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The family business sector's access to finance and its response to the global financial crisis
The sixth and seventh articles of the terms of reference direct the
committee's attention to the capacity of family businesses to access to finance
and insurance, and their resilience in response to the global financial crisis (the
GFC). This chapter addresses these issues.
A family business or a small and medium enterprise?
Chapters 2, 3 and 4 of this report noted the lack of reliable official
data on most aspects of family businesses in Australia. This is also the case
in terms of family enterprises' access to finance and insurance, and the
sector's resilience in the wake of the GFC.
The committee's evidence about the family business sector's access to
finance and resilience following the GFC was predominantly focused on small and
medium family enterprises.
Data on large family businesses was limited.
Evidence received from Authorised Deposit-taking Institutions (ADIs) and
financial regulators particularly illustrated the overlap between SME data and
family business statistics. The Reserve Bank of Australia (the RBA) advised
that it 'would not profess to have any specialist knowledge about family businesses'.
Rather, the RBA 'focuses on small and medium enterprises' reflecting its 'area
of particular interest, which is monetary policy and how decisions on monetary
policy are flowing through to small, medium and large businesses'.
In response to a question on the importance of distinguishing between
family and non-family enterprises, the RBA advised that such data 'is not
irrelevant'. However, at this time the RBA does not perceive any clear benefits
to isolating family business data:
It is not irrelevant. It is about the marginal benefit of
going down that route versus the cost. For us, we may not decide that the
benefits would be enough, because we think we get enough information on small
businesses. But if you are trying to develop policy and family businesses you
will have a different view on that. In an ideal world, the statistical form
that people fill in would be bigger and there would be a field to do with
family businesses. That would let you slice or dice the information in the way
that you wanted to instead of adopting a single standard everyone.
Similarly, the Commonwealth Bank of Australia (the CBA) advised that it
'does not categorise information from our customers on the basis of
"family" as opposed to "small" business'. The CBA also questioned
the practicality of isolating family business data from non-family businesses,
advising that 'it is difficult to distinguish a "family business"
from a "small business" from a policy perspective'.
The RBA acknowledged the limitations in the statistics presented. As Mr Christopher
Alymer of the Domestic Markets Department advised:
I would like to...draw the committee's attention to the fact
that a lot of the observations we have made in the supporting documentation
have actually been focused on small and medium-sized enterprises as opposed to
family businesses. To a large degree that reflects the availability of
statistics, if the truth be known.
The lack of a clear demarcation between SME data and data focused on family
business was also evident in representations of family business advisers and
others concerned with the family business sector. For example, BusinessSA, Bond
University, and the Institute of Certified Bookkeepers, oscillated between
references to the family business sector and references to SMEs. Accordingly, data was
extrapolated from SME statistics and conclusions were based on inference. The
submission from Deloitte Private is illustrative of this approach:
Commercial banks have significantly reduced their lending
since the GFC, particularly to small and medium businesses in which family
businesses predominate...many family businesses have difficulty accessing bank
funding. According to the results of the above-mentioned CPA survey on small
businesses, 32 per cent of small businesses seeking additional financing in
2011 found it difficult or very difficult. 
Similarly, the Chamber of Commerce and Industry Queensland (CCIQ) linked
the family business sector to the SME sector. It advised that 'many small
businesses reported adverse impacts as ongoing following the GFC, and family
businesses as a subgroup of SMEs was not immune'.
Submitters' acknowledgement of data
The lack of targeted data was also the subject of comment by family
business advisers and academic researchers. It was strongly submitted that
there would be economic benefits to obtaining data specific to family
businesses. For example, in their joint submission, Dr Chris Graves, Professor
Mary Barrett and Dr Jill Thomas identified three potential benefits
of longitudinal data about the financing preferences of family businesses.
First, the data would increase understanding of the impact of business culture
on the sector's economic performance. Second, the information would lead to
more targeted professional advice and ultimately 'allow external advisers to
help family firms professionalise their management and governance structures'. Third,
the data would broaden the scope of finance available to the family business
sector, as a more professional sector would more easily attract private equity
Access for small and medium
business to finance
The committee's analysis of the family business sector follows its earlier
inquiry into access to finance for SMEs. Reporting in April 2011, the committee
considered the types of finance that are available to SMEs, the degree of competition
in SME lending, and the impact of prudential regulation and the GFC on the
availability of finance.
The committee's inquiry found that while Australia weathered the GFC,
the crisis reduced the number of providers and increased the cost of finance.
SMEs continued to have access to finance, albeit on less favourable terms. Notably,
SMEs appeared to fare better than large businesses. Lending to large businesses
declined dramatically while lending to SMEs declined more modestly and recovered
Figure 8.1: Bank lending to business
In evidence provided to this inquiry, the RBA confirmed that growth in
lending to small business has accelerated since the height of the GFC.
Committee view: a word of caution
The utility of evidence from ADIs and the RBA is limited. This evidence was
largely extrapolated from SME data and is based on inference and supposition.
The committee further notes that it is not a broad sample of the banking and
finance sector. The committee invited 18 ADIs, and other lending and insurance institutions,
to contribute to the inquiry. Despite this, only two lending institutions—the
CBA and the Commercial Asset Finance Brokers Association of Australia—participated
in the inquiry process. Notably, no representations were made by members of the
mutual banking sector. No representatives of the insurance sector participated
in the inquiry.
Noting these limitations, the committee draws general conclusions about
the sector's access to finance and insurance, and resilience in response to the
GFC. Where possible, it compares family and non-family enterprises. In doing
so, the committee seeks to identify any overlap in circumstances faced by
family businesses and the SME or large business sector.
Access to finance
A theme that emerged from the committee's 2011 inquiry into access to
finance for SMEs was the significant link between business lending and business
growth and profitability. As the committee was advised at the time of that inquiry,
SMEs 'need financial support to grow and thrive'.
Evidence submitted as part of the committee's current inquiry indicated that
the family business sector places the same emphasis on the importance of access
to financial resources.
PricewaterhouseCoopers told the committee that in the international
context, securing access to finance is a critical issue common to family
businesses regardless of geographical location. The PricewaterhouseCoopers' 2012
survey of approximately 2000 family businesses from Africa, the Asia-Pacific, the
Middle East, Europe and Canada found that 'family businesses often face
difficulties accessing significant levels of new capital to fund expansion'. For
Australian family enterprises, accessing finance is reportedly one of the
critical issues demanding the businesses' attention.
