Family fortunes

Michael o’Sullivan and Ariel Sergio Davidoff consider the role of family businesses in the post credit crisis economy family businesses are back in fashion. As the credit crisis uncovers the downside of the leveraged corporate business model, the attractions of the relatively sensible family business framework are growing. Across continental Europe, as well as in the UK and the US, we believe that the characteristics of the family business model offer other companies, but also policy makers, a good reference point as they look to pick up the pieces from the credit crisis. The past year has witnessed the fall of some European companies with either too much balance sheet leverage, or as is increasingly the case, too much operating leverage. More pain can be expected as the unwinding of high debt levels continues and as the economic contraction deepens.

Well-positioned

While family businesses are by no means immune to the credit crunch, they are arguably better positioned to deal with some of the threats and opportunities that have arisen. We suspect that the family business model will start to appear an increasingly wise one through the course of this downturn and anecdotal evidence suggests that family businesses are now picking up relatively cheap assets and managerial talent as other types of corporation cut back. There are a number of reasons for this. Broadly speaking, family influenced businesses tend to be less leveraged, more conservative in their investment decisions and generally have a longer-term focus on investment and innovation (for example long-lasting family ‘empires’ like Sweden’s Wallenbergs have often entered recession periods cash rich and have been able to take a more opportunistic stance as recovery arrived, and indeed, as competitors have faltered). During the previous (dot.com) bubble, certain family influenced businesses notably followed long-term objectives rather than short-term fashion, as evidenced by Bouygues refusing to run for UMTS licenses and Peugeot declining to develop a B2B internet lead strategy in 2000. In general, though there are exceptions, family businesses can be predominantly found in more traditional economic sectors – industrial engineering rather than financial engineering for example, therefore limiting the impact of tight credit on their business. Indeed, the literature on family businesses is replete with case studies that note the devotion of family businesses to cash flow, rather than sales or earnings growth as a governing performance metric, making family influenced businesses less dependent on outside financing. Family run, owned or influenced businesses make up over 30 per cent of the major Western stock markets (the UK being the exception) and more importantly, on average they comprise over 60 per cent of small and medium-sized firms in the private sector in countries like Germany, Italy and Sweden. As such, they are a vital, though very often unheralded part of the European economy and a focal point for entrepreneurship, and their relative stability allows them to function as a base for innovation. In this respect the family business model can be seen an important indicator of the health and potential future direction of activity across Europe. Read more