There is a huge misconception around the term “family business”. The words seems inextricably linked to the idea of small business; of Mum and Dad toiling round the clock in a corner shop or the reluctant son pressed into service as an apprentice butcher.
Yes, there are millions of small and medium-sized enterprises (SMEs) run by families, but the reality is that family-run businesses are amongst the biggest and most successful in the world.
A recent report by Center for Family Business at the University of St.Gallen, Switzerland, reveals the true scale of family business across the globe.
The 500 top firms in their Global Family Business Index employ nearly 21 million people and produce a combined annual sales of $6.5 trillion, enough to be the third-largest economy in the world. Firms like Walmart, VW, BMW, Ikea and Aldi are all family businesses with the majority of shares being held by members of the family, or in the case of Ikea 100%.
Barclays Bank says Britain now has more than two million family-owned businesses and that first-generation companies are growing sales at a rate of 22% a year. The bank reckons family-owned businesses generated revenues of £540 billion last year and that this figure is set to hit £661 billion by 2018.
Leading that growth are companies like The Pentland Group which is owned by Stephen Ruben and his family. Founded in 1932 as The Liverpool Shoe Company with little more than £100 base capital, the organisation has evolved, over eight decades, into a global family of sports, outdoor and fashion brands like Berghaus, Speedo and JD Sports generating global sales of over $3 billion.
What is clear from all the evidence is that family business model is generating huge value for its shareholders and should never be dismissed solely as a way of organising small scale economic activity?
So what is it about the family model that produces such sustainable businesses?
The fundamental principle that runs through every family business is the concept of loyalty – the emotional bond that ties together all participants in the business with an unquestioning duty to achieve the best for each other.
It is a powerful force which most manager-run businesses would dearly love to replicate but are unable to achieve with purely financial incentives. Loyalty is not just a soft management concept – it does have a tangible value and its impact on a business can be easily measured. In recruitment costs alone, family businesses often have an advantage over their managed business counterparts because they tend to keep their staff longer, not least because junior members are likely to take more senior positions in the future. Many of them become trusted confidents and this plays to the heart of the loyalty factor
Family business have a luxury that many firms dream of – the ability to plan for the long term. Knowing that shareholder pressures for a quick return are simply not there, family businesses can better align the deployment of resources with their strategic objectives. This long-term approach to investing is often referred to as “patient capital” and it can have huge pay-offs as many of the businesses in the top 500 Index can testify. Around 44% of businesses in the index are run by fourth generation family members and the average age of the top companies is 88 years. The most successful family businesses move beyond the ‘dangerous’ third generation trueism that they often fail, and build sustainable management and governance processes which are way beyond the often held view that nepotism prevails and damages the business.
KNOWLEDGE AND EXPERTISE
True expertise is endemic in a family business because knowledge gets handed down and from generation to generation, not just in training session or product manuals. The greatest violin maker of all time – better, many would argue than Stradivari whom he trained, was Nicolas Amati, who learnt his craft from his father, who’d been tutored by his father. The same is true of today’s family firms, where in depth product and sector knowledge is part of growing up in a family business. The most successful family businesses complement this knowledge and expertise with sound and solid business and financial management and training to ensure that they can last the test of time and the very many changes in cyclical businesses and economies.
Running a family business is, however, not without its challenges. With every positive that comes from the emotional bond of the family there is a negative.
There is often a dangerous assumption that a younger relative will take up the reigns, so succession planning is not deemed necessary. The baton is simply passed on at death or retirement. But the massive swing from manufacturing society to a knowledge-based economy does present challenges for family business as many of the natural candidates for leadership simply don’t want to follow in the parents footsteps, or are often not the most able to do so.
In the case where there is no clear succession, we have to bring in a leader from outside who has to quickly become part of the family and learn the unwritten rules of the business whilst building the sustainable systems, processes and skills which are critical to future success and sustainability. Anyone of you who has had experience of a new step parent in the family will appreciate the challenges this brings!
When you get it right- like Walmart who combine family members with the best outside talent- the results can be spectacular. The retailer has 15 board members but only two are now Waltons – a fact that has not stopped the family amassing a fortune estimated to be a cool $147 billion.
By Steve Benger, Managing Partner, Accelerus