The link between access to finance and the health of the family business sector
was family business owner, Mr Robert Pennicott: 'without bank assistance we
would not have been able to expand in the way we have, for sure'.
The New South Wales Business Chamber told the committee that the health
of the family business sector is linked to the health of the economy and the
community. It argued that any difficulties accessing finance have ramifications
that extend beyond individual family businesses:
[A]t the end of the day what we are missing out on is
opportunities. This is the 30 per cent who had to forgo growth and expansion
opportunities. There is a cost to jobs and there is the cost to local
communities and the broader economy as a result.
The experience of family
enterprises compared with non-family enterprises
Views differed on whether the difficulties encountered by family
business are greater than those experienced by non-family enterprises. On the
one hand, the committee was advised that the difficulties encountered by family
businesses do not measurably differ from non-family enterprises. Conversely,
the committee was told that family businesses encounter challenges unique to
the family business sector.
In support of the proposition that there is little to distinguish the financial
experience of non-family enterprises from family businesses, family business
owner, Mr Andy Kennard, reported that there is '[n]othing different due to
being a family business'.
The Commercial Asset Finance Brokers Association of Australia reported that its
members experienced similar challenges regardless of whether the entity is a
family or a non-family business.
The Agribusiness Council of Australia observed that access to finance, and the
cost of finance, 'is not significantly affected by the status of the business
being a family business'. Further, the Agribusiness Council of Australia
maintained that businesses status as a family enterprise 'is of little or no
consequence to finance providers'.
Similarly, while acknowledging slight variances, the New South Wales
Business Chamber reported that barriers to finance do not significantly differ
between family and nonfamily enterprises. Commenting on the results of its most
recent quarterly survey of business conditions among its membership, the Chamber
advised that family businesses were more likely to have had a formal loan
application formally rejected. It found that in terms of loan approvals, family
...somewhat more likely to have been rejected: 26 per cent
versus 19 per cent of businesses of their type that actually applied. Overall,
though, the indication is that family businesses had about the same level of
problems accessing finance as other businesses.
In contrast, several submitters characterised the family business sector
as unique, particularly in the area of business finance. The Australian family
businesses that participated in PricewaterhouseCoopers' 2012 survey submitted
that the barriers to accessing funding are greater for family businesses than
for their non-family counterparts. The apparent, but unspecified, additional challenges
are reportedly among the 'downsides' of operating a family enterprise. Bond
University also commented on the challenges that may be unique to the family
business sector, noting that the desire to retain control within the family can
limit available financing options and, accordingly, exacerbate the 'SME finance
gap' for family businesses.
Submitters also commented on the effect of governance structures on the
sector's capacity to access finance. Several family business owners advised
that the more sophisticated and experienced a family business is, the easier it
is to acquire finance. Councillor Steven Kons, Mayor of the Burnie City
Council, speculated that the more informal, community-based management style of
family businesses can hinder businesses from accessing finance:
It is probably easier for non-family businesses. The level of
sophistication and capacity to prepare documentation is much easier for
non-family businesses, because when you are on top of it, and you are having a
look at your daily cash flows and those sorts of things, you tend to gloss over
the detail that other entities—whether it is banks or financiers, you know it
inside out; if you are a small company that reports to someone else you have
those at hand and you are distanced from it. I know exactly how much money I
have in the bank, how much is coming in and all those sorts of things. So in
relation to the expectations of banks and other agencies that may be interested
in my business: I know them, so I gloss over them when it is necessary to
provide them. That is probably an impediment because of the hands-on way we run
It was implied that family dynamics and future planning are relevant to
the sector's capacity to access finance. Mr Albert Beard, Chairman and Managing
Director, A. H. Beard Manufacturing, argued that the education and experience
of family members is a criteria considered when seeking finance:
Because our business relies very much on cash flow lending, the
quality of people at the business is very high on the agenda, without involving
bricks and mortar. So yes the qualifications are very important to what I know
about the ANZ bank. They are probably already ticking those boxes themselves.
Similarly, Mr Mark Cleary, a business adviser to the Gosford-based
family firm, Sharpe Bros, spoke of the relevance of governance structures and
succession plans to family businesses' capacity to access finance.
It was further submitted that the funding preferences of family
businesses distinguish the sector from non-family enterprises. SMEs can access
a combination of debt and equity finance, which can include internal funding,
owner equity, venture capital, secured and unsecured intermediated credit, and
bank bills. Overall, however, SMEs primarily rely on debt funding from ADIs
followed by internal resources.
In contrast, anecdotal evidence before the committee indicated that the
funding priorities of family businesses differ from that of the SME sector more
broadly. It was apparent that family businesses access a mixture of debt
finance, equity and reinvestment of business profits.
From the available anecdotal evidence, a funding hierarchy emerges with
own-source funding by way of family loans or reinvestment of profits being the
preferred source of finance.
As KPMG advised, bank debt is incurred only after own-source funding options
have been exhausted.
As explored below, private equity was reportedly the least favoured finance
This hierarchy, it was suggested, reflects the conservative mindset of
Chapter 4 identified the conservative, 'patient capital' approach to business finance
as a key point of difference between family businesses from non-family
enterprises. As Institute of Chartered Accountants Australia (ICA) reported:
[r]esearch and anecdotal information indicates that family
businesses tend to be more risk averse and desire to retain greater control
over their business affairs than non–family businesses. This is reflected in
their appetites for credit, with greater use of bank finance and lower use of
external sources of equity finance.
Bond University agreed with this view, advising that the reliance on own
source funding is particularly pronounced for smaller family businesses:
[S]mall family businesses in particular tend to rely heavily
on family loans, rather than loans to outsiders as a source of finance.
Consistent with their noneconomic objectives, these preferences protect the
family's influence over the firm's operations...family firms will utilise more
internal rather than external sources of finance.
On the basis of available research, Bond University concluded that while
SMEs can rely on own-source finance, there is a greater reliance on internal
equity among family businesses.
