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Family businesses prioritise financial wealth less as they age, research finds

Business-owning family members become less focused on financial wealth with age and increase the value they place on relationships within the company, new research out of the US has revealed.

The academic paper, published in a recent edition of Family Business Review, also revealed the results had knock-on effects for the type of people families go to for advice about their business, which could affect their companies’ ability to meet challenges down the road.

The research, Which type of advisors do family businesses trust most? An exploratory application of socioemotional selectivity theory, used the results of a US survey to reach its findings.

The paper found the correlation between business age and type of wealth emphasis was “significant”, as was the correlation between the type of wealth valued and what type of advisers family businesses chose.

Companies were questioned about their motivations for remaining a family business, what type of individuals they were most likely to go to for business advice, as well as details about age, financial data and number of employees.

The average annual revenues for companies surveyed was $40 million.

Wichita State University professor and paper co-author John T Perry said he was motivated to do the research due to the fact strategic management studies typically focus on financial returns, but in his view many companies, especially family-owned ones, are willing to forgo financial returns for “socioemotional wealth”.

The term “socioemotional wealth” refers to the positive relationships individuals develop and value within a group. As Perry explains: “With a family business the nature of the relationships may be around family and family pride. It can also be heritage, but that’s still a relationship to my grandfather or my great-grandmother and so on.”

Perry says a psychological theory that typically pertains to individuals was used as the framework for the research. This theory, which in the paper is applied to family businesses, argues people’s social circles shrink with age, as they get more value from developing fewer but more meaningful relationships. It is known in academic circles as “socioemotional selectivity theory”.

The hypothesis of Perry and his co-authors had been that family businesses would mirror this, and as they aged would rely on a small circle of trusted family members for business advice rather than professional advisers.

A direct correlation between the age of family businesses and the advisers they choose was not found through the research; however, the results did show that family businesses place greater emphasis on socioemotional wealth as they age, and those that priortise this, rather than financial wealth, are more likely to turn to family for advice.

Family business adviser Juliette Johnson says she doesn’t know a family that doesn’t set financial goals for their business, but adds: “At the same time having the family behind the business not only creates a very stable and solid platform for the business to move forward on, it also creates an amazing glue within the family.”

Johnson says within family businesses she often notices individuals’ priorities change as they age. “When you’re working with the older generation, as their individual time horizons start to shrink, they tend to become much more aware and sensitive to having meaning in their lives and what they’re doing,” Johnson says. “I think when you’re younger and you’re starting out in a family business it’s much more about your aspirations and what you want to achieve.”

Perry says the scope of the report didn’t address the interplay of family member executives aging within the family business. He suggested, however, that while a young next gen may want to deemphasise a family business’s focus on socioemotional wealth initially, as they aged they might grow into the values of the firm they had inherited.

Perry says it is up to families to decide what value they seek from their businesses, but he explains companies that don’t seek advice from people with diverse perspectives are less prepared to deal with challenges to the business.

“It’s really an argument about homogeneity versus heterogeneity of mindset. If you seek advice from people that think like you do, then you’re less prepared for an exogenous shock in the future,” Perry says.

He adds that the research did not take into account advisers who are specifically focused on family businesses. He says, however, that this type of adviser may better understand a family’s desire to work together and keep the business in the family, while still seeking financial returns.

Johnson says she notices that families often have a lot of faith and trust in other families and long-term friends and will use them as sounding boards, but once the family business gets to a certain size it will often need to turn to professional advisers also.

Johnson explains: “Ideally there will be a balance between external advisers who can offer some challenging, external, objective input, but also family members, long-term advisers and long-term friends, who understand the dynamics of the family and can help support them as the family business grows and develops.” 

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