14 million. This is the number of family businesses in Europe. They are a resilient business model. Through the decades, they have always remained a heavyweight in the global economy, but how and why? A long-term vision and limited risk-taking can explain their durability. Also, the family business is a very unique model. It sits at the interface of two different functioning frameworks. The family is dominated by emotion, affect, tradition and security whereas the business is driven by rationality, the search for profit, growth, competitiveness and change. The family values give a strong and remarkable identity to business because leaders directly embody these values – it’s what is called “stewardship”. Yet, this entanglement between professional and personal is what can weaken the balance of these businesses.
Barriers that can stop the prosperity of family businesses
30% of family businesses disappear within the 3rd generation according to a Deloitte survey. There are several reasons for it: namely marriages, divorces, deaths or conflicts that can cause a lot of perturbations in a family structure. These types of events won’t have any effect on non-family businesses but can literally destroy some families, and therefore some family businesses.
What’s more, in a family business, personal assets and company assets are one. Therefore, they tend to have a certain reluctance toward bold innovations and taking risks because if they fail, their personal wealth is damaged. In 2012, economist Joern H. Block found in a sample of 154 American companies from sectors sensitive to R&D that R&D intensity is negatively associated with family control.
That said, some family business leaders recognise their lack of innovation and modernity that harm the company’s economic results. 35% of them are willing to pass on the company to a non-family member to increase the company’s profits.
Succession and innovation are the key issues
Innovation represents business development prospects for family businesses and enables them to consolidate their positions. When both are accomplished successfully, innovation and succession can be interesting growth levers and solutions for the sustainability of the business. Indeed, handing over to the next generation is the pivotal moment of a family business. In an article, bpi France details the issues related to this event and highlights the need for good communication for a successful succession. During this transition period, the company finds itself under investment capacity due to the cost of transmission. Ultimately, if family businesses are not passed on, they often end up in the hands of a large group. Transferring a business also has different costs depending on the country; in France, for example, small companies can receive a tax advantage for passing the business on to the next generation. In the end, the issues are legislative and fiscal – it is up to us to know what place we want to leave to family businesses.
This post gives the views of its author, not the position of ESCP Business School.