Concerns with access to ADI debt
Family businesses and their representatives reported four concerns with
debt financing from ADIs. The first of these is the lack of competition between
lenders. The committee was advised that the majority of family businesses
borrow from 'the Big 4' as opposed to smaller lenders or the mutual sector.
Pitcher Partners argued that there is a lack of banking competition within
the Australian market, which presents challenges for family businesses:
With access to debt funding, there is a current lack of
competition in the banking sector that acts as an impediment to family
businesses. The loss of St George into Westpac and Bank West into CBA during the
immediate aftermath of the GFC removed two emerging and competitive financial
institutions from the market place. This void is slowly being filled again but
it will take many years for rising institutions to reach sufficient critical
mass to be truly competitive and have the breadth of finance options available.
Pitcher Partners further submitted that the absence of competition undermines
family businesses' capacity to negotiate favourable finance terms:
Examples have also been noted of what could be described as a
brinkmanship approach by financiers to re–negotiation of facilities at a time
when alternative options are few. The lack of competition therefore has a real
cost to family business and influences its competitiveness.
MGI Australasia also argued that there is currently a lack of choice and
product diversity in the Australian ADI market:
The Australian banking market is dominated by the Big 4...Whilst
the existence of four players should in theory lead to substantial competition
the reality is that it does not and the offerings of these 4 banks are
constantly very similar and rarely substantially different...The other smaller
banks have been regularly acquired by the Big 4 over the last decade so that
the remaining smaller banks are ill placed to provide meaningful competition
across the full range of products.
MGI Australasia also submitted that the absence of meaningful competition
increases operating costs for family businesses:
By world standards Australian banks are extremely profitable.
Large public listed corporations and multi–national companies are the only
enterprises in the Australian economy that can extract competitive deals in our
banking market. The result of this lack of real competition is that family
businesses are incurring substantially higher funding costs than their
competitors in other world markets.
Second, it was submitted that the terms and conditions of ADI finance
are inappropriate for family businesses. Several submitters noted that family
businesses may be required to blur the boundaries between personal and business
assets in order to secure business finance. Commenting on her experience as a
family business owner, Mrs Janice Taylor of Taylor Bros. Holdings Pty Ltd,
informed the committee that:
[t]o enable finance to be put in place it is usually an
expectation of the financial provider that the business
shareholders/directors/family members will provide asset backing whether it be
business premises, private property, private share holdings, or any other
privately held assets.
Mr Michael Claydon, the Managing Director of the Perth-based firm National
Corporate Training Pty Ltd, recounted a similar experience:
We are in the growing phase and we find it extremely
difficult to get finance from banks. You basically need to have it to get
it—that is the thinking behind banks. I do not know whether there is any
particular issue with family business versus a standard business, but certainly
the basic rule is that if you do not have it you cannot get it. The only way to
get finance is to put your home up as part of the collateral.
Family business advisers also commented on this practice. Pitcher
Partners noted that accessing even a 'modest amount' of capital will
'frequently...involve pledging private assets such as a family home as security'. A 2009 KPMG survey
of family businesses observed that finance options can merge a family's private
life with the family's business ventures. It found that 41 per cent of
directors in a family business had given personal guarantees to obtain debt
funding. In contrast, only approximately 25 per cent of non-family businesses
surveyed reported giving personal undertakings in order to secure business
Family business advisers told the committee that the security
requirements indicate that the ADI sector that does not appropriately support
family businesses. The ICA submitted that it is the value of security, rather
than the success or the viability of the business, that determines a family
business' capacity to access capital.
Deloitte Private argued that the requirement to provide security limits the
growth of the family business and hinders family businesses from reaching their
As shown in the CPA survey, the commonly cited difficulty in
accessing bank funding related to the willingness of the financiers to provide
the funding. Other factors include the reluctance of financiers to provide
cashflow based loans to small and medium sized enterprises, which includes many
family businesses. Consequently, a family business' ability to fund its growth
potential is often constrained by the security available to be offered. Many family
businesses are reluctant to provide security and therefore face a funding
squeeze when seeking to financing their growth potential.
Ultimately, it was questioned whether ADIs are willing to engage with
the family business sector. As the Institute of Certified Bookkeepers stated:
It also appears in the current banking environment family
business is not supported by the lenders. Without family providing security
(the house, or other property, personal guarantee), a family business cannot
generate the finance. It would appear that the lenders do not in fact a wish to
lend to a family business but will lend to the family if there is sufficient
security and other income to service the debt.
The accountancy firm, FINH, argued that the reticence of the ADI sector
to engage with family businesses requires family businesses to merge private
and business assets, thereby increasing their reliance on family funds and
Third, it was argued that the risk ratings attached to family business
finance applications are inappropriate. Deloitte Private noted that in response
to the GFC, the level of funding had decreased while the cost of funding has
While acknowledging the higher costs of long-term wholesale funding, Deloitte
stated that the business lending rate has remained relatively unchanged from
July 2006 to September 2012.
The New South Wales Business Chamber reported that it is a widely held view
among family and non-family businesses that in response to the GFC, lending
conditions have become 'too strict'.
The ICA also disputed the SME loan rates, noting that the RBA interest
rate cuts have not been passed on in full.
It noted that debt finance has been difficult to access for many businesses,
with banks in the current economic environment tightening eligibility requirements.
Pitcher Partners also questioned whether ADI finance appropriately takes
account of family businesses' financial acumen or potential:
[D]uring the aftermath of the GFC, many family businesses
were, and are still, striking maximum lending limits that capped a bank's
exposure to any one customer. These limits were often arbitrary and did not
reflect the size of the business or its prospects.
The committee did not receive an indication from ADIs that the finance
applications of family businesses are considered separately to the finance
applications of non-family enterprises. As the Agribusiness Council of
Australia told the committee:
There is a high level of indebtedness. I do not want to go
into banking 101, but banks fundamentally risk rate all industries. They risk
rate them based on their perceived loss. That perceived loss is not necessarily
an actual loss, but they rate them and charge interest rates based on whatever
the risk rating is for those particular clients. So there is the perception and
there is the reality. The reality is that agriculture is not as high a risk as
the banks have perceived it to be. I think the GFC has had a part to play in
this in terms of banks being, not reluctant to lend, but looking more closely
at their lending policies with regard to which industries they lend to and how
they lend. If you had family businesses as a separate class...the banks would
develop their own risk strategy around the family business category and
therefore they would risk rate it accordingly.
