A multi-billion corporation doesn’t exactly spring to mind when thinking of family-owned businesses. However, family-run companies represent a third of the S&P 500 index, often outperforming non-family companies in longevity, debt management, and employee retention.
The largest companies of today’s economy all started somewhere – and there are hundreds that found success as family-run establishments. Some of today’s most profitable businesses with family-owned roots include:
- Walmart – founded in 1962 by Sam Walton and is now a international conglomerate
- Ford Motors – weathered drastic economic shifts as an automotive industry giant
- News Corporation – founded 1979 by Rupert Murdoch, grosses over $33 billion in annual revenue
- Mars – 1911, founder Frank Mars built his company at home, selling candies and chocolates
- McKesson – originated as a wholesale distributor of pharmaceutical products in 1833
- Cargill – no longer managed by its founding family, but remains the largest privately owned company in U.S.
- Koch Industries – managed by the founder’s sons, Charles and David Koch, Koch Industries capitalized on the energy industry in the 1940’s
Studying the operations and management of these companies provide insights into the characteristics that distinguish family-operated business from others.
Unique Properties of Family Businesses
Family-owned companies have a unique approach to their performance and methodology in comparison to their non-family counterparts. Studies have revealed these distinct differences lead to stronger company cultures, resulting in higher survival rates when external factors threaten a business’ success.
There is also a dark side to a family business model, revealing a tendency for declined performance after ownership or management is transferred – particularly when a direct family member inherits the company. While prone to unconventional pitfalls, family establishments foster a number of solid principles that benefit all types of business models.
4 Lessons from Family Businesses
Lesson 1: Keep your debt vs. equity ratios in check.
Family-owned companies are notorious for their frugal spending habits – keeping their debt vs equity ratios under control in case external factors were to force “belt-tightening.” Their choices intentionally limit spending, often not engaging in large acquisitions or mergers that may require substantial investments and debt.
According to one survey referenced by the Harvard Business Review (HBR), family-owned companies often keep debt as much as ten percentage points lower than comparable non-family-owned companies (37% of total capital as opposed to 47% in control companies).
Lesson 2: Trust and reward your employees.
Family-run companies typically demonstrate higher levels of trust in both their employees and their mid-level management. In addition, they spend, on average, up to three times more on professional training and employee development than their comparison companies.
In turn, family operated establishments often have higher employee retention rates, as well as stronger, consistent levels of performance and loyalty.
Lesson 3: Diversify your offerings.
Family-owned companies ensure the longevity of their business by strategically developing their operations across a wide range of diverse, international markets. By diversifying their product offerings, they protect themselves from any significant economic setbacks. So, if they were to hit a speed bump in one market, they often have enough momentum to survive in another industry.
For instance, McKesson, a now $179 billion company, started simply as a pharmaceutical, wholesale distributor. But through a long lineage of strategic development and mergers, the company catapulted into an industry-leading, international healthcare product provider.
Walmart is another perfect example – offering a wide range of diverse products through the efforts of founder Sam Walton. Building a convenient, “one-stop shop” for a variety of consumer needs not only shaped the brand’s very existence, but created a multi-billion dollar company that operates as an international conglomerate, grossing over $420 billion annually.
Investment diversity fosters a slow, predictable growth pattern, allowing family businesses to maintain smaller dips in revenue as external environments fluctuate.
Lesson 4: Select your leaders carefully.
In order to thrive, family businesses must select their leaders based on their qualifications – not on their bloodline. Choosing an effective leader instead of simply “passing the torch” to an inexperienced family member protects companies from potentially crippling damages.
Family-established companies can employ non-family members to manage their business, while staying actively involved in business decisions. The Cargill agricultural giant and Ford Motor Co. both have CEO’s outside the family, yet the founding families continue to play a role within company affairs.
An inverse example can be found in News Corporation, still helmed by founder, Rupert Murdoch. Murdoch not only gave his son a position on the company’s board, but also started grooming him to become the company’s next CEO. However, his son’s public actions earned him a great deal of scrutiny and accusations of scandal, leading to many questioning his viability for the role.
The principles that many family-owned establishments employ in their business decisions position their organizations to capitalize on unique benefits their comparison companies often never achieve. Though family-owned businesses have their own weaknesses, their histories and principles (as well as past shortcomings) are worth studying and learning.
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