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Why family owned businesses are more resilient

Why family owned businesses are more resilient

Volkswagen, Cargill, Robert Bosh, MARS, IKEA, L’Oreal, Marriot are some of the largest family owned businesses that had survived world wars, Pandemics, Financial crisis and recessions over the last century. Many research prove that family owned businesses are more resilient over economic crisis compared to non-family owned businesses. Unique ways of making decisions and engaging in business had created the ability to overcome many economic downturns. Based on research and our experience in working with family businesses we have set out below some key characteristics which give this edge to the family owned businesses;

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Article by

Thamali Rodrigo

 

Business has an obligation to the family, to be successful in the long term rather than in the short term.

All successful family owned business leaders lead their organizations keeping in mind their obligation towards their families to grow and sustain the businesses so that it can be passed on to the next generation.  This typically will lead to very different decision making choices particularly when it comes to strategic decisions compared to non-family entities.  Most family businesses invest with long term view and they will make very careful analysis before investing on new projects. One of our clients took 3 years to make the decision to buy a business which will backward integrate their business  operations. Significant analysis was made prior to making  the investment. The CEO’s  explanation was “Although I invest as a company, the company money belongs to our family. Hence any investment we make should yield in to generations, not only during my tenure or couple of years.” Our experience is that all successful family business leaders share this approach. Due to the long term view, investments will be made with careful analysis and as a result, such entities  have the ability to withstand most economic shocks. 

Borrowing is viewed as a risk to the family ownership of the business and its assets.

Majority of the successful family businesses carry low debt. Even if these organizations borrow it is generally with adequate risk margins in such a way that the businesses can be bailed out if and when such requirements arise. Almost all the directors representing the family of one of the large family owned entity’s that we worked with had one information which they critically evaluated during every meeting. That was the debt situation of the company. They were of the view that “we should grow with the money we earn not with the money borrowed from banks. When we borrow we have to pledge our assets, which is risky when the times are bad.”  They also believe that quick growth with borrowed money is too risky and as a family business a stable sustainable growth with own reserves is always preferred. This is another reason why we will see most successful family owned businesses will not be significantly impacted in crisis situations.

Loyal employees with significant amount of experience, is an important trait of a successful family businesses.

They would have seen the journey of company over many years and the way the company had overcome many challenging situations. A third generation family business in tea industry where we were consulting, had a layer of very senior employees with experience ranging from thirty years to sixty years. These employees had worked across all three generations. Family business had looked after them and in turn these employees consider themselves as part of the family. They had created a culture of ownership among the employees. This is a significant strength a business can have when the going gets tough. Employees will work for the loyalty and trust they have built over the years disregarding short term implications that they have to face during challenging times

Established long term relationships with stakeholders is an important  strength of  family owned companies

During difficult times, it’s the trust and relationships that  help businesses  to overcome the road blocks. Successful family businesses  consider earning the respect of  their stakeholders as  important corporate value. Generally family businesses are directly related with an identified family. Therefore maintaining trust, loyalty and long lasting relationships is not only a business affair but a significant matter of importance for the entire family. Hence successful family businesses will see a significant competitive advantage when attending to business needs when times are hard. 

Supportive family shareholders during the difficult times

All successful family businesses  have a supportive family behind them. This support will be most relevant in difficult times. They will forego dividends and benefits until the business could get back to normal. Family will support holding on to the ownership as the family believes in a long term view about the business and not mere  short term gains. These family business owners invest time in building this relationship with the family over the years. Business will be very transparent to the family in every aspect. Constitutions are in place defining how the family will engage in the business and it clearly stipulate what to expect from the business. These family businesses  have family councils which functions  as the conduit between the business and the family. Family council’s primary responsibility is to create awareness and maintain harmony within the family so that the business can perpetuate in to many generations to come. 

It is a known fact that only 13% of the family businesses make it to the third generation. The statistics are low because many family businesses do not address the predictable and manageable issues on a timely manner. However the families in businesses who address these predictable issues will survive through to many generations. A successful family owned business is much more resilient and has many competitive advantages that could be identified. We at KPMG believe that the family owned businesses are a key strength in any economy and we are pleased and proud that we can be part of their successful journeys. 

© 2020 KPMG, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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