Articles Family business: Making a success of the next generation transition

Family business: Making a success of the next generation transition
While family-owned businesses are more financially successful than other companies, a change in generations is a common obstacle.
Family business

Although they are the backbone of many economies, the reputation of family firms often differs from reality. Many people believe they are non-transparent, unpredictable, fraught with infighting, and promote nepotism. "The facts say otherwise though," says Ernesto J. Poza, Professor Emeritus at the Global Family Enterprise of the Thunderbird School of Global Management.

Family firms generate higher returns

Some 80% of all US companies are family-owned, and this figure is even higher in some other countries. In every country of the world, they account for between 60% and 75% of GDP, employ well over half of all workers, and can succeed for multiple generations, growing to become multinational concerns. Some examples are Ikea, Walmart, Mars, and Hermès, to name just a few.

Credit Suisse has been studying this phenomenon for a decade. Its in-house think tank publishes regular research to help understand the specific dynamics of this type of company. The "CS Family 1000" published in September 2018 looked at the development of 1000 listed companies under family ownership. Its analysis showed that family businesses generate much higher returns than non-family-owned firms. Higher sales growth, margins, and cash flow are responsible for the above-average price development. The study also explains that family firms are focused more on long-term growth, as reflected by a lower dividend ratio and larger investments in R&D.

Market-cap-weighted sector-adjusted returns

The "three-generation rule"

One thing is for sure, however: Family businesses are all different in their own way. They must straddle the line between financial success and family demands. Managing them successfully for multiple generations is a challenge not everyone is made for. The three-generation rule, which exists in multiple versions and multiple languages, is evidence of that. In North America, the phrase is "Shirtsleeves to shirtsleeves in three generations" while the Italians have a tongue-twisting "Dalle stalle alle stelle alle stalle." No matter how you say it, it implies that the third generation ends up where the first began. While the expressions are folksy in nature and broadly generalized, they do point to an important weak spot: Handing over a family business to the next generation can be a hurdle that many successful business owners fail to clear.

Support for the next generation

That's why paying close attention to generational change is worth your while, as is learning from family firms that have managed to sustain their success over multiple generations.

This was the starting point for the white paper with Cristina Cruz and Credit Suisse, "How to increase cross-generational potential?" The paper explores what successful family businesses do better. Cristina Cruz is the academic director of the IE Center for Families in Business and professor for Entrepreneurial Management and Family Business at the IE Business School in Madrid. Cruz, who comes from an entrepreneurial family herself, researches and teaches on the subject at the IE Business School in Madrid. Outlining the options for a smooth intergenerational transfer of assets she said, "It's not all about the money. Socioemotional factors matter substantially for each generation. Every family is different, each in its own way. Knowing its values is important for preserving the family legacy. The next generation can only learn these values in the family," noted Cruz.