Many of the world’s great businesses started with family money. Virgin Records owes its existence to a loan from Richard Branson’s Auntie Joyce. Mark Zuckerberg’s Facebook empire is said to have started with a $100,000 loan from his father. The list of such loans is long, and it may be getting longer.

According to the Centre for Entrepreneurs, today’s youth launch twice as many businesses as the baby boomer generation did. Last year a record 900,000 companies were started in the UK. These included 82,000 new online retailers and 21,000 new takeaway and street food stalls. 

Cautionary tale

Sadly, many of these will fail. My friend David Molian at Cranfield School of Management told me a story recently about a retired businessman — let’s call him “Richard” — who had risen to head up the US subsidiary of a well-known UK firm. 

A son from his first marriage fancied his abilities as an entrepreneur, and Richard backed his new e-commerce venture with an injection of £100,000 in the form of equity, giving him a substantial minority shareholding. The start-up began well, but within 18 months faltered and ran low on cash. 

Richard pumped in a further £150,000 in loans. His second wife was less than happy. Richard’s son made some unwise decisions. Three years later the business was declared insolvent. Creditors and shareholders received nothing.

“[The father] had spent a lifetime as a careful steward of corporate assets. His son saw himself as a buccaneering risk-taker. It took a long time to heal the personal rupture caused by the business failure,” says Molian.

Thinking like a banker

Wanting to give your kids a helping hand is only natural: lots of parents want to help their children on to the property ladder; many will have paid for the private education, too. Investing in a child’s business can be a tougher ask, though. Thinking like a professional banker can help. 

If you’re facing such a request, ask to see a business plan. It will give you a sense of the scale of your child’s ambition, and might even excite you. Writing up their research on the proposition, the market opportunity and the costings can encourage them to think through the challenges more thoroughly. 

Research shows that if you are an entrepreneur your children are 60 per cent more likely to be entrepreneurial. If you have business experience you can give valuable advice at this start-up stage. This assumes your children are prepared to take it on board – a big assumption perhaps!

One of the biggest mistakes the Bank of Mum and Dad makes is not to be clear about the terms of the financial arrangement. Is this a gift or a loan? If it is a loan, how much is it? What are the repayment terms? What is the interest rate? And what happens in the event of a default? Will there be any assets to claim against if the business fails?

Written agreements

Draft a written agreement that sets out the loan conditions. If it’s a big loan, don’t be afraid to enlist the assistance of a solicitor. Should the business fail, as many do, a formal legal agreement could help ensure you are recognised as a creditor. 

Research suggests that default rates for unmanaged loans between family and friends drop significantly if a signed agreement is in place with a monthly payment plan and automated electronic bank payments. 

Your child may ask you to “invest”, as Richard’s did. As with any equity investment there is a need to establish a return expectation. How and when will you realise a profit? Will there be a dividend or growth in the value of your share? A written agreement is even more necessary in this scenario because others may co-invest later as the business grows (hopefully), diluting your initial shareholding. You need a clear sense of your position. 

And, while you may just only be getting over the shock of the initial sum, consider how far you are willing to go beyond that first investment. Business angels have a rule of thumb: when you make an investment set aside the same amount again as contingency. Over-optimistic company founders almost invariably return for more money.

IHT planning

If your money is a gift you might consider it part of your inheritance planning strategy. Many clients tell us they have given a cash advance to one child and need to equalise the inheritance — often by carving that figure out of the will so that their other children do not feel hard done by. 

There are other ways to help your child’s business venture besides handing over cash. The loan of a garage, for example, free accommodation, or your time. I know one retired father who helped his son launch an electronic game — producing, packing and posting items, and working out the search algorithms to earn a “best buy” spot on the Amazon site. 

And, while it was hard work, it brought the father and son closer together.   

Be warned: it can go the other way. You can become an unpaid labourer. Time has value. As with any financial loan or gift, be clear about the terms and limits. 

Prudent giving

Most importantly, ensure you can afford whatever you give — be it money or time. Remember, the more sacrificial this is for you, the greater the risk of you feeling upset if you feel it is not appreciated or squandered.  

It can be infuriating if you are going short on luxuries to support your child’s venture and then discover them spending money on what you consider to be non-essentials. Similarly, it can be painful for your son or daughter if they feel they are working really hard and every time they want to relax and spoil themselves you are scowling in the background.

Ultimately, no two families are alike and emotions can run high. Being a branch manager of the Bank of Mum and Dad is not an easy job. A more formal approach may take some of the emotion out of the equation for some families. For others, it might heighten it. 

