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05 June 2023

Family businesses fare better than listed firms in downturn

By Shuchita Kapur

Family businesses fare better than listed companies in economic downturns due to their work ethic and culture ethos. Family businesses, according to some estimates, account for 70 to 90 per cent of global GDP.

According to a new report released by Barclays Wealth and the Economist Intelligence Unit (EIU), titled 'Family Business: In Safe Hands?' family businesses are the world's most prevalent organisational form and among the most enduring.

"While there is no panacea for coping with a downturn, the organisational structure, values and outlook of the family business can often provide a strong foundation for coping with difficult economic conditions," the report says, as opposed to listed businesses.

It states certain attributes that make such businesses resilient and advantageous in today's challenging environment.

Firstly, family businesses have a long-term perspective and are not subject to the short-term demands of external investors in the way that listed businesses are. Second, they tend to be financially conservative, and do not employ leverage to the same extent as many other companies.

Third, they have close alignment between ownership and control, which helps to prevent the 'principal agent' problem, whereby a separation of ownership and control (as is seen in listed companies) can lead to managers pursuing opportunities that are not in the interests of the company and its shareholders. Fourth, they have a close network of family members, who control the business.

The research shows that family firms are much more committed to the longer-term and not driven to maximise returns from one quarter to the next. According to analysts at Barclays Wealth and the EIU, a long-term perspective means that family businesses can exercise prudence during both upswings and downswings in the economy.

"They are less likely than listed companies to pursue adventurous growth strategies to satisfy short-term investors during a boom and some academics have argued that they are more likely to invest through a downturn, giving them a sustainable advantage over companies for whom there are wider swings in performance and investment."

However, this trend is a bit different in the US, but that is mainly influenced by the cultural bias towards a shorter-term decision-making focus in the country. This differs if other parts of the world are taken into consideration, according to the report.

As per the data in the report, family business members from Asia are especially unlikely to cite the enjoyment of making money as an important motivation. Just 30 per cent said that it was important, compared with 43 per cent from Europe and 48 per cent from North America (although it should be pointed out that the pool of family business respondents from North America was fairly small at 30 individuals).

Overall, the goal for family-owned companies is not about making a quick buck and this deters them from seizing the short-term opportunities that most listed companies go for. On the contrary, family-owned companies focus on a wider range of values than just the pure financials.

"The family business means a lot to them. Their name is on the door, they have a reputation and standing in their community. So it's rarely just about making money. They tend to care about the longer-term standing of the brand and business, and about their legacy. Families want to pass on a business to the next generation that is stronger and more likely to succeed," says an expert in the report.

According to the survey carried out by Barclays Wealth and EIU, family business members run companies for many more reasons than just to make money.

When asked about their motivations for creating and protecting their wealth, family business members were less likely than non-family business members to cite the enjoyment of making money as being important, the survey revealed.

The most commonly cited advantage of the family business model is its long-term perspective as there is less pressure on family businesses to generate a quick return.

"Without a stock market listing, private family businesses are insulated from the need to respond to the short-term demands of investors. They can adopt a more long-term, so-called 'patient capital' approach that could mean that they are better placed to ride out volatility than their listed peers."

This coupled with a well-structured family business that has clear objectives can have a significantly longer timeframe than other types of organisations. According to Mark Kibblewhite, Managing Director of Barclays Wealth: "This allows them to exploit opportunities that others cannot because they do not need to achieve such a quick payback. They are not under pressure to hit certain benchmarks and have the advantage of being able to anticipate longer-term trends."

Agrees Emmanuel Fievet, Head of International Private Banking at Barclays Wealth: "Certainly in a family business, the management can have more time to see the results of their action and there is less external pressure on them. But I would add that external pressure is not always negative – sometimes it forces companies to do the right thing sooner rather than later, so it's not black and white."

The survey by Barclays Wealth and EIU reveals family business members who represent service-based companies (such as financial services, media and professional services firms), and those who represent industrial or manufacturing companies (such as chemicals, automotive or natural resources firms) tend to have different perceptions when it comes to time horizons.

As per the data in the report, in general, respondents from service industries are more likely to view the ability to think long-term as an advantage of the family business model.

