Malta: Hidden Growth Within Family Businesses: Driving Success Without The Fame

Last Updated: 29 November 2016
Article by Anthony Pace

INTRODUCTION

For over a decade scholars, politicians, economists and journalists have expressed growing interest in family-owned companies, evaluating their economic impact and dissecting their unique business models.

Much ground has been covered. Graphs and reports compare the performances of family and non-family companies of diverse sizes, sectors and regions, during economic ups and downs. Leading universities and business schools integrate family business courses into their curricula. European and international institutions are paying close attention to the sector. Finally, family businesses themselves have come out of shadows, unabashedly publicizing and highlighting their family roots.

Still, there is no generally agreed definition of the term, and only limited data is available on the sector's real economic weight. Many family business owners stay discreet about their success, rarely appear on front pages, and continue to be an enigma.

For many, the term family business immediately brings to mind the quintessential mom-and-pop. However family businesses are all around us – from small and mid-sized companies to renowned multinational corporations. One third of all companies in the S&P 500 Index are defined as family businesses.1 Some 30% of all companies worldwide with over US$1 billion in sales are family-controlled enterprises.2 Of the 250 largest companies in France and Germany, 40% are family-owned.1 Many family companies do extremely well, and even better than their non-family counterparts.

Our research, conducted by KPMG and European Family Businesses (EFB), involved discussions with prominent family business leaders in various European countries.

We sought to shed light on some frequently asked questions regarding family businesses:

  • What does success mean for them, and what is their ultimate strategy: stability; growth, or profitability?
  • What drives their success, and what are the inherent barriers to growth?
  • When growth is at stake, how do owners choose the right strategy and align the interests and needs of both family and business?

We trust that our report will provide you with insightful, interesting answers.

STABILITY, NOT STAGNATION

Longevity, long-term outlook, and stability are traditionally cited among the specific attributes of family businesses. Although stability is sometimes mistakenly confused with stagnation, closer examination reveals that the two have nothing in common. To the contrary, growth is high on the agenda for family businesses, and long-term orientation tends to steer strategy.

Family legacy and strong personal attachment underpin the desire of family business owners to preserve their businesses for their heirs. Long-term outlook is their vision, longevity is their mission, and growth is their clear strategic choice. While growth is high on the agenda for family businesses, the way in which they achieve it has a number of characteristics unique to them.

Family businesses tend to project into a very distant future. In the words of one of our questionnaire respondents, "we have a 50-year strategy", "after 160 years of existence, our objective is to see the company last for another 160 years", "the desire of our company is to exist in 500 years' time". Their long-term outlook is measured in decades or generations, not quarters or months. Family-owned businesses need not fret about impressing investors with short-term performance figures. They can afford to slacken the pace slightly without sparking anxiety over momentarily lower or flat figures. Yield tomorrow is more important than return today. Family businesses are able to think and plan in the long run.

They can take a longer-term strategic outlook, which is not always possible in other business models. This means they can make decisions that are right for the long-term even if that means sacrificing some short-term earnings.

The first key to sustainable success for family businesses is therefore safer thinking and moderate risk tolerance. However, these are balanced with an understanding that 'adequate' growth is necessary for the company to stay successful and competitive. As one Dutch respondent notes, "if you are too focused on stability and security, it could hinder growth".

The second key is prioritization. Our recent European Family Business Barometer3 demonstrates that, while 83% of family businesses plan to grow in the year to come, 57% cite improved profitability and 34% increased turnover as their top business goals. Both profitability and turnover growth are necessary for a company to survive and remain attractive to investors and analysts. Nevertheless, profitability is critical to a company's long-term survival.

Finally long-term vision, which could appear to be a barrier to growth, most likely spurs on family businesses. "Dreaming in the long term and seeking resources in the short term" is the way one Spanish respondent defines his business tactics. Long-term outlook is in the DNA of family businesses, the philosophy determining everything they do. It tends to steer strategy, enabling the development of good business planning, breaking down plans into small projects and taking one step at a time. Long-term outlook creates positive thinking, since businesses can grow in the long run without being beaten down by occasional downturns in performance. Family business owners can accurately choose the right strategy and prepare their companies for growth.

Preparing to grow

The determining feature of family businesses is their particular business model in which family and business interests are closely aligned and strongly intertwined. While owners seek business prosperity and family harmony, they are sometimes confronted with issues like differing positions of the shareholders, conflicts about business direction, and in the worst-case scenario, sibling rivalry, leading to shareholder exits or the (partial) sale of the company.

When growth is put on the agenda, business owners wonder how to make it happen, how to align business and family interests, and how to prevent those conflicts or differences of opinion that hinder growth.

As a first step, our respondents advise to clearly differentiate between family and business and not to mingle the two spheres. The business should be considered a business project, not a purely financial asset. The company's primary goal should be to serve customers, not the family. "By serving its customers, it will eventually serve the family". A business, with its vision and strategy targeting its well-being, should be separate from the family with its shareholders. The co‑functioning of both is ensured by good governance. Governance mechanisms implemented should serve several purposes, such as separating ownership from management, setting up family and business rules, and defining dividend policy. With clear rules and guidelines as an anchor, family businesses can pursue their growth plans.

This separation does not mean that the business goes its own way. Ownership has special meaning in family companies, with a strong personal element. The family business should not be seen purely as a liquid asset, but as a property which is built and developed by the family over generations. "Family and business are two different things, they are separate. Business is primary to the family. If business interests are put in first place, it will then ensure the family runs smoothly, not the other way around", comments one French respondent. His Spanish and Dutch counterparts concur: "Conflicts occur when no distinction is made between the company and the family." "We have made an almost exorbitantly strict separation between family and business. From the beginning, the first focus was the business."

Once rules are set up, the next step is to communicate. Shareholders should engage in constant discussion and "open dialogue" with the business to ensure they are happy with how the business is being run and what the returns are. Owners should have an "adequate knowledge of the company" and feel involved in its development. Our respondents confirmed that "communication is key" to satisfy all parties.

Good governance not only separates the functioning of family and business, but also helps both achieve their shared goal: to safeguard and increase family wealth. Parallel planning4 helps accomplish this goal. It is a proven tool to align the thinking and planning of both family and business into a comprehensive family business plan.

Parallel planning facilitates communication about business strategy and potential, which are in turn supported by the family's investments in human and financial resources.

To read this article in full, please click here.

Footnotes

1. The five attributes of enduring family businesses, McKinsey & Company, 2010

2. What you can learn from family business, HBR, 2012

3. European Family Business Barometer — Successful & Resilient (fifth edition), EFB and KPMG, September 2016

4. The term 'parallel planning' was introduced in: Strategic Planning for The Family Business. Parallel Planning to Unify the Family and Business, Randel Carlock and John Ward, 2010

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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