Keeping it in the family

by Su Aziz

Think not only mom-and-pop stores when talking about family-owned businesses because the likes of BMW and Samsung are exactly that, but with a vastly different profit margin. Be that as it may, they face the same challenges and need similar key success factors. 

World-renowned brands and household names such as BMW, Porsche, Estée Lauder and Samsung are family-owned businesses, as much as your mom-and-pop stores on the corner of your street. While their profit margins may put them worlds apart from each other, there’s one common thing they both share – the dynamics of family relationships that add to the complexity of managing the business.

A majority of family-owned businesses are those of families who own a significant share and thus influence fundamental decisions such as choosing and appointing the company’s chairman or CEO, or both. However, globally, there are millions of family-owned SMEs that contribute to economies significantly.

According to the Global Family Business Index by the University of St. Gallen in Switzerland, Europe leads with 50 per cent of the world’s 500 largest family businesses, followed by 24 per cent in the United States. However, regions that are typically associated with more family-oriented cultures, like Asia and South America, comprise a smaller segment of the top firms.

Fortune Global 500 list that tracks the world’s largest firms by sales, reports that family-controlled firms, as of a few years ago, make up more or less 20 per cent of the companies. While this may be so, The Guardian quotes The Family Business Institute and reports that ‘only approximately one third of family-run businesses survive into the second generation with just 12 per cent remaining “viable” by the third. Disputes over profits, business goals, transparency, philanthropy, company legacy and succession can take their toll’.

The challenges these family businesses, regardless of bottom line, such as succession planning, wealth preservation and, as mentioned earlier, family dynamics, are faced by all across the board and globally.

It’s in the blood
The article Business in the Blood in The Economist reports that, ‘even in the rich world, big family firms are defying expectations of their demise. The tendency for founders and their heirs to abandon control to faceless institutional shareholders seems to have reached a limit’. It states that 15 per cent of the American firms in the Fortune Global 500 (circa 2014) are family ones and only slightly less than in 2005. This shows the staying power of family-owned businesses and among them is the world’s largest family firm, Walmart, in which the children of the late founder, Sam Walton are still big shareholder.

In Europe, states the same article in The Economist, 40 per cent of big stock market-listed companies still have a controlling family and one of the main reasons many big firms stay under family control is access to capital markets without losing control. What’s more, family firms also tend to take a longer-term perspective and family firms are also less likely to load up on debt – a reluctance to borrow may limit growth in good times, but it can make family firms more resilient when the going gets tough.

Testing their endurance
McKinsey & Company, a global management consulting firm, believes that there are five active attributes to ensure the endurance of family businesses: family, ownership, foundations, business and portfolio governance, and lastly, wealth management. Their article The Five Attributes of Enduring Family Businesses states, regulating the family’s roles as shareholders, board members, and managers, is essential for succession of power.

Furthermore, it states, a major thing to address is ‘maintaining family control or influence while raising fresh capital for the business and satisfying the family’s cash needs’, because this can be a major source of potential conflict, especially in the transition of power from one generation to the next.

The same article states that many family businesses restrict the trading of shares to keep control and, ‘family shareholders who want to sell must offer their siblings and then their cousins the right of first refusal. In addition, the holding often buys back shares from exiting family members. Payout policies are usually long term to avoid decapitalising the business’. Accompany these facts with a strong governance, vision and a certain amount of frugality, endurance is assured.
Although, the article reminds, success may not be a sure thing but ‘by diversifying risk and providing a source of cash to the family in conjunction with liquidity events, successful wealth management helps preserve harmony’.

Lastly, the article concludes, charity can be a vital component that keeps family members committed to the business. It’s because it provides meaningful jobs for family members and promotes family values as the generations come and go. ‘Sharing wealth in an act of social responsibility also generates good will toward the business. Foundations set up by entrepreneurial families represent a huge share of philanthropic giving around the world’ and it gives Bill and Melinda Gates Foundation, as an example.

Basically, these are ingredients that ensure a successful continuity of family-owned businesses.

Family business vs non-family business
Business Insider, in their article 6 Reasons Why Family-Owned Businesses are Smoking the Competition, lists a few reasons as determinants of the success and profitability of family businesses. They include taking risks in the areas they know well, engaging in international ventures that have a solid operating rationale, transparency, family directorship and disciplined capital allocation.

According to The Guardian, ‘the family business model also has some distinct advantages – including a shorter chain of command when it comes to making crucial decisions and a sense of solidarity that can only come from family ties’.

In the research article by University of Antwerp titled Differences Between Family and Non-Family Firms, concludes that, family businesses not only achieve higher levels of profitability but also export less. What’s more, the article discovers how CEOs of family businesses are older, ‘tend to enjoy longer tenures and have more self-employed parents’. It adds that CEOs of family businesses ‘worked less and are more female than their non-family counterparts’. Finally, the article states that family firms ‘make use of variable reward systems to a lesser extent’ than non-family businesses.

Last words
As owner and president of the Denver-based Family Enterprise Alliance, Kim Schneider Malek says in an interview with The Guardian, ‘Still, with all the advantages that may come from a family structure, family firms are vulnerable to the same pressures as other businesses. As they attempt to adapt to globalisation, changing value systems and a revolution in technology and communications, it remains a challenge for sustainability-minded family businesses to balance their commitment to creating and growing wealth with long-term stewardship.’

It’s generally the same one way or the other. What you’ll need is a certain amount of flexibility. That one trait, that ability to adapt and change, to ride the wind and wave, as many research and analyses conclude, will get you through anything.

Photo by Hiep Nguyen on Unsplash.

25 Jul 2018
Last modified: 19 Sep 2018
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