The UK’s family-owned businesses are built off the back of determination and entrepreneurial spirit. Their natural instinct when challenges arise is to navigate a path ahead and not slow down.
We see these qualities very clearly in KPMG’s latest private enterprise Pulse survey of 1,500 private business leaders, including 400 from family businesses. Despite market challenges, confidence levels over their future prospects are robust – 84% being positive about the path ahead.
Nevertheless, this is lower than for private businesses where the figure stands at a remarkable 96%. It is a sign that family businesses have undoubtedly come under significant pressure in recent times. The inheritance tax increases announced at last year’s Autumn Budget are the overwhelming issue here, with the rises set to come into effect in April next year. This has set the clock ticking for families to find a way ahead that preserves wealth and enables succession – with the first generation of founders in many businesses set to hand the business on to second and third generation family members in the near- to medium-term. In some families, these difficult and complex conversations have been put off for some time – but the changes announced have become the catalyst for them to happen. It’s about finding holistic and bespoke solutions based on each family’s individual dynamics across all the different layers: personal tax, business tax, legal and compliance.
But it is not only about IHT – huge though that is. Capital gains tax was also increased at last year’s Budget, eating into margins when releasing profits through that route. At the same time, increases to employers’ national insurance, combined with an uplift to the national minimum wage, have put significant additional pressure on cost bases.
Many family businesses are entirely UK-focused, but a growing number have begun to explore international markets – and here, the new US tariff regime, combined with ongoing global geopolitical volatility, have thrown additional cost and complexity into the mix.
It’s a challenging array of factors – but family businesses are certainly not throwing in the towel. Instead, they are planning to diversify to unlock new profit streams, with 60% looking to create new products or services, 47% planning to enter new markets within the UK or internationally, and 14% saying they are keeping themselves open to acquisition opportunities in the coming years.
They are also planning to invest in order to optimise their businesses – with the key area being technology, including AI. Over half (52%) name this as their top investment priority, followed by workforce & skills (38%) and sustainability (34%). This is encouraging, because there is no doubt that some family businesses have under-invested in technology over the years. Modernising the business through technology can also be a way of engaging and energising second and third generation family members to get involved. There are three principal buckets for this investment: cybersecurity and protection (a key risk in today’s threat-heavy environment); data frameworks and systems, which are foundational to generating decision-useful insights and also implementing AI; and go-to-market interfaces such as new digital channels and apps that are key to driving engagement and sales from customers who are increasingly digitally-oriented.
These are all important drivers of business success. But we are also starting to see other innovative ways in which family businesses are bolstering their resilience and safeguarding their futures. One of these is that some families are seeking to diversify their shareholder structures – bringing outside capital in. At KPMG, we have seen a number of our family business clients bringing private equity investors on board through a minority stake (perhaps 25-30%). This keeps the business in majority family control whilst unlocking new liquidity that can support future growth. When asked in our survey about the financing of business diversification, six in ten family business leaders said they would do so from their own internal funds – indicating a degree of financial strength – but private equity was the second highest response (35%) followed by government support/grants (25%).
The ambition of family businesses shines through in our research – but at the same time, they clearly signal that additional cost pressures would be highly unwelcome. When asked about the biggest potential negative impacts on their business, the joint highest response was further tax rises in the Autumn Budget (40%) alongside inflation. Employment costs were the next highest issue (32%). Asked what they would like to see prioritised in the forthcoming Budget, the strong consensus was business profitability (48%), ahead of skills & talent (32%) and technology adoption (28%). These responses were quite different to those of the respondent base overall, where measures to support technology adoption were the clear frontrunner.
This suggests that, while they are resilient, family businesses are looking to government for policy and taxation decisions that make their lives easier, not harder. Whatever happens, they will find a way – but if there are no more tax and cost rises around the corner, that will provide them with the runway to grow and use their entrepreneurial spirit to drive further value creation in the economy.