"This is likely to reflect the differing time horizons of services and industrial companies. While service companies may in general have a time horizon that spans one or two years, industrial companies must take a longer view because of their greater requirement for capital expenditure and fixed investment. So for service companies, the ability to look beyond their traditional time horizon is naturally a greater advantage."

Financial security for dependents also proves to be a vital consideration for family business members, which encourages a time horizon measured over decades rather than years. According to the survey, 67 per cent of respondents consider financial security for dependents as an important objective for wealth creation and protection, compared with 58 per cent of non-family business members, the survey reveals.

Steady leadership and the stewardship of family members also help to foster a long-term perspective. "While a listed company may see chief executives come and go every few years, the management team of a family business is likely to be there for an entire generation."

Moreover, family businesses tend to have a more consistent value set in the way that they run their business. Fievet of Barclays Wealth emphasises the distinction between assets of the business and personal wealth in terms of risk appetite. "With most family businesses, risk is taken at the business level, and the wealth creation strategy is often the business, less the family's financial assets."

Most family businesses are also risk averse, which again works to their advantage, especially in a downturn. "This combination of relative risk aversion, along with a recognition that money is not the predominant motivation, may be one reason why family businesses, in general, do not apply leverage to the same extent seen in listed companies," the report states.

"They (also) do not suffer the pressure from activist investors to gear up their balance sheets. There is evidence that large family firms are less leveraged than public companies. Family businesses tend to very cautious when it comes to their balance sheets," an expert is quoted as saying in the report.

The report also highlights that family businesses are relatively less willing to sell the business, adding to their long-term goals.

According to the research, just 10 per cent of family business owners say that they have or would consider selling their business, compared with 22 per cent of other business owners in the survey.

Although an exit, such as initial public offering, is a goal for some family businesses, the vast majority, it seems, prefer to remain in family ownership, the report says.

The report shows that family business members in Asia-Pacific were least likely to have sold or sell – just four per cent said that they had done so or were planning such a move, compared with 13 per cent in Europe.

"Again, this reflects the very strong family values in many Asian societies, which see the business as an asset to be passed down the generations, rather than as one that can be sold to make a return. It might also reflect the relatively earlier stage of capital markets in the region, which mean that there are fewer opportunities for exit."

However, this broader set of motivations and values that are held by family businesses should not be interpreted as reflecting a lack of entrepreneurial zeal or competitiveness, the report cautions. "Indeed, compared with non-family businesses in the survey, family business members are more likely to consider the opportunity to beat the opposition as an important motivation to amass and protect their wealth."

"They are also fairly confident about their ability to compete with listed companies. Almost four in 10 family business respondents believe that they are successful in their ability to compete with listed multinationals. There is, however, a difference between service-based companies and industrial or manufacturing businesses. Among the family business respondents, those from service companies believe that they are much better placed to compete than those from manufacturing or industrial companies."

Despite the many advantages that family businesses may have, there are certain drawbacks it has to face.

"What is interesting, however, is that the very factors that can give family businesses the edge – the strength of family relationships and their close-knit leadership team – can also be their downfall," the report says.

According to the family business members questioned for the survey, the strong support that they derive from other family members in their network is perceived as being the biggest advantage of the family business model, more important even than the ability to take a long-term perspective.

However, this strong, mutually supportive relationship can lead to some problems. Sibling rivalry, succession, the misalignment of strategic objectives and internal power struggles are old problems that plague family businesses. Besides, conflict between members of the family that are involved in the business and those that are more distant is another problem.

"To some extent, conflict is inevitable in family business – just as it is in any other kind of organisation. But the danger in a family business context is that the disagreement occurs not just between individuals who work together, but who share other aspects of their lives. For this reason, conflict in family business can be far more pernicious and difficult to solve than in other companies," it adds.

The key is to keep family and business disagreements separate, it suggests. However, this is a hurdle and according to the survey, the difficulty in separating home and work life is the second biggest disadvantage of the family business model.

Even though most families have shared values and ethos, differences of opinion and perspectives grow as more family members become involved, both directly and indirectly. Divergence of perspectives can lead to disagreement, and this can further fester into conflict, which can be the undoing of the family business model, says the report and warns resolving conflicts is a challenge.

However, the above-mentioned problems do not undermine the successful model of family-run businesses, the report says.