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How family businesses can prosper post-Brexit

Family-owned entities can grow without dilution of their capital base, says Jonathan Schneider, executive chairman and co-founder of Capital Step, a provider of funds for growing businesses.

According to a nationwide study titled – A State of the Nation – The UK family business sector 2017-18- family-run businesses account for 88% of all UK firms (conducted by Oxford Economics for the IFB Research Foundation) . They operate in every industrial sector, across all of the UK’s regions, employing almost half of the UK’s private-sector workforce. In no small part, the UK’s family and regional businesses represent a significant proportion of Britain’s bottom line.

Family-run and regional businesses form the life-blood of the UK’s entrepreneurial landscape, and to see so many believe that the Government is not looking after this vital sector of the UK’s business community is concerning. Equally – it is apparent that the funding options available to established family-run enterprise seem to be eclipsed – in local communities – by corporate entities who have greater exposure to the most appropriate funding options. The role of the family enterprise, community SMEs and bricks and mortar productivity across the length and breadth of the British Isles must be considered a firm priority for the UK government – deal or no deal.

Transitioning the immediate aftermath of Brexit will be an acutely sensitive process; ensuring the foundations for a business community that can thrive and scale in the long term will lead the charge for a successful post-Brexit future – the UK economy is only as strong as the businesses and communities that uphold it.

However, the European institutions and mechanisms that benefit businesses in the UK have been rarely been discussed in the mainstream media. For example, ask the average man or woman on the British street to describe the workings of the European Structural Investment (ESI) program and the response would probably be a blank stare. The same would be true if you asked for an opinion on the work of the European Investment Bank or the European Investment Fund.

In 2016, little was said about these institutions and initiatives during the referendum campaign and, to be honest, amid an ever more clamorous debate on the shape of Britain’s future relationship with the EU, they are still not widely discussed.

For regional and family-run businesses, they do matter. For instance, an average of Euro2.5bn has been allocated annually to the UK from various ESI funds in the period between 2014 and 2020, according to British government figures, and the biggest percentage of that sum goes to projects designed to support SMEs. For its part, the European Investment Bank has advanced around Euro117bn over to British projects over its lifetime. Its priorities include supporting innovation and ensuring that SMEs have access to finance. Meanwhile, the European Investment Fund provides funding for VCs and around Euro2m has been pumped into funds operating in Britain. There are other funding initiatives too – such as Horizon, which was established to support innovation.

Post-Brexit challenge

The role that these institutions play goes to the heart of the political arguments within the UK over the costs and benefits of EU membership. Those on the remain side point to the good that the likes of the EIB and ESI do. For their part, proponents of “leave” will say that the UK would be better placed when it is funding its own programs.

But one thing is certain. As the UK disentangles itself from Europe, funding from these sources will dry up and while alternatives have been established, the beneficiaries are unlikely to see a totally smooth transition.

Successive governments and politicians have failed to fill a funding void for established businesses that do not offer the high-growth appeal of start-ups and the next round of FAANG companies. While this is not surprising, it has left a gap in which in established businesses have been left within. These mid-market entities (MMEs) are left with limited options to scale, develop, or re-invest into themselves. Popular television shows such as Shark Tank and Dragon’s Den have perpetuated an assumption that dilution is the only option available to these enterprises. For more established businesses, it is important that they have more flexible funding options open to them than just the Dragon’s Den model.

As both investors and entrepreneurs, we have witnessed countless examples of business owners having to give up control of their companies in exchange for funding. In many instances, even successful founders end up with a disproportionately small reward for their hard work upon exit as a result of having sacrificed too much ownership and control along the way. Alternative models are specifically designed to address this issue, by providing flexible capital solutions without existing shareholders having to give up ownership or independence in exchange.

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