When it comes to investing in equities, family-controlled businesses are not top of most people’s shopping list. But should we be taking the opportunity they present more seriously?
I think too many investors take family control as a negative – while, in certain circumstances, it should be read as a positive, and even give a stock a premium. After all, in the US, family businesses generate more than 50% of the country’s GDP, in Europe family businesses employ more than 60 million people, and in Germany 90% of all businesses are family owned or run.
So, before you write off the idea of investing in family-run companies, here are three reasons to reconsider.
1. The Family Component Is a Strength Not a Weakness
Many investors are put off by the idea of buying into a business run by successive generations of the same family. Surely family firms smell of nepotism and a lack of focus on profits and productivity? But, firstly, it’s worth remembering that some of America’s largest and most successful corporations started off as family operations – or still are.
Walmart (NYSE: WMT), for example, is the world’s largest company by revenue. No one ever dismisses this giant as just a mom-and-pop outfit; or Roche (SWX: RO), which is still controlled by Hoffmann-Oeri family; or Facebook (NASDAQ: FB) with its multi-billion market capitalisation, which many people tend to forget is still family controlled. These giants employ millions of people across the globe and are at the very top of the corporate pyramid, regardless of the fact that they’re family businesses.
In fact, family businesses have a long-term vision that many non-family corporations lack. They think in terms of 30-year generational cycles rather than in five-year strategies. Yes, this might mean that they may move at a slightly slower pace, but when it comes to patient capital they are a very sound bet. This often means that family-run companies are a surer long-term value proposition for investors who are looking to hold their stock for more than a decade.
In fact, according to the Global Family Business Index, this is why family-run businesses are better able to navigate difficult periods. “Zellweger offers a few possible explanations for why family companies are suited to survive difficult periods. [F]amily firms tend to be focused not on the next quarter but the next generation,” writes Forbes reporter Chase Peterson-Withorn.
2. Family Businesses Focus on Profits
There is a widely held view that family businesses are not serious about profits; that they prefer to focus on stewardship and guiding the business for the benefit of future generations. But the figures tell a very different tale.
The Center for Family Business at St. Gallen University in Switzerland, has charted the world’s top family businesses. According to their Family 500 index these firms generate $6.5 trillion in annual sales, enough revenue to be counted as the third-largest economy in the world.
They’re also committed to growth. In fact, PwC found that nearly 60% of US family businesses surveyed in 2017 are now exporters, a steady rise over the last decade, and the vast majority expect existing revenue growth to continue over the next five years.
Family firms are just as dedicated to building profits as other type of company. They just come at revenue creation from a different angle. Many family-run firms believe that by focusing on society, community and brand culture, you create profits by default. And there is clearly some truth in this.
Many iconic global brands are lodged in our psyche not just because they’re hugely profitable but because they’ve reflected our changing society over the decades – or they’ve created new markets themselves, from scratch: Coca-Cola, McDonalds, Amazon, Ikea, Starbucks, Apple, Harley Davidson and many more. We don’t write these companies off for focusing on the brand rather than the profits.
3. Family Firms Innovate
Another accusation that’s regularly thrown at family firms is that they’re incapable of innovation.
For investors, this is a long-held view that’s never been fully tested; until now. In a recent study published in the Journal of the Academy of Management, academics found that although family firms don’t spend as much money on R&D, for every dollar they do spend on innovation, they secure more patents, build more new products and generate higher revenues from those new products than non-family firms.
Perhaps even more fascinating is the idea that rather than being averse to innovation, family firms have the ability to view how innovations will affect people in the far distant future more easily and more accurately. In fact, the same study found that family firms may have a greater propensity to invest in potentially disruptive technologies that may take years or even decades to produce tangible returns.
In my view, this idea stacks up. Take Ford, a family-controlled business, as an example. The company was one of the first major auto manufacturers to understand that in order to win the long-term race for commercial self-driving cars you must own the technology stack that other manufactures need to run their cars. In early 2017, they shocked the market by buying Argo AI, and today they’re well on their way to rolling out the industry standard OS. They might still fail, but they certainly have the vision to innovate.
Next time you’re tempted to write off the idea of investing in family businesses, forget your preconceptions and look at the hard facts. Family firms are sound investments and, one day, they might just go out and surprise you.
Read Next
