Ireland’s resilient family businesses reboot the economy

Family businesses employ more than 700,000 people in Ireland, generating up to 50% of the country’s wealth. Approximately three-quarters of all Irish-owned enterprises are family businesses — a sector which has proven very resilient in its response to challenges such as the pandemic and Brexit.

Small business owners were quick to engage with national supports helping them navigate these challenges, in addition to prioritising questions around succession planning.

“Every business saved is at least one job saved, a livelihood secured and a family sustained. The financial support the Government is providing to businesses and workers in unprecedented times,” Leo Varadkar, Minister for Enterprise, Trade and Employment, told his Oireachtas colleagues in February 2021.

One example of the State’s support for business during Covid-19 is the €90 million Sustaining Enterprise Fund. Offering funding of up to €800,000, with €200,000 or 50% in non-repayable grants to eligible manufacturing and internationally traded services companies, helping to protect 22,000 jobs throughout the State.

Similarly, the Restart Grants funded by the Department of Enterprise, Trade and Employment, offered grant aid of between €2,000 and €10,000 to small businesses with a turnover of under €5m and employing 50 people or less.

Another clear sign of the sector’s resilience was the significant number of small businesses, many of which are family-owned, upgrading their online engagements with their customers. Cork City’s Local Enterprise Office saw a 1,200% increase in the number of trading online vouchers to improve online presence and provided issued to SMEs last year.

Family-business owners have been quick to seek out qualified and experienced advice. Here are leading business people with advice very relevant to the current business environment.

Aidan McLoughlin, Group MD of Independent Trustee Company, offers advice on why people should keep their pension plan separate from the family business

A family business can generally be defined as a concern that the founder has created and built up over many years - but the failure rate of these businesses is significant when it gets to the third generation.

“When it comes to third generation, only 5% of them continue to survive - so the process of transferring along is a very serious one,” explains Aidan McLoughlin, Group Managing Director, Independent Trustee Company.

“A fair amount of effort has been put in over the years by the Government in trying to ensure that transfer occurs as smoothly as possible. The vast bulk of businesses in Ireland are family-owned, and are not alone important to the families and the communities in which they operate, but also to the State.”

Independent Trustee Company specialises in the provision of retirement and investment structures and related advisory services. Established in 1993, the business addressed a gap in the market for individualised pensions. Aidan went on to set up other related companies, namely Independent Trustee and ITC Consulting, which together comprise the ITC Group.

Financial independence

“One of the ways these companies remain successful is by keeping the money within the business to ensure it survives,” he says.

“The net effects of that and one of the things that tends to get neglected is personal pension funding for the principal. And when it comes to passing on the business to the next generation, that is often one of the fundamental that has to be addressed.

“Serious consideration needs to be given to ensure that they have financial independence through their pension scheme, independent from the business.”

He adds that the State has ensured that pensions are ring-fenced from the business, so that any possible subsequent failure of that business will not come back to bite them.

“Pensions can also help financial planning via certain tax reliefs available, but what happens on the balance sheet can dilute those tax breaks. Moving them into a pension fund not only allows the owner a secure retirement, but also ensures that the transfer is more tax efficient.”

A graduate of UCD, Aidan qualified as a solicitor and a tax consultant in 1987. He is a Fellow of the Institute of Taxation in Ireland and a member of the Law Society of Ireland, the Society for Trust and Estate Practitioners, the Association of Pension Lawyers of Ireland and is a Fellow of the Irish Institute of Pensions Management.

“The fact is that businesses do fail, and that can happen in the first, second or third generation. Failure can occur for variety of reasons, and it is not necessarily down to the skillset of any following generation. In many cases, it can be down to diversifying away from what the business was good at in the first place.”

In terms of how pension funds can impact on national economies, Aidan cites the Australian model: “The Australian economy has enjoyed 25 years of growth, helped in no small way by 80% of that money being invested back into their economy. In an Irish context, a significant amount of pension funds are invested outside of Ireland, in shares of companies across the EU, the UK and the US.

“These funds are not being invested into Irish enterprises, roads, hospitals or social housing. With all of the consultations that have taken place, where the money goes is not focused on. Allowing pension fund trustees to invest 10% locally, in effect ‘wearing the green jersey’, would release up to €15 billion into the Irish economy. The opportunities are there, but are not being recognised.”

James McMahon, Head of Tax, Grant Thornton Cork, says indigenous Irish businesses have a strong history of investing in R&D

Entrepreneurship and innovation are synonymous in business, and you rarely have one without the other, according to James McMahon of Grant Thornton.

“In Ireland, the entrepreneurial spirit and innovation go hand in hand in helping businesses find an advantage over their competitors,” he explains.

James leads Grant Thornton’s Innovation Tax team providing advice to a wide range of clients from SME’s to large multinationals. His experience includes a broad range of sectors including financial services, manufacturing, food & beverages and technology.

“In addition, Irish businesses are incredibly quick to respond to change and quick to listen and take note of observations from suppliers and customers.

“Because they are smaller than the larger corporations, there is less red tape internally and thus they can get new products and services out to the market without any of the bureaucracy that exists in bigger companies,” he says. “Smaller businesses are close to their customers can respond more readily to changing market conditions.”

