One of the key differentiators of family businesses is a committed ownership group who are proud of the legacy their family business represent. Research shows that family businesses outperform non-family businesses, and this focus on the importance of legacy is one of the contributors to superior performance. However, an overemphasis on the past can also have a negative impact on family business performance.
Ability to change is also important. Every generation is different, and requires different structures and rules to succeed. Take just one element – ownership structure. In earlier generations, many family business owners created a structure where stock was consolidated in the hands of those who involved in the business. Many felt the alternative of entrusting ownership to family members who may not be as interested in the business could lead to non-employed owners getting in the way of family management’s ability to make decisions. Further, some thought it unfair that those not involved benefit from the hard work of those involved in the business by participating in the financial gain created by employed owners.
While this model of ownership may have served a family and company well in the past – as the business evolves and typically gets larger, there can be many benefits to cultivating a group of informed and committed owners who are not employed in the business. In the interest of brevity, lets just focus on the financial benefits.
By limiting the ownership group, family businesses may limit the pool of capital available for investment in the business. For instance, if a business founder has 3 children, only one of whom goes into the business, and he decides to give the business to that child, he will often make a financial gift to other children to treat them equitably. That money could have been used to fund business growth. Or, if he gifts shares to all three children at a young age but requires them to sell back their shares to the company if they decide not to pursue a career with the business, again the business capital is limited.
A great strength of family businesses is the patient capital they have by virtue of an ownership group that is interested in managing the business for the long term. This mindset leads family ownership groups to support management decisions that contribute to long-term business success even if they may not show immediate results. In fact, research shows that family businesses invest more in R&D and employee training than non-family businesses. The benefit of a larger ownership group is that they provide capital at a lower cost with a longer time horizon than other investors (including banks) – providing their businesses with a significant competitive advantage.
So, let’s circle back to legacy. A commitment to the principles that served the business well in the past is important. Equally important is a thoughtful analysis of what changes need to be made as the business evolves. Just as it would be impractical to use a typewriter to generate business correspondence today, it may be impractical to maintain the same ownership requirements from generation to generation (or the same employment requirements or other elements of the family legacy).
Honoring legacy is important, but if part of that legacy is a desire to maintain the business for generations to come, perhaps a new addition to the legacy needs to be an ability to change.