There is a popular narrative out there which holds that all family businesses are born containing the seeds of their own destruction. Every case of a family business closing is used to support this “original sin” theory, which explains why it has become so popular even when it is simply, not true, writes Ken McCracken of KPMG's Family Business practice.
The logic is that every family business is some kind of inverted pyramid scheme with generation after generation all demanding an income while making no contribution. The business inevitably collapses under the weight of its greedy and indolent shareholder base.
This happens in a few instances, but the truth is that the majority of multi-generational family businesses do not suffer this fate. In Ireland examples such as Sisk, Musgrave Group, and Barry’s Tea demonstrate that family businesses can continue to grow and prosper as they pass from generation to generation.
These businesses have grown over time and have no difficulty in meeting the demands of their family shareholders. This is not unusual. Central Europe is replete with other examples which include the likes of BMW and Aldi. The only real surprise is that anyone should find this surprising.
It is capitalism, pure and simple. The system works by people providing capital and businesses delivering a return on that capital to their owners. Nowhere does it say that owners must work in the business. If it did, it would make equity investing interesting.
And that is perhaps the best way to view a multi-generational family business, as another enterprise with a wide shareholder base. The only difference is that the shareholders are likely to know each other and decision making can be more complicated due to family ties and other bonds of kinship.
That means the shareholders have to figure out what ownership means to them. They have to decide what they want out of the business and what involvement they want in running it. They have to know how to be good owners and they have to ensure that subsequent generations also learn about good ownership.
Bad owners can be fatal for a business. If you want to destroy a business, you are far better off having a dissolute group of owners than having bad managers. You can always sack bad managers, but you can’t fire the owners. And even if the owners do want to get out, there is often little liquidity to smooth the path to an exit.
Some family businesses develop policies to allow family members to pursue a career in the business if they so wish. Others deliberately separate the shareholders from the management of the business and have family representatives on the board to take care of their interests. In each case, the objective is to achieve the overall return on investment that the owners desire.
Family businesses are not morally superior to any other form of enterprise but nor are they doomed by some congenital fatal flaw. There is nothing abnormal about a family business. In fact, it’s the most dominant form of business in the developed world. There are many good family businesses out there which have grown over the generations to create empires and Ireland has a number of strong examples. These success stories can provide the templates for others to build their own strong family businesses for themselves and future generations.
Want to hear more from Ken? Listen to the KPMG Insights for Entrepreneurs podcast series and learn from a mix of some of Ireland’s leading entrepreneurs and expert business advisers.
This article originally appeared in Business Plus magazine and is reproduced here with their kind permission.