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Facts about family-owned business

A few days ago we introduced Mattias Nordqvist, House of Innovation’s latest addition! His research focuses on entrepreneurship, innovation and ownership/governance in different types of family firms. Today, he takes us deeper in the interesting world of family-owned businesses. What are their most common traits and challenges? What happens when new generations engage in start-ups? What does it take for a family business to be successful? Mattias answers these questions and more. Keep reading!

Large Swedish companies such as H&M, Axel Johnson AB, Bonniers, Ratos and Lundbergs are family controlled. But also many successful medium-sized companies. Could you tell us what are the most common traits in this kind of organizations?

For many years, research about the characteristics of family business was almost non-existent. Mistakenly, many assumed that most companies did not have a controlling owner. Today, however, we know much more. And we know that family-controlled firms are the most common type of organization in most countries – definitely among private companies. But contrary to what many believe, family control is very common also in publicly listed companies.

Family-controlled firms have at least five common traits:

  • Real and visible owners. This means that the owners are not anonymous, and they tend to accept that this means greater accountability.
    Long term orientation. Family owners are famous for not only looking at the financial result of the next quarter. They value their history and look towards the future with the perspective of the next generation in mind. Among other things this often means that they have a great concern for sustainability.
  • The pursuit of both financial and non-financial goals. Many family-controlled companies do strive, of course, for financial success but they often explicitly acknowledge that they value non-financial goals based on a broader purpose of why they are in business. For instance, they often take responsibility for their local and regional environment, they tend to keep employees longer in recessions and they are concerned about their reputation as good citizens.
  • A concentrated governance structure. In many family-controlled businesses, family members are involved as owners, in the board of directors and in the top management. While this sometimes can mean a relative lack of external influence in the business, it also typically means that family-controlled businesses are fast-moving through quick decision-making processes.
  • Innovative and entrepreneurial. To extent to which family-controlled companies are oriented towards change and improvement differs of course. But contrary to what many believe, research shows that family-controlled companies really drive innovation and entrepreneurship in many sectors and economies around the world. And interestingly, the family is still the most common form of startup team! 
      

Are there challenges as well?

Yes, there are, indeed. I don’t think it is a coincidence that many movies and TV-series take place in a family business context. Consider the Godfather, Dallas, Succession and The Inheritance!

  • Conflicts. Particularly, when the family and the business grow there is the increasing risk for conflicts. With more people desiring to be involved in the business or to benefit from the value it generates, tensions tend to emerge. The reason why these tensions lead to conflicts is usually related to different expectations from different people with regards to the role of the business in the family. A classic example is that some family owners may want to reinvest profits in the business, while other family owners prefer dividends.
  • Succession. Who should take over the family business? This is still the most common challenge and it is very relevant since it will affect all family businesses at some point. Succession is difficult because there are so many dimensions to it. Who should take over ownership, and when and how much? Who should take over the executive leadership and become the CEO? Should it be a family member or an external individual? These questions often spark a lot of emotions within family businesses, and efficient communication is therefore key.
  • Difficulties of letting go. Many owners of family businesses have worked in the business for a long time; they may even be the founders. In this context, it is common that they identify very strongly with the business, with their role as an owner and perhaps also as the CEO. It is only natural that they have difficulties letting go. it is not rare for a family business to run into trouble if the incumbent hangs on to power for too long.
  • Lack of external influence. Unfortunately, we see that owners and managers in many family-controlled companies find it very challenging to open up for the influence and involvement of people outside the immediate owner family circle. This lack of external influence can lead to group-think and tunnel vision and, as a consequence, the risk to miss important business opportunities or signals of the need to change.
     

Values and long-term purpose can change through time. How is this managed by family owned businesses?

This is a very good question. What we know from research, and this is corroborated from many years of experience in working with owner-families, is that values are surprisingly stable over time and across generations of owners. Many strong family enterprises started because the founder introduced an innovation or wanted to solve a specific customer solution. But often they also started because of the need and vision to create a better life. These values of innovation, improvement, hard work and creating a better life are common in many large family enterprises still today. And they are often implicitly or explicitly formulated into a general purpose that survive for decades, sometimes centuries. Consider for instance the motto of Väderstad-Verken – making life easier and work more efficient for farmers, or Ikea – creating a better everyday life for the many people.

The challenge is then to balance innovation and tradition. To know where you come from, that is, what your historical strengths are, but also look towards the future and lead the development today and tomorrow. Interestingly, many established family enterprises declare that their history, is their greatest source for innovation. At the same time it is, of course, absolutely essential to be able to question your traditional way of doing business if this threatens to become a liability. For example, some owner-families find it very difficult to exit product or markets, and even specific businesses that might be closely associated with the founder and the origins of the family enterprise. This can be devastating if these products, markets or businesses are not competitive anymore. Here, I’ve been active as research and educator to see the opportunities that emerge if you shift your mindset from a focus on running a family business, to becoming on enterprising family. The latter gives you a much broader perspective that allows you to invest and divest in different businesses and products than only the legacy business. In fact, what we see today is clearly a trend in this direction. Many entrepreneurial families build groups or portfolios of businesses rather than only focus on their original, legacy business. Such a strategy has the added advantage that an enterprising family is not as exposed when a crisis hit, they have spread their risks on several business. For many this has proven to be important not the least in the Covid-19 crises which we experience in 2020.

