Why are family businesses viewed to be more trusted, able to weather the ups and downs of volatile markets, and better positioned for long-term success? What makes them so valuable when it comes to discussions of family business succession and leadership transition planning?
There’s no one answer. Instead, successful family businesses often rely on a set of shared principles, structures, and perspectives that foster continual growth and sustainability. They are designed and led by those with an eye on the long-term plans and goals, meaning they are better able to withstand short-term disruptions. The long view can be powerful and lead to decisions that not only benefit the company but its customers, stakeholders, and surrounding communities.
It comes down to the belief in socioemotional wealth, says Justin Craig, program director for the John L. Ward Center for Family Enterprises at the Kellogg School of Management at Northwestern University. Socioemotional wealth is the decision-making process that provides leaders of those firms, not financial success but rather the ideals of power, influence, sense of identity, and continuing the family name. The value of those ideals leads to decisions that increase socioemotional wealth, sometimes at the expense of profits.
As Craig notes, the mindset is one of: “Our legacy will be that we upheld the values of this company, and we handed it over to the next generation in better condition than we received it. So, it behooves us to look after our non-family stakeholders—because if we don’t, the following generation is not set up to succeed.”
The Economic Benefits
While the decisions may not always favor profits, family businesses are often some of the most profitable, outpacing other companies. In a study published in Harvard Business Review, researchers studied 149 family-owned, publicly traded businesses with revenues exceeding more than $1 billion, based in North America (the United States, Canada, and Mexico) and Europe (France, Italy, Portugal, and Spain).
The results? In strong economic periods, family-run companies do not earn as much as businesses with other ownership models. However, during slumping economies, family-controlled businesses excelled, far outpacing other organizations.
The researchers concluded that the family business focus is more on resilience rather than on performance. They look to the long term and make decisions that ensure the sustained viability and success of the business rather than on short-term gains. Those companies often make investments in the company that look at 10 to 20-year horizons in order to ensure success for the next generation of family leaders and beneficiaries.
Factors Leading to Success
A Credit Suisse study showed that family business typically have the following characteristics when it comes to their business investment strategy:
- Agile Decision-Making. The streamlined management structure in many family businesses means that decision-making can happen faster, leading to a stronger ability to handle disruptions and challenges.
- Longer Time Horizon. The perspective and lengthier period for investments is critical to success.
- Flexibility in Growth. Family offices often can invest in regions or products that will not be profitable in the short term but are intelligent moves in the long run. These acts are often not possible for companies with different ownership structures.
- Less Focus on Short-Term Results. Shareholders in firms that are not family-run want more immediate results. Those same pressures are not always a reality for family-run operations, which do not need to justify capital expenditures, near-term earnings, and investments. That leads to a flattening of volatility and normalized decision-making.
- Fiscal Mindset. Non-family-owned firms often take a conservative view of the balance sheet, while a family-owned business may take a less pressured approach.
- Institutional memory. Businesses that stay in the same industry over generations of leadership, a buildup of passed-on information, perspective, and history can be invaluable.
Family-owned companies that have lived through the roller coaster of economic cycles can point to a shared history that can allow for calmer, cooler reactions to volatile times. They can ride out the economic cycles differently than other businesses run by a variety of shareholders in the same sector.
Family-owned businesses are in a unique position to leverage perspective, history, and mindset to thrive. If your business is looking to leverage its family-owned structure and begin succession planning to continue success for generations to come, our team can help initiate and guide the process when you’re ready.