Family Businesses Are a Safe Bet for Long-Term Survival
Sometimes, in the world of business writing, family businesses get a bad rap. You read about how there are conflicts of interest to avoid or succession issues to manage. It's easy to feel as if the virtues of family businesses get short shrift.
That's why it was refreshing to read a recent article in the Kellogg School of Management's magazine by Lena Singer, which highlights the upsides of family businesses.
Frugal During Good Times, Ambitious During Lean Times
"Our experience with family businesses has confirmed that in down times, family businesses will take advantage of the negative economic conditions to make some seemingly unconventional and courageous decisions," is what John L. Ward, co-director of Kellogg's Center for Family Enterprises, tells Singer.
Those courageous decisions include making acquisitions, adding capacity, making investments, and avoiding layoffs. As result--when economic conditions improve--family businesses are in a better position to pounce.
Ward's words are consistent with the findings in a Harvard Business Review article called "What You Can Learn from Family Business."
In that article, the authors demonstrate that family-run companies don't earn as much money as companies with "a more dispersed ownership structure" during good economic times.
But when times get worse, the family businesses excel. Which makes them stronger in the long haul--all over the world. Having studied company data from 1997 to 2009, the HBR authors found that "the average long-term financial performance was higher for family businesses than for nonfamily businesses in every country we examined."
There's Something About Families and Fiscal Prudence
The data is convincing, but what's the logic behind it? One trait the HBR authors identify is that the familes are "frugal in good times and bad." They present some compelling anecdotal evidence to back this up:
After years of studying family businesses, we believe it's possible to identify one just by walking into the lobby of its headquarters. Unlike many multinationals, most of these firms don't have luxurious offices. As the CEO at one global family-controlled commodity group told us, "The easiest money to earn is the money we haven't spent." While countless corporations use stock grants and options to turn managers into shareholders and minimize the classic principal-agent conflict, family firms seem imbued with the sense that the company's money is the family's money, and as a result they simply do a better job of keeping their expenses under control. If you examine company finances over the last economic cycle, you'll see that family-run enterprises entered the recession with leaner cost structures, and consequently they were less likely to have to do major layoffs.
In Kellogg magazine, Singer presents an example of this frugality, courtesy of Avi Steinlauf, the CEO of Edmunds.com, a business his father started as an automotive pricing guide. Between 2007 and 2009, she reports, when business slowed down drastically, the company--which then employed 400 people--avoided layoffs. "We just sweated it out," Steinlauf tells her.
"Sweating it out" meant suspending bonuses, cutting back on some benefits, and cutting some executive salaries. "Now, as car sales return to pre-2007 levels, Edmunds.com's workforce has grown to more than 500," she writes. "If we had downsized from a people perspective, it would have taken us that much longer and have been that much more costly to hire people back or hire new people," Steinlauf tells her.
"We were able to make a decision to keep people, and it paid off."