Why Family Businesses Will Continue to Matter
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Transcript of Why Family Businesses Will Continue to Matter
Why Family Businesses Will Continue to Matter
Cal State Fullerton Center for Family BusinessSeptember 20, 2016
Quiz
What is a family business?
Perceptions…
Pathway
• Define, ground rules, disclaimers• Family business
– Advantage or disadvantage?• 5 distinct advantages • Global perspectives
– Extremophiles. • What can you do?
Why Family Businesses Will Continue to Matter
Family businesses have received an increasing amount of attention of late, and rightfully so. They dominate the global economy, from the corner store to the Fortune 300. As publicly owned corporations grow larger, as political systems grow more fragile, and as uncertainty permeates through many corners of society, family businesses will continue to play a key role in building trust and providing essential services. Exploring recent research and relevant case studies, we spend time understanding what makes family business unique, amply positioned and ultimately well suited to tackle the challenges of the coming century and how your own business compares.
Succession Checklist
Definition of a family business?
• Ownership control (>15%) by family or partnership of families
• Strategic influence by family members on the management of the firm
• Concern for family relationships• The dream (or possibility) of continuity across
generations Poza, 2007
Family Business Research• Two watershed events played key roles in turning the
study of family business into a field:– The publication of a special issue of the journal Organizational Dynamics in 1977– The launching of a specialized journal, Family Business Review, in 1986
• Still, between 1975 and the early 1990s, most of the published work on family businesses was anecdotal, rooted in the stories of consultants and observers of these mostly privately held enterprises
• Only in the past decade has research begun to struggle with this definition of the family business and address the unique characteristics of this form of enterprise
What we do know• In their first 5 years of operation, approximately 85% of
entrepreneurial and family-owned companies disappear • Among those that survive, only 30% are successfully
transferred to the second generation of the founding-family owners
• Only 12% survive under current ownership to the third generation
• Only 3% of all family businesses survive into the fourth generation level and beyond.
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Family Business MortalityMany reasons why businesses don’t continue from one generation to the next
1st Gen 2nd Gen 3rd Gen 4th Gen
100
75
50
25
0
• Sale of the business• Loss of family interest• Unpredictable challenges• Industry changes• Missed opportunities• Mismanagement• Succession problems• Family conflict• Family norms challenge business
norms
Publicly traded any better?
Of 25,000 publicly traded companies from 1950 – 2009, the AVERAGE LIFE SPAN WAS 15 YEARS
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Evidence shows family companies outperform public companies
Founder-stage family firms are 19% more valuable than non-family firms3.
Family businesses generate higher… • annual shareholder return• annual revenue growth• income growth• return on assets
…than non-family firms4.
Family businesses employ 50-60% of the workforce in
industrialized countries2.
Publicly traded family firms significantly outperform non-family firms in earnings and
stock performance: 5.5% more profitable
6.65% better return on assets1.
Family-run companies are valued
10% higher by the stock market than
non-family companies1.
1 Anderson, Ronald and David M. Reeb, Founding family ownership and firm performance: Evidence from the S&P 500, Journal of Finance, June 2003, vol. 58, no. 32 Financial Times, Family companies are ready for the worst, October 30, 20013 Amit, Raphael and Belén Villalonga, How do family ownership, management and control affect firm value? Evidence from the Fortune 500, 2004, working paper4 BusinessWeek, Family, Inc., November 10, 2003
5 Distinct Advantages• Values • Patience• Governance• Entrepreneurship • Trust
Values
The easiest money to earn is the money we haven’t spent
We have a simple rule, we do not spend more than we earn
People think we are rich and courageous, but in fact we are cowardly
This feels like I am coaching my son’s Little League team
If one sector suffers a downturn, businesses in othersectors can generate funds
We accepted that we’d lose money in the US for 20 years
When a problem hits, they can act immediately as a team – on thathas been there before
Patience
Family Business Longevity• Kongo Gumi (578 to 2007)
– Hoshi (Japan 718) – Chateau de Goulaine (France,1000)– Barone Ricasoli (Italy, 1141)– Baravier &Toso (Italy, 1295)– Hotel Pilgrim Haus (Germany, 1304)– Zildjian (Constantanople, Newton, 1623)
• Family businesses represent 80% + globally • Studies indicate that on average family businesses outperform
non-family businesses in terms of ROA, ROE, market value creation, as well as other measures of performance (Anderson R., & Reeb, D., Founding Family Ownership and Firm Performance: Evidence from the S&P 500. Journal of Finance, 58(3) 1301-1328)
• Mittelstand• Not just a freak show
Many years ago, as a young chemist working in the company’s lab, Samuel Curtis Johnson III, now-deceased chairman of SC Johnson: A Family Company, tried to convince his father that he had the formula for a breakthrough product, an insecticide. Reports are that several attempts at convincing his father of the soundness of the idea were rebuffed with a simple “Remember son, we are a wax company.” Samuel Curtis continued to perform his assigned job faithfully at the lab and carry out his “skunk works” project on the side. He also continued to bring up his idea and advocate its merits in subsequent meetings with his father, only to receive the same admonition. Finally, young Samuel Curtis reportedly added a tiny amount of wax as an inert ingredient to his formulation for the insecticide. When he once again took the new product, now part of the wax family of products, to his father, it received the go-ahead; after all, the insecticide was now wax based.
