Banishing The Myth That Family Businesses Are Small Size

To many, the phrase “family business” denotes a small or midsized company with a local focus and a familiar set of problems, such as squabbles over succession. While plenty of family businesses certainly fit that description, it does not reflect the powerful role that family-controlled enterprises play in the world economy. Family business such as Porsche and Tata account for more than 30% of all companies with sales in excess of $1 billion, according to the Boston Consulting Group’s analysis.

Conventional wisdom holds that the unique ownership structure of family businesses gives them a long-term orientation that traditional public firms often lack. Some studies suggest that, on average, that these very same family businesses outperform other businesses over the long term.

Family-run companies do not earn as much money as companies with a more dispersed ownership structure. But when the economy slumps, family firms far outshine their peers. Family businesses focus more on resilience than performance. They forgo the excess returns available during good times in order to increase their odds of survival during bad times.

So how do family-run firms manage for resiliency? Hereunder a number of examples of how this is attained ;

1: They are frugal in good times and bad.

A family business can be identified just by walking into the lobby of its headquarters. Unlike many multinationals, most of these family businesses do not have luxurious offices.

2: They keep the bar high for control of capital expenditures.

Family-controlled firms are especially judicious when it comes to capital expenditure. Basically they do not spend more than they earn.

3: Family businesses carry little debt.

In modern corporate finance a judicious amount of debt is considered a good thing because financial leverage maximizes value creation. Family-controlled firms, however, associate debt with fragility and risk.

4: They acquire fewer (and smaller) companies.

Of all the plays a manager can make, a sparkly transformational acquisition may be the hardest to resist. It carries high risks but can pay large rewards. Family businesses normally favour smaller acquisitions close to the core of their existing business or deals that involved simple geographic expansion.

5: Many show a surprising level of diversification.

Plenty of family-controlled companies—such as Michelin and Walmart—remain focused on a core business. But despite a generation’s worth of financial wisdom that diversification is better done by individual investors than at a corporate level, a large number of family businesses are far more diversified than the average corporation

6: Family businesses are more international.

Family-controlled companies have been ambitious about their overseas expansion. They generate more sales abroad than other businesses do; on average 49% of their revenues come from outside their home region, versus 45% of revenues at nonfamily businesses. But family businesses usually achieve foreign growth organically or through small local acquisitions—without big cash outlays.

7: They retain talent better than their competitors do.

Retention at the family-run businesses we studied was better, on average, than at the comparison companies; only 9% of the workforce (versus 11% at nonfamily firms) turned over annually.

 

At the Family Business Office we can offer you assistance in dealing with family business succession planning issues through incentives supporting advisory and mediation services. Contact us today on [email protected].

(All factual and statistical information presented in this blog has been obtained from an extract of an article from the harvardbusinessreview.com) Follow us on our Facebook page and Family Business Office website at www.familybusiness.org.mt