have had to adapt to survive the pandemic so far and the pace of change only seems to be increasing. For digital dinosaurs this future is probably best tackled by the younger generations and we are seeing family businesses increasingly willing to address the challenge of succession and generational transition.
Johnathan Dudley, Head of Manufacturing says,
“The pandemic has made everyone pause and reassess what’s important and family businesses are no exception. Whereas, in the past family members have grown into roles as much out of a sense of duty as expertise; post pandemic, there will be many family businesses who reflect on the purpose of the business, the skill sets needed to make it a success and whether they exist within the family and indeed whether the family have the motivation to fill or continue to fill, these roles. This can lead to family businesses contemplating a sale, where this might have been unthinkable in the past, or maybe some mechanism that drives expert, non family, management, to take the business forward with the family becoming the ‘private equity investor.”
The ability of a family business to survive such a change can determine its longevity; it is that longevity which frequently sets some family businesses apart from differently capitalised competitors. In addition, a pandemic-inspired heightened sense of mortality may have encouraged senior members of the family to consider their position.
Rebecca Durrant, National Head of Private Clients comments:
"Long standing family business owners who have been reluctant to think about or discuss retirement plans or inheritance tax have now been given a clear sense of their own mortality and have wanted to take advice on family wealth and succession planning to protect themselves and their families for the future. The support we give here can be more of a family counsellor role rather than tax planning to begin with. The tax advice is simply a foundation to build on to support their goals."
New business structures such as Employee Ownership Trusts have also helped business owners make the jump to retirement. Under the rules, a controlling interest in the company must be sold to a Trust whose object is to act in the interests of the employees. It is a highly tax-efficient exit for the owner and the hope is that the company’s success will continue in the hands of a board of Trustee who will be highly motivated to succeed.
Simon Warne, Tax Partner says:
“We have seen heightened interest in Trusts, and an increased number of transactions though it remains to be seen whether Trustees can make effective management decisions to run these companies profitably.”
While COVID-19 has impacted employment prospects for many of the younger generation, it has also acted as a catalyst for those towards the end of their working careers to re-evaluate their retirement plans. For some in the more mature age group, lockdown has afforded chance to take a look at traditional day-to-day spending and ask some big work/life balance questions such as exchanging unutilised gym memberships, competitive holidays and high spend eating habits in favour of culture, learning and gourmet home cooking. Those who have lost work may have had to delay retirement, but there are also those who through the experience of the pandemic have come to realise that they can in fact afford to retire early with the children leaving home and with an opportunity to enjoy life while fit and active.
Simon comments “Crowe are helping our family clients achieve their transition from one generation to the other and retirement goals. We have seen leaders in the family seek advice to understand their options to transition and the cost implications of doing this, whether it be tax, legal, banking or valuation related.” Even in property-focused family businesses where the costs of transactions and generational transfer are high compared to trading businesses, owners contemplating large impending inheritance taxes have shown themselves willing to contemplate lifetime disposals. This, triggers tax charges in order to release the funds necessary to move the main property portfolio now rather than waiting for death. Large transactions such as these need to be handled with care but once transition is fully achieved, the new ownership structure allows the majority of the portfolio to be managed and protected for the second generation and beyond. Structures such as Trusts and investment companies also permit better control of income flows.
The pandemic has acted as a change accelerator, causing everyone to re-evaluate their priorities on to live, work, spend their leisure time and how to choose to interact with the world. Many family businesses have shown resilience when times were tough and a willingness to adapt to today’s reality.
Rebecca adds, “It is clear that the pandemic has affected families and their attitudes to business significantly. With the clients I work with, while innovation has been key to survival throughout the pandemic, some of the biggest changes have been to mindset and priorities for the future. I have worked with entrepreneurial family businesses who were excited to expand pre COVID-19 but now want to completely rethink their plans. This has meant more consolidation of the business including preparation for sale and succession, moving away from the 16-hour days spent running a business to a better work/life balance and family time. Strategic thinking is more important now than ever.”
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