Packer Leather provided a personal account of the risk categories
applied by ADIs, reporting that ADIs are very risk-averse:
Our Australian Banks are extremely adverse to any form of
risk! The risk analysis of our business – an exporter and manufacturer
certainly does not give them a lot of confidence in our industry...The finance
models that they use for risk assessment seemingly make no or little allowance
for the personal factor – who they are supporting.
However, these concerns were not shared by all family businesses that
contributed to the inquiry. Mr Robert Pennicott, Managing Director, Pennicott
Wilderness Journeys, described the family business sector as being in
partnership with ADI sector:
I have a bit of a philosophy with banks that we need each other...We
do borrow a lot of money from one bank. We are very fortunate that we have had
a very good relationship with our bank and they bend over backwards to help us...personally,
I think our bank has been very fair and reasonable. Obviously we can complain
about fees, interest rates and everything that goes with it, but without bank
assistance we would not have been able to expand in the way we have, for sure.
It was further contended that the introduction of the Basel III
prudential regulations would increase the cost of business finance. Developed
in response to the GFC, Basel III aims to improve the banking sector's ability
to absorb market shocks arising from financial and economic stress, whatever
the source, improve risk management in governance and strengthen banks'
transparency and disclosures.
As the Australian Prudential Regulation Authority (APRA) has stated, the global
liquidity reforms are intended to remedy weaknesses in the international
financial framework that existed at the time of the GFC:
The Basel III capital framework was introduced by the Basel
Committee on Banking Supervision in December 2010 to raise the quality and
consistency of the capital base and harmonise other elements of capital. In addition,
Basel III improves the risk coverage of the Basel II Framework by strengthening
the capital requirements for counterparty credit risk exposures arising from
banks’ derivatives, repurchase and securities financing activities.
However, Deloitte Private noted that measures that are intended to
promote economic stability may adversely affect the financial stability of
family enterprises. Citing the opinion of the NAB Chief Financial Officer,
Mr Mark Joiner, Deloitte Private, advised that the impact of the
Basel III capital requirements will reduce the available finance for SMEs and,
accordingly, increase finance costs.
The concerns raised are not unique to the family business sector.
Similar concerns were raised by SME representatives during the committee's 2011
inquiry into access for small and medium business to finance. SME
representatives also disputed whether the interest rates attached to SME loans
actually reflect the cost of, and risks associated with, providing SME finance.
Family finance and private equity
The committee was informed that private equity is an underutilised financial
resource for the family business sector. It was reported that family businesses
are reluctant to engage with the private equity sector. According to the
Council of Financial Regulators, 'private equity' encompasses two forms of
investment. Firstly, private equity refers to 'venture capital'—the investment
of equity funding in small and relatively high risk companies with strong
growth potential. Secondly, private equity can include 'the acquisition of a
public company by a group of investors who take the company ‘private’, delisting
it from the stock exchange'.
According to PricewaterhouseCoopers, private equity 'is a term for pools
of capital, managed by professional fund management teams, specifically to
invest in unlisted companies'.
As outlined by PricewaterhouseCoopers, in exchange for providing capital private
- obtain a share in the company;
- typically establish closely monitored performance targets; and
- generally retain their share for three to five years. At the end
of the investment period, the private equity fund will sell its share of the
company to 'a suitable acquirer'.
MGI's 2006 Australian Family and Private Sector Survey found that
external equity is the 'least favoured' finance option for family businesses.
This reluctance was linked to the conservative, family-orientated nature of
The committee was advised that family businesses' desire to retain control of
the business acts as a significant deterrent to obtaining private equity
finance. Bond University reported that numerous research projects 'have found
that the financial development of family firms with regard to equity is
governed by a "keep it in the family" tradition'. Bond University
further advised that 'these characteristics suggest that family SMEs tend to
have a more limited external equity financing base, but a wider base of
internally generated equity'.
Professor Ken Moores characterised the short-term focus of
private equity investments as 'an anathema to the value system of a family
Similarly, Deloitte Private commented that the objectives of family firms are
not easily reconcilable with the investment strategies underlying private
equity finance. The committee was advised that the short-term, high risk outlook
of private equity investment is inconsistent with the 'patient capital'
approach preferred by family businesses:
An additional hurdle to raising private equity funds for
family businesses is the mechanism by which private equity investors realise
their return on their investment. Private equity firms generally strive to achieve
cash on cash returns of three times their investment in three to five years.
Such an investment horizon and growth imperative (often coupled with a more
aggressive debt appetite) is often not aligned with the goals and objectives of
the family members.
It was also noted that private equity investors may be reluctant to
engage with family businesses. Separate to this inquiry, PricewaterhouseCoopers
has noted that the 'majority of deals [by private equity firms] involve small
and medium-size enterprises'. However, it defined SMEs as firms valued between
$10 million and $100 million.
Deloitte Private told the committee that family enterprises seeking
capital to fund expansion may not meet the investment criteria applied by
private equity firms:
Australian private equity firms, which could be valuable
sources of equity capital for family businesses, are generally focused on
larger and more mature businesses to maximise their return on investment in the
current economic environment. The majority of private equity firms look for opportunities
to write equity cheques starting at $10m - $20m which, combined with the
leverage associated with such transactions makes the overall capital investment
too large for many family businesses.
It was unclear whether the family business sector's engagement with
private equity differs from that of non-family businesses and SMEs more
broadly. The committee was advised that 2012 research by PricewaterhouseCoopers
found that there is a widespread misconception about what private equity is and
the role it can play for owners considering investments and/or succession'.
Nevertheless, some submitters advocated greater use of private equity by
family firms. Associate Professor Pi-Shen Seet advised that private equity is
increasingly a feature of ownership transfers of family firms in Europe and
It was recommended that the government promote the use of private equity firms
through providing information to educate family businesses on private equity
FINH argued that the risks associated with private equity investment
would be mitigated if the investor were 'another business-owning family'.
