Better on stormy seas than calmer water: Lessons from family-owned firms

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Family businesses foster unique working cultures and retain employees for longer (Source: Getty)

Western business has long criticised the family-run firm. From succession disputes to their reliance on dual-class shares and pyramid structures to clip the wings of external investors, they’re not often held up as models of corporate achievement.

But research by Boston Consulting Group (BCG) has found that 40 per cent of French and German companies with annual revenues exceeding $1bn are family-owned, as are 90 per cent of businesses worldwide. So what can we learn from them?

LONG-TERMISM

Family businesses are rarely about a quick buck. “The majority of owners run them to secure a livelihood for their children, so this gives them a strong vested interest in the continued success of their company,” Journyx chief executive Curt Finch told Small Business Trends.

This desire to pass a company onto the next generation acts as a safeguard against the short-termist attitudes to which publicly owned companies are sometimes susceptible. Jean-Charles Decaux, founder of the outdoor advertising company, has also said that family ownership enabled the “patient innovation” which has allowed his company to thrive, such as the provision of free street furniture in exchange for the right to lease advertising space on it.

GROWTH AND DEBT

But in other ways, family firms are very cautious. They tend to opt for self-financing, then loans, before finally the opening up of equity to investors as a means of generating capital, says KPMG’s Christine Blondel. Such illiquidity and bootstrapping has taught them discipline when it comes to joint ventures and acquisitions.

“The constraints affecting the financing of family enterprises push them in the direction of more economic strategies: calculated acquisitions, alliances, as well as realignments,” said Blondel. She cites biopharma company UCB, which from being “a dual pharmaceutics and chemicals enterprise transformed itself into a leader in biopharmaceuticals through major acquisitions and disinvestment.”

Such conservatism can be beneficial. At a time when it is estimated that only 16 per cent of firms in the US will survive a generation, family-owned firms survive twice as long. Indeed, the BCG study found that medium-sized, publicly-traded, family-controlled companies performed more consistently than similar companies with no family connections. This was because they were more resistant in difficult periods, despite falling behind in more prosperous times. Some non-family firms are emulating this behaviour. Nestle is often singled out for outperforming rivals in tough times, despite losing out to competitors on calmer seas.

And as Germany’s Mittelstand attests, an aversion to debt need not stymie innovation. According to Grant Thornton, 54 per cent of Mittelstand companies launched “an innovative product or process into the market between 2008 and 2010”. Their success may be down to their ability to retain their inventions through intellectual property.

“Family firms seem imbued with the sense that the company’s money is the family’s money,” BCG’s Nicolas Kachaner, George Stalk and Alain Bloch told the Harvard Business Review. “And as a result they simply do a better job of keeping their expenses under control.”

CAPITALISING ON CULTURE

Family firms are also able to cultivate cultures which differentiate them from other employers, allowing them to foster loyalty among employees and increase retention rates. According to the 2013 Survey of Family Businesses, the average tenure for non-family employees at US family businesses is 12.3 years, significantly longer than the national average of 4.6 years.

And with taglines like “from our family to yours”, brands like Warburtons recognise that the mythology of family companies can be valuable in itself. In October, the Institute of Family Business found that 68 per cent of people thought that family status reinforces the perception of quality, and two thirds agreed that it improves corporate reputation.

Successful Mittlestand firms like pressure washer manufacturer Karcher combine technical expertise with knowledge of their customer base. Customer loyalty may be the result of sticking to their patch.

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