Assessed blog 6- Family business

The E.U. commission defines a family-owned business as any business in which two or more family members are involved and the majority of ownership or control lies within a family.

In the current challenging economic climate, times are tough for the majority of Businesses out there. The outlook appears gloomy. The family business context is one of the most important components in the world of entrepreneurship, however, taking a look at the family business sector, which creates an estimated 70% to 90% of global GDP annually. To support the statement above, it is needed to mention that, for example, a recent study by Campden FB revealed some insights into the top 50 fastest growing family businesses around the world and indicates the sector is booming. In Europe, a large percentage of these small-medium sized enterprises are owned and controlled by families. In the UK for example, almost one-third of UK employees work in family-owned enterprises, which account for 65% of all UK businesses and contribute nearly 41% of GDP, like Sainsbury’s. In the U.S., according to figures compiled by the Family Firm Institute, a big percentage, that in some cases exceeds the 80% of domestic companies, are family businesses. These companies account for 60 percent of total U.S. employment, 78 percent of all new jobs and 65 percent of wages paid. According to Gaebler Ventures, a Chicago-based business incubator, “Here is why: 35 percent of Fortune 500 companies are family companies.”

Therefore, the development of family businesses become a concern among whole economy. Family businesses, whether private or public are presented for simplifying the conflicting objectives of the business and its shareholders with respect to the fundamental issues of capital, as well as various financial alternatives available to the family business.

For the family businesses, it is no accident that self-finance and debt are the two most popular forms of finance for family businesses. Both forms of finance do not alter the share ownership of the company and thereby preserve family ownership and control. While family-owned businesses often steer away from equity finance in a bid to retain ownership of their business, it is also the case that external investors are often deterred from offering equity finance to family-owned ventures due to the limited opportunities to secure an exit.

However, staying within these financial constraints can retard the development of the venture and sometimes even be the cause of its downfall. Most high performing modern family businesses take external finance in order to achieve their potential.

Of course, finance plays a big part in attempts to resolve typical family business issues, such as passing on a business to children but extracting value for the parents’ retirement, or many family members receiving an income from the business and so on. Any solution requires the dual challenge of satisfying both the emotional and rational financial considerations of fairness.

How do family businesses perform when only the strong survive?

To answer this question, the performance of family-owned companies with businesses using Standard & Poor’s Compustat database will be compared. 

It is clear to find that family businesses handily outperformed non-family companies during both the 2001 and 2010 recessions in terms of a key metric, Tobin’s q.  (Tobin’s q is the ratio between a company’s market capitalization and the replacement cost of its tangible assets, with a higher ratio indicating that a company has more intangible assets such as patents, brands, leadership etc., and is likely to grow more in the future than one with a lower Tobin’s q.)

For instance, in our sample, the average Tobin’s q of all the family businesses remained at 0.86 regardless of the economic cycle, but that of the non-family corporations reached 0.95. Thus, the former coped better with the recessions than the latter.

A Family system tends to be orientated around emotions whereas a Business system tends to focus on profit and efficiency. However, when managed effectively, family firms can far outperform their non-family owned counterparts; think IKEA, think Wal-Mart, think Clarks Shoes. Here, we set out some of the qualities of family businesses that can make them very special indeed:

• ·         A Long Term View

Family Businesses tend to have a longer term view than other business models. This is because families often have a horizon for success which is a generation or more.

• ·         Quality Time

Successful business owning families tend to spend time together. Family firms which are successful, whatever the size of the family and business, tend to have a family behind it which is aligned behind a common vision and set of values.

• ·         Good Governance

Those family businesses that we see that are really special, understand the importance of good family governance and not only that, they work at it. 

• ·         Self-Awareness

Family Businesses who are successful are also self-aware. They understand their strengths and weaknesses and are open to new ideas.

Aronoff and Ward (1990) have made the excellent point that many of the virtues of family enterprise cannot be bought and, therefore, should not be sold. Just the same, to keep the family business in the family during the next decade and beyond will require extensive self-examination and the will to make some hard decisions (Lansberg, 1988). Getting empathetic and timely professional assistance will be a key component to achieving an outcome appropriate to the business, equitable, and well thought out with respect to the family that built it.