Yes, there is risk in supporting the next generation of entrepreneurs through the tough stages of business start-up and growth. But many businesses do succeed, and nothing can make most parents prouder than the thought that they have played a role in that success. Entrepreneurs always remember those who put trust in them at the journey’s start.

Shirley Coe is a senior private banker at Weatherbys Private Bank  

*Featured on the Financial Times website on 6th June 2024: Beware the Bank of Mum and Dad’s grey areas.

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With almost perfect timing, a week before the Prime Minister announced in the pouring rain that he was calling a general election, we held a Chatham House panel event for clients hosted by Polly Toynbee, the renowned Guardian political and social commentator. Our panellists for the evening were Dr Miatta Fahnbulleh, the Labour Party parliamentary candidate for Peckham, James Murray, MP for Ealing North and Josh Simons, Director of the political think tank, Labour Together. Here are some key highlights from the discussion.

Labour is not seen to be on the side of business. To what extent has that barrier been broken?

The panellists told the audience that when they have met businesses up and down the country the overriding message from them is that they want stability, certainty and predictability – and a government they can work with. Rachel Reeves, the Shadow Chancellor of the Labour Party, has said publicly that Labour wants to be a pro-business party working together to keep the economy growing – and the panel said that through its actions, it will prove it. Labour’s central mission is to grow the economy but the panel admitted they cannot do that if they are not in partnership with business. “This is not a political slogan; it is not a tactic. It is just the reality,” said one panellist.

However, the discussion highlighted that its partnership with business should not be short-term. Governments all over the world including Australia, the US, Canada, and Germany have recently won elections because their right-wing opponents have failed. However, it was highlighted that many have struggled since coming to power because they are not delivering material economic improvements to people’s pockets. “If Labour comes to power, it has to mean what it says about forging a ‘real relationship’ with businesses if it is to win [a second term] again,” said one.

Will accepting the same fiscal rules and treasury conventions be a challenge?

The panel were very clear that it believes it is impossible to build a credible offer in opposition without iron-clad fiscal rules. The rules, they said, will underpin everything that it wants to achieve and advocate the changes to enable private sector-led growth; it will form the foundation for getting the economy to grow. “With stability, we will be able to work in partnership with businesses to remove the barriers to investment to invest in the industries of the future,” added one member of the panel.

How confident are you in Labour’s growth plan?

One member of the panel urged the audience not to underestimate Keir Starmer’s and Labour’s commitment to implementing a new way of governing to get the desired results. But the panel are in a confident mood that they have dug into the details beyond the manifesto headline-grabbing policy to make the plan work. “The level of detail is not like what I have seen before,” said one. “There is huge confidence.”

What are you going to do about the Treasury’s black hole?

The panellists are under no illusions that the next government will inherit an incredibly difficult situation should it get a firsthand look at the Treasury’s books. Tax revenues are extremely high – yet Labour has said that it is not talking about or wanting to put up taxes. A panel member said that the NHS and schools will need a more immediate injection of cash and said that Labour will look to close some tax loopholes such as with non-doms, tax avoidance and modernising HMRC. But it goes back to growth. “The only way to get sustainable finances for public services is to get the economy growing,” added a panellist.

Do you think attitudes have changed to be more socially democratic?

All the panellists, to varying degrees, agreed that the attitudes of voters had changed and this has been evident not only by the recent local election results but also by knocking on people’s doors and speaking to them in person. “There is a sense of hopelessness and genuine anger,” said a member of the panel. But there is a bigger challenge that lies in wait. A theme throughout the discussion is that any meaningful change will take more than one term of office. Yet, governments around the world are struggling to figure out what it means to govern responsibly in today’s age. The challenge for Labour will be how, as a centre-left party, it can reassure an electorate that is more willing to switch allegiance very quickly. “That is going to require doing things differently and experimenting,” said a panellist.

What do you hope to achieve in five years, should you come to power?

The overriding hope is that it has raised living standards and that the current housing crisis shows signs of easing. One member of the panel said that its Green Prosperity Plan could be a game-changer. They said that the transition to net zero has to happen and is a real opportunity, creating jobs and growing industries. “If we get momentum and give people hope that we are turning things around, then we have a chance for a second term,” they added.

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Clare Munro is our Senior Tax Advisor. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.

Important information
Tax laws are subject to change and taxation will vary depending on individual circumstances.

*Featured on the Financial Times website on 30th April 2024: Your business needs a will too.