Sometimes, of course, values have to change in business families. This is perhaps most evident when the values in the surrounding society are changing. We see this in very long-lasting family enterprises that have been operating for several hundred years. Here some rules or priorities change. An obvious example is that in many traditional owner-families there has been an implicit or explicit rule that the oldest son takes over the business. This is obviously not a legitimate value today. An interesting case in point is the large Italian Wine producer Antinori where the oldest son has taken over the business in every succession since 1385. However, recently the business was handed over to three daughters; and Albiera Antinori from the 26th generation is now the president of the company.  What we see in our research is that changing values that constrain both the family and the business tend to release a lot of energy and potential that makes the business more successful.

Besides changing values, there is also the issue of succession. How do family owned businesses handle this?

Succession is absolutely one of the main challenges in family-controlled businesses, and in owner-families. This is perhaps also the one issue that makes family enterprises most unique in relation to other forms of business. A common problem is a lack of planning and a lack of discussion within the owner-family about different expectations and options. You would be surprised how many current owners in the senior generation don’t know if their children are interested in taking over the business, or how many in the younger generation who have never heard their parents talk about the future of the business and their potential involvement in it.

Today we can see a general change where more and more owners become aware of the importance of starting the discussion about succession early. It is important to understand the unique dynamics, strengths and weaknesses in family enterprises not only for those who have links to a business family but also for the many professionals who work with family enterprises and owner-family’s as managers, advisors or consultants. I believe education is key here, and our intention at SSE is to bring these issues more into our programs.

There are so many important aspects to how succession can be handled, but to name a few:

  • Keep in mind that there is a difference between ownership and management succession. For instance, appointing a new CEO is not the same as transferring the ownership. A trend we see in both large and medium-sized family enterprises is, for instance, that families keep ownership but appoint an external, non-family CEO to run the business.
  • Start planning both ownership and management succession early. It is better to start too early, rather than too late. The planning can be formal, but it is also important with many informal conversations within the family to explore expectations, options, and individual priorities.
  • Spend time on determining what are the historical and current strengths and weaknesses of the family enterprise. Try also to identify what will be the success factors in the future. Let the result from this analysis be an important part of the succession conversation. In this way, you naturally connect the family and the business. The succession conversation should not only be about the owner-family, but about the business as well. See succession as an opportunity not only to change ownership and/or leadership, but to renew and infuse new energy to the business.
  • Use external events as an opportunity to start the succession conversation. The crises caused by Covid-19 Pandemic is an example of an unexpected situation that call for the need to talk about succession and the future of the business. I see that many owners do start to think more actively about the future of the business as a result of a worry about possible consequences of the Pandemic. It is important to keep in mind that these are not only consequences for the owner-family, but also for many other stakeholders such as employees, suppliers, customers and the community.
     

New generations are also engaging in start-ups or other types of external venturing. Can you tell us about your research findings in this area?

This is a fascinating phenomenon. In Sweden, when we talk about entrepreneurship we often talk about start-ups. But a large part of the new ventures, and new innovations that enter the market originates from established companies; and many of these companies are owned by families.

In a recent study we found that new ventures that are started by former employees from a family enterprise survive longer than new ventures started by former employees from companies that are not family controlled. Interestingly, this is the case regardless of whether the former family enterprise employees are family members or not! This seems to indicate that family enterprises should be considered as important sources of new entrepreneurial activities. This is also very important from a sustainability perspective because a central dimension of a firm’s sustainability is, of course, that the firm survives!

It is also important to keep in mind that the family is still a very common form of entrepreneurial team. An interesting example of this is Beleco where mother and son have teamed up to “revolutionize the interior design industry.” Their business is leveraging on the trends of digitalization and the circular economy to combine high-tech and sustainability in the furniture industry. The family start-up can absolutely be a model for the future! But of course, some of us would love to be in business with our family members, whereas others really would like to avoid it!

Taking into consideration the challenges, are family owned businesses destined to end in the long run? 

Well, this is a tricky question. And it depends on what we mean with “to end”. Most languages have a variant of the saying “from rags to riches, back to rags in three generations” about family businesses, popularized in Thomas Mann’s classic novel The House Buddenbrooks. This say refers to the myth that few family businesses manage to survive business challenges and family fights for more than three generations. There is some statistics supporting this myth, but there are also several studies that shows that family enterprises are more long-lasting and resilient than most other forms of business. If “to end” means closing the business, many small companies run by families for instance small retail shops or craft-based business may close down when there is no one to take over the business when the current owners retire. However, if “to end”, more refers to the sale of larger businesses to another company; exit by the owner-family can actually be a great success because it allows them to invest their resources more productively in another business.

What is also quite common is that an enterprising family “prune the tree”, which means that some family owners are bought out and ownership becomes more concentrated on fewer family members. In some cases, this may be the result of devastating conflicts within the family and in this sense “to end” is not a happy story. There are of course also many examples of family enterprises where family members would have preferred to keep the business but were forced to sell and “to end” their connection with the business because of conflicts or lack of commitment. It is clearly a huge challenge for many enterprising families to keep commitment and involvement at a genuine and professional level for several generations.

If you ask me to make a general statement it would be that if enterprising families find a way to build on their strengths and address their weaknesses, this is one of the most long-lasting, sustainable and resilient forms of business organization that there are. It is also important to keep in mind that many companies that we perhaps don’t think about as family controlled, are indeed family controlled. Many of Sweden’s and the world’s leading publicly listed companies are for instance controlled by enterprising families.

What are your top 5 tips for family business to succeed?

  1. Balance your past and your future
  2. Use your independence to question and dare to be different
  3. Stay together and build a team
  4. Encourage people to seek various experiences and inspiration sources
  5. Continue only as long as you have passion and genuine commitment

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