Does Government Ignore Family Businesses?

Family businesses inevitably have to deal with the consequences of government policy, but despite making up the majority of businesses in Australia they are too often regarded as the quiet achievers and are forced to follow regulations and tax policies designed for large corporations to their disadvantage. Below is an article as part of my regular column published in Australian Bus and Coach Magazine, where I analyse the relationship between governments and family businesses. David Harland - One of Australias leading experts in the Family Business Sector.

Although around 70% of registered businesses in Australia are family-owned, most family businesses seem to fly under the radar of communities, legislators, and even corporate competitors. Despite employing over 50% of the Australian workforce, they exert a fraction of the influence on policy as their much larger corporate competitors. Family businesses aren’t able to participate in trade delegations nor do they receive massive government subsidies to help them compete against foreign producers.

One of the biggest challenges facing family businesses around the world is a lack of understanding among lawmakers about the specific needs of family businesses. One of the major causes of this limited awareness is that family businesses are quiet achievers that blend into the small and medium sized enterprises (SME) background. While they may share some characteristics with SMEs, family businesses have unique needs and unique challenges – such as succession – that corporations don’t face.

Many family business owners are concerned about the effect that government regulations have on their businesses. A 2010 international survey of family businesses by Pricewaterhouse Coopers found that a majority of respondents want simpler tax regimes and lower taxes, while 56% wanted to see a tougher corporate compliance environment. Many respondents believed that their governments had not done enough to support the business community through the global recession.

In Australia, one of the biggest bones of contention is the heavy price of regulatory compliance. Many compliance regulations have been designed to police large corporations, and are burdensome and costly for smaller businesses to follow; many must hire extra employees or employ outside specialists just to ensure compliance. When times are tight, these extra costs are especially difficult to support and can significantly impact the profitability of a family business. Regulations are rarely reviewed by government agencies once they have been imposed and ineffective regulations continue to be applied. In a dynamic economy, even initially good regulations can become rigid and stultifying, reducing business flexibility, innovation, and competitiveness. Compliance can become especially onerous when regulations:

• Require an unnecessarily high frequency of reporting or duplicate reporting;
• Overlaps or contains inconsistencies between jurisdictions;
• Are redundant or no longer justified by policy intent or economic reality.

The taxation policies of many countries can also hinder the growth and development of family businesses. Australia’s taxation system (like that of most developed countries) discriminates in favour of debt financing by allowing the deduction of interest expense but not the costs of equity financing. Since family businesses often fund growth through retained earnings (as opposed to taking on debt), this system can leave them at a grave disadvantage with respect to their corporate competitors.  Owners of family businesses often tend to be reluctant to fund growth through instruments that erode their control of the business or may prove difficult to pay back. They typically fund growth through internally available business or family funds, followed by debt financing, and lastly through external investors. A solution for government might be to expand the preferential treatment given to debt financing to equity as well so that family businesses are not penalized for funding growth in different ways.

What Can Family Businesses Do?

For family business leaders to be able to effectively influence public policy, they must engage in a collaborative effort with other stakeholders across multiple fronts. In order to initiate change, lawmakers must be made to understand why a change is needed, and what action needs to be taken to create that change. Family businesses can suffer a problem of legitimacy; for lawmakers to be willing to listen to family firm representatives, legitimacy must be established through developing coalitions of business representatives, family business advisors, and scholars.

A simple way to start raising the visibility of your business is to get to know local lawmakers, and introduce them to family businesses among their constituents, demonstrating both the economic contributions made by family businesses and the unique challenges they face.

Family business leaders who wish to influence local and national government policies regarding family businesses should:

• Join Family Business Australia, our national advocacy and education organization;
• Take an active role in your community business organizations to build understanding of the special character of family businesses;
• Become an active community member and show customers and local residents the human face behind your business;
• Contact with your local council, State and Federal representatives and let them know that you vote!

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