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These initiatives have their place, but often overlooked is the role played by our own domestic business founders in creating wealth and opportunity. Crucially, we have the evidence to prove it. In the first decade of this century a major study showed that just six per cent of high-growth businesses created around 50 per cent of the nation’s new jobs*. Remarkable, really. In a country of over five million businesses, we are talking about roughly 11,500 commercial concerns with at least 10 employees, growing at a rate of 20 per cent or more per annum. They are spread across the country and feature in numerous sectors of the economy.

Perhaps even more remarkable is the same study found this pattern is repeated across the economic cycle, including the banking crisis of 2008-9. It should give us all grounds for hope and optimism. Growing a business sustainably, however, is no easy task. We know most new ventures will fail within five years. If they survive beyond that period, then their chances of getting to 10 years improve significantly – and they have an even better chance of surviving after that.

It might not be easy, but the process of growing a business successfully is not a mysterious black box. There are two fundamental requirements. The business must be capable of scale [that is to say it’s past the start-up stage], and the founder has to be capable of change. In his many years of directing Cranfield’s Business Growth Programme, David identifies five key challenges – or barriers – to growth and the remedies for overcoming them.

• The first is the trap of early diversification. In virtually all cases, entrepreneurs who create a business with independent value, identify a niche where they can compete successfully, and stick to it. However, distractions from the core are too often tempting and invariably consume time and resources with no lasting commercial benefit.

• Second, there is the question of financing growth. Too frequently, businesses rely on expensive short-term measures that are out of sync with their long-term aspirations. In reality there are often better ways to squeeze cash out of the existing business, or attract external capital. Founder of Cobra Beer, Karan [Lord] Bilimoria identified 17 different funding mechanisms to power Cobra’s growth before entering the current partnership with Molson Coors. This is one area where an experienced private bank such as Weatherbys can add real value.

• The third challenge is how founders spend their time. A business can only grow if the entrepreneur devotes significant time to making today’s business better, and fashioning a new business for the demands of tomorrow. Many founders get trapped in endlessly solving other people’s problems or trying to do their jobs for them. Either way, it is a barrier to growth.

• Fourth is the requirement to be better than or different from the competition. Many of the successful firms we have worked with are challengers or contrarians. Hotel Chocolat, for example, set out its stall deliberately to challenge the dominance of Thorntons in retail confectionery; GoApe has gone against much-prevailing health and safety orthodoxy to encourage tens of thousands of people to live life adventurously [and safely] on its high-ropes courses.

• Fifth and finally is the need to demonstrate to the outside world that the business can operate independently of the founder. This means building an empowered senior team that has the discretion and authority to manage daily operations. When serial entrepreneur and investor Lara Morgan decided it was time to sell her first business, Pacific Direct, she moved 90 miles away from the firm’s offices and made herself non-executive chairman.

The move from CEO to chairman is quite a common tactic for founders looking to transition away from day-to-day business involvement in preparation for a sale or, indeed, handover to the next generation.

Nick Gornall comments:

“The creation of wealth has for a long time resulted from human enterprise in business but without sound financial planning and advice, there are pitfalls. Whether you are starting a business or growing a business for sale, you will value partners who understand your needs and are keen to build relationships over time – both are key ingredients of the Weatherbys Private Bank proposition. We also understand the intricacies of succession planning implicitly, as a business that has been under family ownership for more than 250 years.”

Some words of caution for those following the path to eventual sale. As chairman you should have outside interests or, if not, develop them rapidly! Your successor as CEO will need to have the freedom to run this business in his or her own style. It may well not be yours. That does not necessarily matter, providing he or she delivers the company’s objectives.

And finally, our experience suggests that it is just as important to be clear about your life after exit, should you choose to sell. The happiest business vendors are those who have lined up a new chapter of their lives after the sale, whether it’s the pursuit of a long-held passion, engaging in philanthropy or embarking on a new career as an investor or even as a serial entrepreneur. Merely turning wealth on paper into cash is little compensation for finding yourself lacking in purpose and no longer relevant.

Speak to us today

If this article has struck a chord and business growth or having a clear financial plan is high on your agenda, and you would like to discuss it further, please contact Nick Gornall on +44 (0) 7436 239639 or ngornall@weatherbys.bank, or Henry Wilson on +44 (0) 7501 384877 or hwilson@weatherbys.bank. Alternatively, click on the button below and we will be in touch.

Scale-up and Build Your Business: How to Recognise and Overcome the Critical Challenges of Business Growth and Exit by David Molian is published by Routledge.

*The Vital 6%: available from Nesta [the National Endowment for Science, Technology and the Arts] at www.nesta.org.uk.

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