Studies show that family businesses last longer. Here’s why
Family-owned businesses are a key driving force behind the success of the Canadian economy. As an accounting firm that works almost exclusively with entrepreneurs, we see this widespread reality playing out almost every day.
Indeed, we’ve worked with dozens of family-run corporations, many in their second or third generations, that have enjoyed sustained financial success thanks to sound business management. We’ve also seen our fair share of cautionary tales, of course—particularly when inter-family squabbling becomes an issue—but for the most part, these organizations have a strong chance of growing over time and funding the professional and lifestyle objectives of successive generations. A new study supports our anecdotal observations.
As reported by the National Post, a study by the University of Toronto’s Rotman School of Management found that nearly 70 per cent of family businesses that were studied over a 50-year period are still in business, with only 24 per cent being acquired or shuttered altogether. Not surprisingly, family-owned businesses also reported less management turnover—with CEOs enjoying tenures an average of four years longer when compared to their counterparts at public corporations—not to mention significantly less financial volatility.
There was another finding that was particularly notable. The study’s authors point out that organizations run by a family are more likely to focus on long-term strategy and financial success, rather than emphasizing quarterly results, as is the case amongst most non-controlled public corporations.
The Rotman study’s findings are consistent with a report released last year by Credit Suisse. In it, the bank analyzed the performance of nearly 1,000 family-owned, publicly-listed companies around the world.
The authors found that “… family-owned companies … have outperformed broader equity markets in every region and sector by an annual average of around 400 basis points per year since January 2006. The financial performance of family-owned companies is also superior to non-family-owned peers. Furthermore, family businesses appear to focus more on long-term growth and their share price returns have been stronger than their peers.”
Family-run businesses edged out non-family-controlled firms in several key financial categories including revenue and EBITDA growth, profit margins and cash flow returns. Organizations with family members at the helm were also noted as being more conservative in their strategic approach, with new investment being funded through cash flow or equity, while executives surveyed also reported a greater emphasis on quality when delivering their products and services.
This all makes sense, of course. If you plan to run your business for decades and then plan to pass it along to the next generation, odds are that you won’t be reckless with its management—or you’ll at least think twice before making overly risky strategic decisions. You’ll also want to keep your customers happy. And if you’re the owner-operator matriarch or patriarch of an entrepreneurial family, there’s a good chance that you’ll be sticking around for a while, at least until the next generation is ready to take over or you pass away, whichever comes first—preferably the former.
Family-controlled businesses are also unique in the sense that the profits drawn from the business tend to directly fund the family’s lifestyle needs. It’s another reason why making unwise business decisions is rarer in these organizational structures. If you want to buy a new family cottage or pay off business debt, for example, you need steady, stable cash flow and revenue to cover those priorities. Owner-operators can literally connect every dollar of revenue to their work, or that of their family members, making unnecessary risk-taking far less appealing.
In contrast, publicly-traded companies operated by hired gun executives tend to compensate based on those aforementioned quarterly financial results. This incentivizes risk-taking and short-term strategic decision-making to help drive share prices higher or achieve short-term performance goals that tend to be arbitrary, even at the best of times. In the end, the executive might look like a genius—at least on paper—for having hit a specific target, but in most cases the business they’re running will tend to suffer over the long term.
What does this all mean? The message from these studies is that family-run businesses have an appeal that sometimes goes overlooked. When the chemistry between family members is strong, roles are appropriately differentiated and tasks delegated fairly, the results can be extremely positive, not to mention financially lucrative.
So, don’t ever let anyone tell you that involving your children, brother, aunt, cousin—whomever—in the business is necessarily a bad idea. If they’re qualified, hard-working and the right cultural fit, those familial ties just might help ensure your company’s long-term success.
Marshall Egelnick, Managing Partner