Professor Ken Moores put a similar proposal, referring to the benefits of a
'family office' or investment by family firms in other family enterprises:
In the United States, for example, there is the firm of
Francois de Visscher who is a Belgian by origin from a fifth generation
business but operates out of Boston. He has partnered up with a Pitcairn trust
and they have bought together 400 family offices and have this pool of family
money. They are looking to invest in other family businesses specifically. So
it is the mobilisation of that patient capital from a supply side that is
looking for the demand side.
To promote greater access to the private equity market, FINH recommended
Government specifically look at the present incentivisation
of the private equity markets and identify performance-enhancing policy
measures that incorporate a greater level of knowledge of the capital needs of
successful multigenerational business owning families.
Access to finance: Committee view
The committee acknowledges the concerns raised with the cost of finance
and the security requirements attached to business loans. On the basis of the
evidence presented, family and non-family businesses can encounter similar
barriers to accessing finance. The two sectors share similar concerns with the
activities of ADIs and the application of prudential regulations.
However, despite the similarities, there are two points of difference.
First, there appears to be greater significance attached to own-source funding.
This reliance appears to be indicative of a sector that emphasises the
'family'-based nature of its economic activities. The committee notes
submitters' suggestions for government to promote the private equity market.
However, the committee recognises the challenges that the private equity market
presents for family businesses wanting to retain control of the business within
the family, and for smaller non-family businesses. Additional information about
the operation of private equity sector may assist family businesses, and the
sector more broadly, to determine whether it is appropriate to seek private
equity finance. This matter could be usefully considered by the Australian
Securities and Investments Commission.
The committee recommends that the Australian Securities and Investments
Commission review information available on the MoneySmart website about private
equity investments, and design information that would assist family and non-family
businesses to determine whether it is appropriate for their business to seek
private equity finance.
Second, it is evident that ADIs do not consider family businesses
separately from non-family enterprises when determining the risk attached to a
family business' finance application. The committee considers that the
integrity of the risk assessment models used by ADIs is compromised where ADIs
do not accurately understand the business structures of applicants. It is of
particular concern that submitters believe that ADIs do not understand the
circumstances, business strategies and outlook of family businesses.
The committee extends its thanks to the CBA, CAFBA and the RBA for their
contribution to the inquiry. However, the overall lack of engagement with this
inquiry by the ADI sector is surprising and raises legitimate questions about
the sector's understanding of family owned and operated enterprises. To ensure
the efficacy of risk assessments, the committee encourages ADIs to analyse the
characteristics of family businesses, as distinct from broader categories of
micro, small, medium, or large businesses.
Given the apparent prevalence of family businesses in Australia's
business sector, and, by extension, Australia's economy, the RBA's apparent
lack of direct engagement with the family business sector must be addressed.
The committee recommends that the RBA include on its annual small business
panel in each state and territory representatives of the family business sector.
The committee recommends that the Reserve Bank of Australia include representatives
of the family business sector on its annual small business panels as an interim
The committee reiterates its 2011 recommendation that the RBA track the
impact of the introduction of Basel III on the cost of small and medium
business finance and residential mortgages.
Any improper increase in costs should be immediately addressed.
As discussed in chapter 4, should the proposed Inter-Departmental
Committee (IDC) decide to gather data about the key characteristics and
behaviours of family businesses, these characteristics should include the
debt-to-equity ratios and the value of assets on the balance sheets of family
businesses compared with non-family enterprises. As part of the IDC process,
consideration should be given to gathering data on family businesses and data on
non-family enterprises in the Business Finance component of the ABS Australian
Business Characteristics Survey (see paragraph 4.69).
Access to insurance
The issue of family businesses' access to insurance received little attention
from family businesses and family business representatives during this inquiry.
Broadly, family businesses can access a range of insurance products including
and workers compensation insurance.
Two points were raised regarding the sector's access to insurance.
First, Pitcher Partners and the Council of Small Business of Australia
questioned whether family businesses have all the necessary and appropriate
Second, there were concerns raised with the cost of insurance. Mr David Shave
of David Shave Investments Pty Ltd, reported that the cost of insurance could
prohibit business expansion, advising that his business had not pursued an opportunity
due to the costs associated with obtaining the required insurance.
Mr Robert Pennicott of Pennicott Wilderness Journeys stated that insurance
and associated compliance costs are an important but costly component of
running a business.
Pitcher Partners submitted that insurance costs may be fuelled by a lack of
competition among insurance providers.
Family Business Australia also commented on the cost of insurance, but held that
insurance costs could be reduced through businesses adopting more professional
However, it was widely held that family businesses can encounter the
same challenges accessing insurance as non-family businesses. The Agribusiness
Council of Australia argued that a business' status as a family enterprise is
of little consequence to an insurance company in assessing or costing an
Two family businesses also commented on whether the challenges they face differ
from their non-family counterparts. There was consensus that their business'
status as a family business does not affect their ability to access insurance.
This advice is consistent with research into the small business sector, with
information provided by CCIQ indicating that the cost of insurance is a concern
for both family and non-family small businesses.
The family business sector's response to the global financial crisis
Neither the anecdotal nor the empirical evidence before the committee
conclusively demonstrates that the family business sector outperformed non-family
enterprises in response to the GFC. Nor was it established that the family
business sector proved unusually resilient in response to the economic crisis. The
evidence did, however, point to attributes of family enterprises that could
assist businesses to respond to economic challenges.
Two markedly different pictures of the family business sector emerge
from the anecdotal evidence.
A resilient family business sector
The first is a sector capable of meeting the challenges of the financial
crisis. Family Business Australia reported that family businesses fared better
on average than their non-family counterparts. Indeed, it argued that the
characteristics that distinguish family businesses from nonfamily enterprises
'meant family businesses were bound to survive the GFC better'.
In particular, Family Business Australia highlighted the sector's conservative
business mindset and capacity to quickly determine business strategies in response
to changing circumstances.
This view was shared by Mr Christopher Lowe, Chief Executive Officer of Bus
Association Victoria, who reported that the experience of non-family businesses
differed from that of family enterprises:
I have had many a conversation with CFOs and, indeed, CEOs of
global public transport operations who are feeling the pinch, who have not had
a happy time through the GFC, which is in direct contrast to the feedback that
I am getting back from my family business members, who are all about
continuance and sustainability.
