The phrase “family business” connotes a small or mid-sized company with a local focus and squabbles over succession. While plenty of family firms fit that description, it doesn’t reflect the powerful role that family-controlled enterprises play in the world economy.
Conventional wisdom holds that the unique ownership structure of family businesses gives them a long-term orientation that traditional public firms often lack. But how true is this?
Though family-run companies slightly lag when the economy booms, they weather recessions far better. Why? Family businesses tend to focus on resilience rather than performance. They forgo the excess returns available during good times in order to increase their odds of survival during the bad. A CEO of a family-controlled firm may have financial incentives similar to those of non-family firms, but the familial obligation leads to very different strategic choices. Executives of family businesses often invest with a 10 or 20-year goal, concentrating on what they can do now to benefit the next generation.
So how do family-run firms manage for resiliency?
1: They’re frugal in good times and bad
After years of working with family businesses, I have seen that they all seem infused with the sense that the company’s money is the family’s money, and as a result they simply do a better job of keeping their expenses under control. You’ll see that family-run enterprises enter recessions with leaner cost structures, and consequently are less likely to have to make redundancies.
2: They keep the bar high for capital expenditures
Family-controlled firms are especially cautious when it comes to CapEx. I have a simple rule for my family business: do not spend more than we earn. This sounds like simple good sense, but the reality is, you never hear those words uttered by corporate executives who are not owners.
At most family firms, CapEx investments have a double hurdle to clear: a project must provide a good return; then it’s judged against other potential projects, to keep spending under the company’s self-imposed limit. Because family businesses are more stringent, they tend to invest only in very strong projects. The downfall is some opportunities are missed during periods of expansion, but in times of crisis it pays off because they’ve avoided projects that may have been money pits.
3: They carry little debt
Family-controlled firms, associate debt with fragility and risk. Debt means having less room to manoeuvre if a setback occurs, and it means being beholden to a non-family investor. People assume many families with their own business are rich and courageous, but in fact, they are risk-adverse leaving most of the cash in the company to avoid giving away too much power to banks.
4: They acquire fewer (and smaller) companies
Family businesses favoured smaller acquisitions close to the core of their existing business, or deals that involved simple geographic expansion. They’re generally not ‘deal makers’.
Family businesses prefer organic growth and will often pursue partnerships or joint ventures instead of acquisitions. Acquisitions represent integration and culture risk, the fabric of any family-owned business.
5: Surprising levels of diversification
Many family businesses expanded into new lines of business organically or through small acquisitions to enter new fields. As recessions have become deeper and more frequent, diversification has become a key way to protect family wealth. If one sector suffers a downturn, businesses in other sectors can generate funds that allow a company to invest for the future.
6: They retain talent better than their competitors do.
Retention at family-run businesses is generally better. The reason? They tend to focus on creating a culture of commitment and purpose, avoiding layoffs during downturns, promoting from within, and investing in people.