European family businesses are a safe bet for investors even in times of economic crises, according to research by the Instituto de Empresa business school, but the problems associated with family ownership make potential investors wary.
For the report, called Value Creation in Listed European Family Firms, the Madrid-based university studied 2,423 listed European companies with a market capitalisation of more than €50 million and looked at the financial results of each firm between 2001 and 2010. Twenty-seven percent of the companies were family businesses – where a family held at least 20% of shares and a family member sat on the board.
According to the report, family firms had better stock return performance; €1,000 invested in 2001 would have generated an average of €3,533 over the decade compared to €2,241 from a non-family firm.
Co-author of the report Professor Cristina Cruz told CampdenFB: "One of the key differentiating factors is that profit maximisation in these organisations exists side by side with achieving other non-economic objectives."
Objectives such as passing the business down to future generations and building a long-term relationship with stakeholders created a sustainable business model, the report said. This sustainable business model meant family-controlled businesses were able to gain access to cheaper finance; according to Cruz, lenders assumed their risk of default was lower due to their long-term vision.
Cruz added: "We came up with the term 'socioemotional' wealth to refer to these non-financial benefits that affect the utility function of family shareholders. We have demonstrated that for family shareholders, preserving socioemotional wealth is an end in itself."
Despite family businesses outperforming their non-family counterparts, family firms were less appealing to investors and usually traded at a discount compared to non-family enterprises. Investors were apparently wary of the controlling families, concerned that minority shareholders' income could be expropriated by the family.
Investors were also put off by the complex management structures of family businesses, said the report, as these structures were often designed to keep control in the family's hands and to limit the influence of outside shareholders.
But Cruz reckons measures to ensure continuing family control don't necessarily destroy shareholder value; instead they create value, as family firms are under less pressure from shareholders to produce short-term results.
Succession was also a factor in the investment decision process. Family firms were more valuable when they had tackled at least one generational handover, yet investors – when they did chose a family firm – preferred to invest in companies that were still directed by the founder.
The conclusions of the report were based purely on numerical data rather than qualitative research. Cruz said: "I am not sure how conscious the decision is, but we know succession conflicts in well-known family businesses are often aired in the media."
Cruz reckons family businesses should tackle their bad image: "If the market perceives that the potential negative effect of the family presence are under control, it would just focus on the positives and this would be reflected in the prices."