Additional hurdles for family businesses

FINANCE looms as one of the main issues concerning family-owned businesses.

Nearly half of WA’s 116,300 small businesses are family operated.

While the finance issues facing family-owned businesses are the same as those facing other small business, there are a few added twists.

Family Business Australia WA chapter chairman George Kailis said family businesses had to consider issues such as the company’s name, control and generational change when weighing finance options.

Like other businesses, family-owned businesses have to decide whether they are seeking debt finance or equity finance.

Horwath-Perth audit and corporate services partner Glyn O’Brien said business-owning families had to decide whether they were raising finance, looking to sell the business or taking the company public.

“In raising equity capital we are looking for funding to grow and expand,” he said.

“In selling the business we are looking for an exit strategy. This is a big picture decision.

“If a family-owned business is to grow past its borrowing capacity and its ability to accumulate profits, it will need to accept equity partners.”

Mr O’Brien said besides having a business plan, family-owned businesses needed to have a family plan that addressed ownership, compensation, employment, shareholder rights and obligations issues.

Like other businesses, family business owners needed to consider whether they were prepared to sell part of their business to an equity partner.

Mr O’Brien said selling part of the business was one of the most wrenching decisions for a family-owned business.

“The opportunity to cash in or raise equity from a partial sale must be weighed against family hopes for generational succession that may promise pain and carry no guarantee for success,” he said.

“There are times when selling is best for the family and the business.”

As with any business, listing on the stock market may be the best way to achieve its aims.

However, with family-owned businesses, the amount of shares the family holds can be an issue.

Mr Kailis said the stock market usually was wary of a family-owned company that listed but kept 40 per cent of its stock in family hands.

Clough Engineering, a family-owned business that grew to become a public company, has been a concern to the share market because of the amount of shares the Clough family holds.

The Clough family, through their company McRae, holds 60 per cent of the Clough shares. Employees hold about 6 per cent.

DJ Carmichael senior analyst Peter Strachan said there were concerns the size of the family holding made Clough shares illiquid.

“Last year only 20 million Clough shares were traded – about 5 per cent of the company’s issued equity,” he said.

“Leighton, on the other hand, had 107 million shares traded – about 40 per cent of its issued equity.”

Mr Strachan said despite the share liquidity issues, going public had borne benefits for Clough.

“It added some prestige to the Clough brand, which was already well regarded in the engineering industry, and brought some extra internal disciplines to the company,” he said.