OUR THOUGHTS ON:

Secrets of My Family's Success: Why Family-Owned Businesses Succeed

Business Advisors

By Frank Wisehart MBA

According to Business Insider, family-run businesses account for one-third of all companies in the S&P 500 index. Prominent family-run businesses include Wal-Mart, $422 billion in annual revenues; Ford Motor Company, $129 billion; Cargill (Cargill/MacMillan Families), $108 billion; Comcast (Roberts Family), $38 billion; and News Corporation (Murdoch Family), $33 billion.

Family-run businesses are foremost concerned about preserving value for the next generation. Preservation is more important than accumulation. Family-run business rarely bet a quarter of the farm on any single strategic maneuver. Newer ventures start smaller, are conservatively leveraged and have more hands-on leadership from top management.

The focus is on the long-term. In a race, a family-run business bets on the tortoise, not the hare. The Harvard Business Review (“HBR”) Article, “What You Can Learn From Family Business,” outlines seven sustaining practices that mid-market and larger family-run businesses utilize in order to weather both good and bad markets. They:

  • Are frugal in good times and in bad times
    • Most family-run firms do not indulge on luxurious offices. The attitude is that the company’s money is the family’s money, and as a result they do a better job of keeping expenses under control. Family businesses generally have leaner business expense structures and are less likely to let staff go during economic downturns.
  • Keep the bar high for capital expenditures
    • Capital projects are vetted against competing uses of funds more vigorously than other projects. Furthermore, management self-imposes spending restrictions for capital projects. These stringent double-hurdle requirements help the firm avoid costly mistakes.
  • Carry little debt
    • Leveraging the balance sheet means potentially leveraging control away from the family should a downturn occur. To avoid this set of undesirable circumstances, family-run businesses avoid debt and instead invest more equity into projects. According to the HBR article, family businesses on average are capitalized with only a 37% debt load.
  • Acquire fewer (and smaller) companies
    • HBR found that family-run business revenue from acquisitions on average accounts for only 2% of total revenue. Acquisitions are typically closer to home and eschew major changes to the core business model. Expansion opportunities involve purchasing similar businesses in nearby geographic markets.
  • Show a surprising level of diversification
    • As part of its survival mentality, family businesses plan for cyclical downturns in their business model. They survey the market for ways to navigate economic tides by investing in countercyclical businesses.
  • Are more international
    • Family-run businesses have ambitious plans for overseas expansion. However, they do so without large cash outlays. Smaller investments over long periods of time allow the company to invest and learn the ropes, rather than make a big splash, run out of money and fail.
  • Retain talent better than their competitors do
    • Family businesses do not solely rely on financial incentives to increase employee retention. Instead, they focus on strengthening the culture. Further, family businesses are more likely to promote from within the organization. They spend far more training their existing staff to do the new job, rather than hiring externally to fulfill employment needs.

Footnotes

1.Business Insider, The 10 Largest Family Businesses In the U.S. by Karlee Weinmann and Aimee Groth, November 17, 2011, http://www.businessinsider.com/the-10-largest-family-businesses-in-america-2011-11

2.Harvard Business Review article written by Nicolas Kachaner, George Stalk and Alain Bloch, November 2012 

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