Consistent with the advice of Family Business Australia, the Bus
Association Victoria attributed the apparent resilience of the sector to its
They have got...a resilience factor there where they are able
to weather storms like GFCs. I think it comes down to their propensity to
innovate and the fact that the success of the business is very much dependent
upon the name of the family. All the family and those who share those family
values get involved to ensure that that business is self-sustaining and
Mr Des Caulfield of MGI Australasia concurred. He reported that
approximately 40–45 per cent of family businesses felt supported by ADIs during
the financial crisis. The committee was advised that this statistic is
testament to the sector's performance:
The fact 45 per cent of them could say that their bank has
supported them is a very good indication to me that their banks actually felt
they were pretty safe. I do not think the general business community would have
answered in that manner.
Mr Caulfield attributed the sector's resilience to its conservative
business strategies and streamlined governance arrangements, which provided the
flexibility to quickly respond to changing financial conditions:
[T]hey are much more cautious than many and were therefore
better placed financially to handle the downturns in turnover et cetera that
occurred. Also, by their nature, they are not over-governed they make decisions
relatively quickly. A lot of them—mum and dad having lunch together or the kids
having lunch with them—say, 'We've got to fix this,' and they can make
decisions much more quickly.
Family business owners also spoke of the sector's resilience. Mrs Diane Tompson,
Managing Director of Powercom Group Pty Ltd, agreed that the family business
sector can readily adapt to change:
Our accountant sums it up when he says that you have to hold
your nerve in times of stress and trouble. I think that family businesses are
very responsive. We are quick to respond. In fact, one of our market advantages
is that we are able to build things for customers, if they want one plug or
two. We can change our designs quite easily instead of only being able to
produce the one product. It is no different in a so-called global financial
crisis. We have not lost anybody at all. We have just had to work a bit harder.
Our sales people are pretty much on board with that. They are constantly on the
road trying to sell a product.
Personal stories collected by Family Business Australia also linked the
values and culture of family businesses to the sector's apparent capacity to
withstand the GFC. Family businesses reported that 'familiness' was central to
the business' success.
Firms reported high incidences of customer loyalty,
with one firm commenting that:
times are still tough. "But we're well positioned so
that when times are better, as someone who continued to support the industry
through the tough times, we will be rewarded accordingly".
Interestingly, not all family businesses shared the view that family
involvement safeguarded the business against the GFC. Mr Alan Berechree, the owner
of a Burnie Newsagency, reported that the business 'really had not had much of
a downturn' in response to the GFC. However, the continued profitability of the
business was attributed to the nature of the industry rather than any
A contrary view: the family
business sector's shared experience
In contrast to the view of the sector as resilient, there is also
evidence that the sector was adversely affected by the GFC. The CCIQ
acknowledged that the family business sector was 'not immune' from the effects
of the global financial crisis.
The Institute of Chartered Accountants wrote in its submission that 'the post
GFC environment has presented challenges for family businesses as it has for
many other forms of business in the economy'.
Somewhat pessimistically, Pitcher Partners reported:
[l]ike all business cycles that have preceded it, the GFC and
post-GFC has, and will continue to, claim victims among family businesses in
Australia. Family businesses accept the risks of failure at this time but that
knowledge does not ease the pain, suffering and personal anguish that is
experienced when it actually happens. Business failure will often cause a breakdown
of the family unit leading to divorce, extreme financial hardship, and division
Family businesses also commented that the GFC adversely affected
business profitability. The multi-generational Queensland firm, Packer Leather,
noted that the global economic downturn had a measurable impact on family
businesses operating in international markets.
Mr Raymond Hind, Chief Executive Officer of the Western Australian
firm Hind's Transport Services, told the committee:
[t]he difficulty now, after the GFC, is obtaining finance. So
we are finding that we are putting a lot of our own money back into the
business for it to survive because of the inability to raise finance.
However, the demarcation between the experience of family and non-family
businesses is again not clear. The anecdotal evidence focused on the family
business sector as a subset of the SME sector. For example, the Institute of
Certified Bookkeepers reported that 'SMEs are doing it tough'.
BusinessSA also grouped family businesses with SMEs, advising that the 'GFC
hurt consumer and business confidence, affecting many businesses including
Empirical evidence - conflicting
The challenge of identifying the family business sector's response to
the GFC is complicated not only by the heavy reliance on often conflicting
anecdotal evidence, but also by inconsistent empirical data.
Statistics that support the view
that the family business sector was uniquely placed to respond well to the global
Several witnesses drew attention to the 2009 KPMG survey as evidence that
the family business sector successfully weathered the GFC.
The 2009 KPMG survey of approximately 457 entities self-identifying as family
businesses found that while over half expected negative or low growth in the
coming 12 months, over 90 per cent reported being well-prepared or moderately
well prepared to face changes over the coming year. Accordingly, KPMG concluded
that '[m]any family businesses appear to have shrugged off credit and finance
constraints' resulting from the GFC.
Reporting in 2011, KPMG subsequently noted that '56 per cent of survey
respondents agreed that being a family businesses helped them deal with the
post-GFC economic downturn while only 10 per cent actually disagreed with this
proposition (the remainder were unsure)'.
Moores Family Enterprise cited the KPMG survey's results as evidence
that 'many family businesses appear to have shrugged off credit and finance
The findings also attracted media attention, with the Herald Sun
reporting in 2009 that '[m]ost family businesses felt little or no effect from
the tougher credit conditions during the economic slowdown, KPMG research has
However, as Dr Chris Graves, Professor Mary Barrett and Dr Jill Thomas
noted, findings about the resilience of the family business sector are
'difficult to empirically verify'.
Deloitte Private observed 'there is very little data to make an informed
response to this term of reference'.
Both submitters called for additional research to determine the sector's
response to the GFC and whether there are broader lessons for Australia's
Additionally, findings vary across data sources. The optimistic findings
of KPMG can be compared with the results of MGI Australasia's 2010 Australian
Family and Private Business Survey. The survey found that the GFC adversely
affected 35.7 per cent of family businesses, leading to unspecified 'cost
cutting' activities by slightly over 50 per cent, delays in hiring staff
by 34.5 per cent, and postponing expansion plans by 26.9 per cent of the businesses
Securing adequate capital for growth and retirement was among the top four concerns
On the basis of this data, it was concluded that the concerns of family
business owners about the future of their businesses has generally risen since
2006, with the family business sector's confidence declining as a result of the
According to MGI Australasia, the GFC weakened the sector's performance and
Today, as Australia disentangles itself from the grip of the
Global Financial Crisis (GFC), the current survey shows that family businesses
have changed from pre-GFC days. Despite Australia having weathered the GFC
better than most countries, the concerns of family business owners about the
future of their businesses has generally risen since 2006, the date of the
previous survey. More business owners are significantly more concerned about
competition, funding for growth and for the future of their particular industry
than they were in 2006 and 2003.
