Why do family businesses survive?

Why do family businesses survive? Aside from succession issues or bad business decisions, over generations socialist policies, the capital requirement of technological progress to compete in free markets, internationalization, the growth of financial power of the pension industry and of the finance sector all suggest the family business ought to be in decline or even extinct in the developed world.

Family businesses seek legitimacy in the context of trends and business philosophies that write them off. Consequently, to counter the currents of contemporary trends, family firms make greater efforts to be legitimate than non-family competitors. This includes aspiring to conformity to the prevailing norms in their sector. Their governance structure is not orthodox from a non-family business perspective. As a result, to gain access to finance, labour and a good public image, successful family businesses compensate in their efforts in other aspects of their operations to seek acceptability in the market. In turn this gives the family business access to resources from stakeholders like banks or suppliers. Counter initiatively, this dedicated effort often leads to a higher return on assets for family businesses than non-family businesses.

This is a paradox of the continued prevalence of family businesses in the British economy. Family businesses obtain synergies between apparently incompatible issues, such as between governance and their access to resources, and generate efficiencies from the complexity of their makeup. With paradox comes tension: short term versus long term perspective; centralize or decentralize; diversify or focus; and whether to internationalize. Resolving tensions often involves balancing trade-offs. Where possible, this should be done in a way to generate synergy, so the strategy of decision making is integrated. This allows for a balance of innovation and tradition that should bear well for the future.

Whilst family businesses are likely to be parsimonious in their research and development budgets, the funds applied are often well spent with a higher rate of innovative output. That output may well be incremental rather than radical change to the product, but most innovation is incremental. That also suits the family business ethos of heritage and cautious, prudent governance. It links to utilizing the network in their value chain that has an interest in the success of the family business’ product or service. This value for money research by family businesses is another paradox of the family business.

This good leadership and economy of resources results from a mindset of agile thinking, mixing the priorities of family and business interests, and accepting the challenge of the paradoxes of family business. This requires a patience with ambiguity and a willingness to openly debate ideas and concepts. It produces results that are resilient and reliable. Ultimately this supports the efficiency of the family business.

For family businesses to thrive on their paradoxes, they should appreciate the need for a trusted brand reflecting the heritage of the family business, the need to innovate from their resources (family, labour, social links and stakeholders) and the need to strive for perfection within the parameters of the product and/or service. Doing this requires the alignment of family shareholders and the business management. This should be founded on the established values of the family influencing the vision of the business and its associated strategy. This operates within and is mediated through a governance structure that reflects the values, vision and degree of involvement of the family in the business. This should factor in the optimum contribution of non-family management. My colleagues and I at Nexa are available for consultation with family businesses on the implementation of these foundations for success including improving their governance, documenting finance arrangements, fine tuning their employment contracts and incentive schemes, and other legal aspects contributing to the survivability and thriving of family businesses.

For more information please contact Henry Clarke using henry.clarke@nexa.law