Think about this for a second: Only 3% of family businesses make it to the fourth generation. That means 97% do not.
Meanwhile, 80% of the businesses in the United States are family-owned. Family businesses contribute 60% of the gross domestic product to the US economy. They employ 60% of the population.
What’s this magic 3%? What are they doing that’s different?
For a family to want their business to remain family-owned, they need to measure the return on their investment in three ways. If a family doesn’t have these three things, it makes it very difficult to have a compelling product that a family wants to continue to invest in.
1. You have to have a financial return.
There are easier ways to make money than to be a part-owner in a family business. If a family member didn’t see herself as a steward of something important, they could take their money and put it in a Vanguard fund or another investment, and it would be an emotionally neutral investment. You’re not going to get excited from reading the financial statements from Vanguard. Family members have the right to take their money elsewhere, so the financial return provided by the company acknowledges the assets that are allocated to the business, whether it’s an active investment or something that was inherited.
The financial return is also an acknowledgment that the value of this person’s assets is invested in something with a long-term return. If you’re invested in a publicly held company, the return horizon is usually less than 2 years on any investment. If a company makes an acquisition, they have to pay it off in 18 months.
You may get a greater immediate financial return if you invest in a publicly held company, but you aren’t getting the other benefits of investing in a company that makes long-term investments. That company can make values-based decisions. That company can invest in their employees. That company can invest in R&D. That company can invest in strategic acquisitions and organic growth that may not pay back in 18 months but may pay back in 3-4 years. That’s a reasonable timeline, but it wouldn’t be acceptable to most investors in public companies.
The potential for a family business to grow for future generations is fairly high. You can afford to think about your future shareholders. In a publicly held company, your responsibility is to think about your current shareholders.
Enough about money. Let’s look at the other two ways that a family business offers a return on the shareholder’s investment.
2. You have to have an emotional return.
The emotional return is loving the business and its products, or loving how it treats its employees or the community. You get excited about its philanthropy. There has to be something that is compelling about the business itself or what it does.
3. A family has to have a relationship return.
Getting together with the family can’t always be hostile or conflict-ridden. The family has to invest enough in each other for there to be some reward to being co-owners of this business. Being together is part of the reward of remaining family-owned.
The way I look at it is that the family and the business are competing for the family’s time and money. You have to have a compelling product. The compelling product is the combination of these three things. It’s not just one. It has to be all.
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