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Poza, 2010. Family Business 3e, South Western Page 103)
Governance
O M F G
Distinguishing family businesses from non-family businesses
CONTROL & INFLUENCEHow?
Through OMFG
combination of Ownership, Management, Family & Governance
Source: 2014 EY Family Business Survey
Tagiuri & Davis (1982)
Board of Directors or Board of Advisors
Ownership
BusinessFamily
Family CouncilCompany
Management
Annual Shareholder Meeting
Shareholder Council
Maybe too much?
Entrepreneurship
Entrepreneurial Resources Provided by the Family
Ernst & Young Coming Home or Breaking Free 2011
Knowledge about how to lead a business
Provision of contracts
Introduction to networks
Coaching/mentoring related to entrepreneurial activities
Industry-specific knoweldge
Physical resources (infrastructure, facilities)
Favorable and negotiable conditions (debt and equity capital)
Equity Capital
Access to distribution channels
Debt Capital
No Family BusinessFamily Business
Transgenerational entrepreneurship
“…the processes through which a family uses and develops entrepreneurial mindsets and family influenced resources and capabilities to create new streams of entrepreneurial, financial and social value across generations…”
Habbershon & Pistrui, 2002; Nordqvist & Zellweger, 2010
Family Entrepreneurship
Business Family
Family Business
Business Family
Family Business
Family Business Focus(Current View)
Entrepreneurial Venture 1
Family Business 2
Entrepreneurial Venture 2
Social, Political, Community and other Activities
Family Entrepreneurship All Entrepreneurial Activity
Trust
Why family business? • 77% of all new business ventures established in
the United States are founded with significant involvement of the family in the business.
• The public views small business as most trust-worthy when it comes to spending efficiency. Federal government is viewed as least efficient.
• 73% people say they trust a family business, however, that number tends to decline after an ownership transition.
GLOBAL Report on Family Businesses • Large numbers & contributors to jobs / economy / society
– Latin America / India: 90-98% – US / Germany / Spain: 80-90%– China: 90%
• Large, Medium, Small size– Think Wal-Mart, Ford Motor Co. and S.G. Johnson
• Out-perform non-family enterprises – Especially in the first generation– Second generation some do, some do not.
70% would like to pass their business to next generation BUT next gen is not always interested OR
capable OR prepared to work in the founder’s business – WHY?
Source: Babson STEP Project
More global impact
• Around 85% of $1 billion-plus businesses in South-East Asia are family-run
• ~ 75% in Latin America• ~ 67% in India• ~ 65% in the Middle East • ~ 40% in China • ~ 35% Sub-Saharan Africa
Family business in China• 40,000 family/private business• 60% GDP• 90% employment
• Approaching succession, but….– < 8% have transferred successfully thus far– > 65%% do not even wish to be in founders
business
Extremophiles?
• Say What? “Family businesses that have successfully adapted their internal systems and external activities to the emergences of an extreme environment.”
• So What? Much of the world’s future wealth will come from “higher-risk “economies. Economic volatility is quickly becoming the new normal.
Why do family businesses make natural extremophiles?
• Investments extend beyond high risk episode• Skilled at tactical triage AND strategic planning• Strong ties to a city, country or region, which
often pre-date the current episode• Robust social networks• Creating and exploiting pockets of “trust” and
stability• Necessity is the mother of invention
Not so gloomy• Families are able to positively affect the
resource inventory and usage of their firms (Arregle, Hitt, Sirmon, & Very, 2007; Habbershon & Williams, 1999)
• Apply a long-term perspective allowing for unique strategic positioning (Zellweger, 2007)
• Have less agency problems and higher firm values (Anderson & Reeb, 2003)
• Drive new entrepreneurial activity (Kellermanns & Eddleston, 2006; Nordqvist & Melin, 2010)
Take heed• Reasons for failure to sustain family wealth:
– 60% lack of trust– 25% lack of education & prep– 3% lack of financial / tax planning
"For empires to fall, all they need to do is exist." – Voltaire
Building Family Businesses That Last
• Building a family business so that it continues takes ongoing dialogue across generations of owner-managers about their vision for the company
• Family businesses that have been built to last recognize the tension between preserving and protecting the core of what has made the business successful on the one hand and promoting growth and adaptation to changing competitive dynamics on the other
The ultimate aim of ANY business is…
VALUE CREATION!
“If there is one piece of advice we would give to all family firms dealing with succession, it is: communicate.”
Chrisman, Chua & Sharma
One Word
Succession Checklist
Connect