Michael Blog

Family businesses possess certain attributes that could mean they are well positioned to survive and even thrive in a downturn. Respondents to our survey who represent family businesses perceive a long-term perspective to be among the most important advantages of the family business model. They also exhibit greater risk aversion and are less motivated by money than other wealthy individuals in the survey. In combination, these traits can lead to a conservative financial and business strategy which, while it is rarely favoured during boom years, comes into its own when the economy enters a downturn. A methodical and careful approach, it seems, can lead to sustainable success. 

Experts questioned for this research suggest that external management can be a powerful tool to offset governance weaknesses. Strong governance is the bedrock of any business, yet all too often, there is a tendency among family businesses to be complacent about this vital capability. Less than one in five survey respondents from family businesses consider a strong governance structure to be an important characteristic of success for their business. They also tend to think that the family business model compares favourably with other types of business when it comes to governance, whereas non-family business respondents largely disagree with this statement. Experts questioned for our research point to the importance of bringing external management rigour into the business to offset some of the governance problems associated with family businesses.  

Planning for the next generation is an essential component of success. Survey respondents identify succession planning as the most important characteristic of a successful family business. Yet all too often, plans for the transition of the business to the next generation are not made early enough. A related risk is that family businesses can be prone to nepotism – indeed, survey respondents see this as the third most important disadvantage of the model. As well as representing poor governance, a nepotistic approach to succession can lead to deficiencies in corporate performance and lead to lower retention rates for talented non-family employees.   

There are numerous reasons why family businesses may be well placed to survive in a downturn. First, they have a long-term perspective and are not subject to the short-term demands of external investors in the way that listed businesses are. Second, they tend to be financially conservative, and do not employ leverage to the same extent as many other companies. Third, they have close alignment between ownership and control, which helps to prevent the ‘principal agent’ problem, whereby a separation of ownership and control (as is seen in listed companies) can lead to managers pursuing opportunities that are not in the interests of the company and its shareholders. Fourth, they have a close network of family members who control the business,