The combination of that responsiveness to change allied to the agile nature of indigenous Irish business very much lends itself to innovation.

“Irish indigenous businesses, when they do focus on innovation, invest seriously in R&D,” James notes. “Innovation should be risky, but not too risky, and that kind of realism encourages the kind of innovation that develops new products and services that customers want.

“Smaller companies don’t have huge amounts of money to invest in R&D, but when they do it is done for a particular reason.

“Bigger companies and organisations have large R&D budgets and can do more ‘blue sky’ type of research, whereas smaller enterprises with less resources have to be meticulous as to how this kind of money is spent. Small companies take risks, but are conscious of limiting the amount of those risks.”

The government recently introduced a 30% tax credit for SMEs, in effect assisting indigenous Irish businesses who undertake R&D and innovation.

“However, while such a credit is geared to assisting small business and signals the Government’s intention to support the sector, unfortunately the legislation has not yet been signed off which means companies cannot avail of the 30% as it currently stands.

“Certainly when Covid happened in 2020 various obstacles were put in place, but this 30% credit is important to support innovation for indigenous businesses and needs to be put in place as soon as possible.”

Succession planning is another area of concern for family businesses, James points out, an area that is quite cumbersome from a tax perspective.

“We are finding more often recently that family businesses are being sold as opposed to being passed onto the next generation. There is significant venture capital money going around, which is good news to a certain degree.

“The concern would be that there are many Irish businesses now switching hands, which would traditionally have switched on a lineal generational path through second, third and fourth generation.

“While many businesses are now being bought earlier by foreign multinationals and realising a their value, it would be great if there were other incentives for family businesses to remain within the family.”

When withdrawing funds from a family business, money is taxed through income tax, USC and PRSI which can lead to a tax rate in excess of 50%, whereas selling the business will incur considerably less tax at CGT rates of 10% and 33%.

Financial planning is vital to succession in any family business, advises Éamon Dwyer of Invesco Cork and Miceál Gunning of Invesco Dublin

Proper succession planning is always a key challenge in every family business, and one that Invesco Senior Financial Planning Consultant, Éamon Dwyer has assisted clients with throughout his career.

“Coming from a family business myself, I saw first-hand the importance of this aspect of planning. Experience has demonstrated time and again that when it comes to the succession process, passing a business from parent to child, the parent might not be in a financial position to complete the process, particularly if it cuts off an income stream in retirement.”

Invesco celebrates 30 years in business this year. Central to its longevity and success has been its ability and experience in guiding family businesses and SMEs over those three decades through succession, the transition and exit process. Éamon is a Certified Financial Planner and joined Invesco in 2019 following Invesco’s acquisition of City Life, which itself was a 2nd generation family business.

“One of the great tools when planning for succession is the pension fund, a facility which, if appropriately managed, can assist a smooth transition as the principal moves into a financially secure retirement.”

The pension fund is a vital tool, particularly for small and medium sized family businesses, greatly assisting in the successful transfer of an enterprise from one generation to another.

It can truly make the first generation business owner financially independent of the business which he or she founded from scratch.

“There is a final point on this, which in effect resembles a well planned circle of life. When mum or dad retires the pension rules in Ireland allow for the remaining pot of money in the pension fund to be divided amongst other children, who are perhaps not in the business, when that owner eventually passes away.

“This way of passing assets to the next generation is important to consider when deciding on succession in family business. It can facilitate transferring the business to just the one key child, rather than handing it to a collection of family members who might not be interested or capable.”

However, it is an unfortunate commercial reality that the current owner of a family business — the company’s most important asset — is often the most forgotten about in this financial planning process.

“Owners are so anxious to grow the business, devoting time to nurturing customers, safeguarding employees and maintaining the facilities, they often forget about the key to the whole operation - themselves,” explains Miceál Gunning, Invesco Wealth Management Director.

“We always try to highlight to owners various ‘what if?’ scenarios, and these are best discussed at least 10-15 years before a founder director is considering handing over the reins. Issues such as - considering what might happen in the event of serious illness or incapacity, or indeed should the owner unexpectedly die. Is there someone in the family capable of then stepping up, should a critical health event happen when the next generation are too young, and what effect would this have on the business? These are basic financial protection issues that owners will often not think about, be they sole traders, partnerships or limited companies.”

Miceál joined Invesco in 2000 having previously held positions with Ulster Bank and Bank of Ireland. A Certified Financial Planner, he leads the Invesco Financial Planning Team, specialising in providing holistic and goal based financial planning to business owners, company executives and families.

“Another area of importance is making sure that Wills are up to date, and that a necessary Power of Attorney is in place, a document which outlines the owner’s wishes on the continued running of the business in the event of incapacity or inability to do so themselves.

“We see time and again situations where owners take the view ‘that won’t happen to me’ — but unfortunately it does.”

CSO statistics underline the reality that, in a three-person business, there is a 50% chance that one will suffer a serious illness between the ages of 45 and 65, and a 30% chance that one of them will die.

“Our advice is of course to focus on the positive, but to also keep an eye on the rearview mirror by taking care of basic housekeeping issues. Make sure those key-person insurances are properly in place for the owner and the key management team in the business. Without the appropriate business protection in place, the best laid financial plans can come unstuck.”