The survey reveals a less confident family business sector
post-GFC than pre-GFC – with family business owners more reliant on the
continuity of their business to fund their retirement and more concerned over
the future of their business.
The committee did not receive evidence on this point from ADIs or the
RBA. However, some empirical information is available from international sources.
As the committee reported in April 2011,
the Organisation for Economic Co-Operation and Development (OECD) concluded
that Australia's financial system 'proved very resilient during the global
crisis'. As the OECD reported:
[t]he performance of the Australian economy has remained
solid. It weathered the world financial and economic crisis better than most of
the OECD countries and, indeed, and avoided a recession...In contrast to most
other OECD countries, the short-term outlook is favourable.
In part, this was attributed to 'solid domestic banking supervision'. As
the OECD noted, Australia's '[b]anks have remained profitable with stable
capital ratios, and the largest Australian banks are now among the soundest in
Other factors the OECD cited were 'the dynamism of Asian markets [and]
well-functioning financial and labour markets and the timely and strong policy
response to the crisis'.
The mindset of family businesses –
lessons for the broader economy?
While neither the anecdotal nor the empirical evidence clearly
demonstrated that family businesses outperformed non-family enterprises, the
data did reveal key features of family businesses that may enhance financial
stability. The European Commission's review of the family business sector in
Europe found that in general family businesses are risk-averse and focus on
'long-term sustainability rather than the realisation of short-term profits'.
Statistical research in the Australian context has highlighted similar
investment trends among Australian-based family businesses. On the basis of its
2009 survey, KPMG concluded that '[f]amily businesses generally take a more
conservative financing approach and long-term are more likely to have a 'patient
capital' financial outlook'. This approach was considered to have assisted the
family business sector to withstand the GFC.
Anecdotal evidence collected by Family Business Australia also highlighted that
family firms attributed resilience to 'long-term investments rather than a
Mr Francesco Barbera of Bond University commented on his research findings
suggesting that family businesses adopt a 'patient capital' approach to
[F]amily firms tend to have a longer term time horizon and
strategic planning happens over multiple generations rather than simply in the
short run. In fact, a couple of weeks ago I interviewed a company which during
the financial crisis spent most of their time buying assets rather than
selling. That was because they recognise the good price currently and realise
they are in business for the next 20, 40 or 60 years so now would be a good
time to buy. But a non-family firm might not necessarily have such a long time
horizon. It might have investors who are demanding dividends and liquidation of
assets rather than the purchasing of assets, for example.
As chapter 4 of this report has noted, family businesses tend to
minimise debt and maximise their asset base.
KPMG argued that this approach to business management gives family businesses a
competitive advantage over non-family entities, and provided family businesses
with a sound economic basis on which to operate throughout the GFC:
As they tend to take the longer term view; interested in
growing the family wealth and having a different set of strategic goals
compared to non-family and private companies, their long-term economic
contribution is significant, and will be increasingly so. For many family
businesses the ability to plan long-term can give them a huge competitive edge,
allowing them to be more innovative than the corporate sector...A strong focus
towards cash reserves are also qualities that will continue to give traditional
family businesses a genuine competitive edge in the marketplace as the global
Mrs Genevieve Power of the Canberra-based firm Iken Commercial Interiors,
advised that a reliance on 'patient capital' and asset accumulation provided
family businesses with financial stability despite the challenges presented by
Good family businesses have strong assets. Whether they are
liquid assets, in terms of stocks and shares, property assets or whatever
assets, family businesses are asset based businesses. Therefore, in a crisis
you rely on those assets to support your borrowings from the bank or you go to
the bank and put up more assets to borrow more or you sell off those assets to
enable you to continue to operate the business.
Several submitters also commented on the personal commitment to the
business displayed by family business owners. Mrs Power commented that this personal
commitment enabled family businesses to better respond to the GFC:
Combined with passion and commitment, and a bit of 'We won't
let the buggers beat us; we'll keep going,' you reduce every cost you can, you
ask your staff to recycle every piece of paper and you do absolutely everything
you can to reduce every cost.
Chapter 4 identified that family businesses' personal and long-term
commitment to the business promotes a long-term view of financial gain. It was
argued that this commitment is common among family businesses and is atypical
of managers and directors of non-family companies. As Deloitte Private stated,
'owners will accept more modest growth in the longer term returns to ensure the
sustainability of the business rather than relentlessly strive for short-term
These views are consistent with international research which indicates
that the long-term focus of family businesses leads to risk averse investment
strategies and 'significantly lower leverage than non-family firms'.
Nicolas Kacher, George Stalk and Alain Bloch wrote in a November 2012 Harvard
Business Review (HBR) article that based on their research:
...during good economic times, family-run companies don't earn
as much money as companies with a more dispersed ownership structure. But when
the economy slumps, family firms far outshine their peers. And when we looked
across business cycles from 1997 to 2009, we found that the average long-term
financial performance was higher for family businesses than for nonfamily
businesses in every country we examined.
Kacher, Stalk and Bloch found that the factors that contribute to this
- a focus on resilience rather than short-term performance;
- low levels of debt and judicious capital expenditure;
- avoidance of risky ventures, desiring to 'forego the excess
returns available during good times in order to increase the odds of survival
during bad times'; and
- the personal investment by chief executive officers, who often adopted
a 10–20 year investment horizon (see chapter 4).
These characteristics can be contrasted with the business strategies
that the OECD concluded contributed to the GFC. In 2009, the OECD Steering
Group on Corporate Governance released its report The Corporate Governance
Lessons from the Financial Crisis,
which outlined concerns that corporate governance structures did not safeguard
against excessive risk-taking in a number of financial companies. The report
points to concerns with the asset holdings of companies and remuneration
systems that encouraged and rewarded high levels of risk-taking behaviour.
The authors of 2012 HBR article concluded that 'well-run family
businesses can serve as role models' for non-family enterprises.
The researchers concluded that a 'patient capital' approach is a sound model
through which to respond to economic crisis:
[T]he resilience–focused strategy of family-owned companies
may become more attractive to all companies. In a global economy that seems to
shift from crisis to crisis with alarming frequency, accepting a lower return
in good times to ensure survival in bad times may be a trade-off that managers
are thrilled to make.
Employment and the global financial
The committee heard that stable employment within the family business
sector may have assisted family enterprises to respond to the GFC. Mr Barbera told
As far as their capacity to withstand economic crisis is
concerned, I am looking into that at the moment. One of the arguments is that
employment—and you said it yourself—is much more stable in those family firms
because they are more reluctant to lay off staff during tough times.
This position was supported by Mr Graham Henderson, a managing
director of a third-generation family business. He advised that family
businesses have the capacity to remain stable despite volatile financial
Family businesses can respond to the challenges of the global
financial crisis and of resilience. We are not inclined to put off people or to
get rid of employees. You only have to look in the media most days to see ANZ
getting rid of 600 people or Qantas getting rid of 500 people. That is not our
make-up. Our make-up is we value our employees and we try to protect our
employees and keep them on in very difficult circumstances. We have this
positive attitude that things are going to get better, and we would rather keep
these people on and support them so that when things get better we can fly off
a lot earlier than the bigger people who are saying, 'I think we should
Time and again we see a spectrum of behaviour in terms of
business. They will cut discretionary expenditure, they will cut advertising
and they will cut training, but one of the very last things they do before they
have to physically close is let go of their employees. It is really the
second-last trigger point for most businesses.
However, the Chamber also observed that family businesses are prepared
to cut staff if necessary:
[T]here is definitely a willingness—nobody wants to see their
family business go under; they feel responsible. I think that in turn results
in a greater tenacity. When it is a choice between sink or swim, if it means
having to let some staff go then family businesses—and small businesses—generally
are prepared to make the necessary decisions. Nobody likes to fire people.
Nobody likes to risk being uncompetitive. But it is a reality of running a
business, and I think family businesses understand that better than anybody.
That has certainly become apparent to us in conducting our case studies.
The anecdotal evidence suggests that in addition to a preference to
retain staff, family businesses owners are prepared to reduce their salaries,
while staff in these businesses forego higher earning opportunities elsewhere. Mrs Power
told the committee that in response to crisis, family businesses restrict
expenditure: 'You do not pay yourself or you take half salary or only what you
need to live on'.
The personal stories collected by Family Business Australia included reports that
family members remain with the business in times of financial difficulty,
accepting lower wages than they could receive elsewhere.
Mr Barbera described the family business sector as 'a more flexible labour
force which is willing to work for less money if need be'.
The New South Wales Business Chamber speculated that access to unpaid
labour assisted family businesses to meet the financial challenges of the GFC.
Mr Paul Orton told the committee:
I think the ownership plus operational responsibility means
that the business has a life beyond simply the set of books. It is a big part
of individuals' and families' reasons for being, in a sense, and I am sure that
they have done things that may not necessarily have stacked up, in strict
financial terms, to ensure the businesses were in a position to survive and
prosper beyond the GFC.
The Chamber also explained that the 'measures that may not necessarily
have stacked up in strict financial terms' may have included access to free
Part of it is simply that businesses that have a lot of
family members involved can probably rely on those family members to support
the business, even when there is not a great deal of access to cash flow or
much by way of sales coming in. It is much more difficult, I suppose, if a
business has to rely on employees that it pays, to wind things back or ramp
them up. It is a lot less flexible for businesses that have those formal employee-employer
relationships more to the fore.
CCIQ also hinted at this practice, providing an example of a family
business that, in response to the GFC, 'fired only non-family members'.
[i]t also poses an interesting question about whether or not
those family members who work in a family business see themselves as operating
outside of the Fair Work Act and, accordingly, are prepared to take what would
not be considered to be a wage and would forgo income with a view to supporting
that business through difficult times.
The committee was also advised that family businesses may perceive the
business operates outside the parameters of the Fair Work Act 2009:
[M]any members who work in a family home business are
effectively shareholders in that business and, accordingly, are prepared to
forgo an income to ensure that that business prevails through a difficult
operating environment. I would hazard a guess—it would need to be
confirmed—that award rates of pay would not be considered of relevance to many
family members. So clearly they do operate outside of the Fair Work Act.
The global financial crisis and the
family business sector: Committee view
On the basis of the available evidence, it cannot be concluded that the
family business sector in Australia outperformed non-family businesses in
response to the GFC. There is strong anecdotal evidence that a number of family
businesses performed well, and the committee recognises the conviction underlying
statements by family business representatives that the sector proved
particularly resilient in response to the GFC. However, there is little
empirical data to support a conclusion that the sector's performance eclipsed
that of non-family enterprises.
There are aspects of the mindset of family businesses that could allow them
to respond to periods of financial instability. The committee notes arguments
that a patient capital approach safeguards businesses from economic downturn
and the OECD's conclusions highlighting the drawbacks of risky, highly
The committee believes that the patient capital approach is a remedy
against business closures in the event of economic instability. An analysis of
the family business sector's response to the GFC indicates that this approach has
distinguished many family businesses from non-family enterprises. The sector's
contribution to the Australian economy includes the promotion of the benefits
of a risk-averse, long-term approach to investment and business profitability
(see also chapter 4). While its effects have not been measured, the committee
considers that it is an approach that the broader economy could consider.
The committee considers that family businesses' patient capital approach
warrants further analysis. It reiterates that the proposed IDC should give
consideration to whether data should be collected on family businesses' debt to
equity ratios and the value of assets on balance sheets (see recommendation 10).
This information would be useful in identifying the conservative, long-term
investment focus of the sector.
The anecdotal evidence that family businesses may perceive that they
operate outside the parameters of the Fair Work Act is of concern. That said,
the evidence on the employment practices of family businesses is inconclusive.
It is insufficient to draw conclusions about the extent to which non-compliance
with employment requirements may be occurring.
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