Why Family Owned Businesses are Vital to Our Economy

As expected, the outlook from the perspective of middle-market, family-owned businesses was equally encouraging.

Family-owned businesses are the quintessential entities behind economic prosperity in our American culture. Comprised of hard-working, entrepreneurial minds, those who run these businesses represent the consummate professionals that are the inspiration behind American ingenuity. According to Rob Ferguson of Ferguson Interests, business advisor for family and private equity-owned businesses,

“Family-owned businesses are the brains behind innovation, the heart behind local philanthropy, and the nerve system behind free-enterprise.”

Before we look at the importance of family-owned businesses, we should first examine some of the intricacies and traits of family businesses that make them so productive and resilient.

Family businesses are distinct from other kinds of companies because they are frugal in the good times and the bad. Because there is so much riding on their stewardship, family businesses tend to be more practical about the way they spend and are less apt to waste. The result is, in most cases, a well-oiled system which runs much leaner and more independently than its corporate counterparts.

Family businesses tend to keep the bar high for capital expenditures, limiting the number and frequency of amortized purchases to a bare minimum. In many instances, investments for productive purposes will be planned well in advance of the current fiscal year. Before a purchase, the timing is tightly monitored and in line with future goals for the business. In the event of emergency expenditures, even these kinds of purchases are vetted against long-term plans and generally lend themselves to some future planned expense. Maintenance (in the case of industrial machinery) and the life-value of the purchases made, compared against the projected revenues that investments may bring, are central components of the planning process.

Family businesses are less likely than other types of companies to carry massive debt. Being frugal and limiting capital expenditures, no doubt, lend themselves to this quality; however, the determination not to take on substantial debt comes from a desire to reach profitability at a much faster pace.

Unlike other types of business, family-owned businesses are acquiring fewer and smaller companies. Though the temptation might be to go after a “sparkly transformation acquisition,” and can lead to substantial rewards, the risk factors are prominent in the minds of owners who tend to be more cautious and would prefer to make smaller acquisitions that lend themselves to the core of their existing business. Savvy owners will make moves on certain assets if they benefit the overall profitability of their own company. Rarely are purchases made outside of the core of the business and if they are it is a calculated risk afforded by an analysis which significantly shows the advantage of purchasing a business that will enhance the companies long-term survival. Purchases of this nature are especially beneficial in cases where the company’s traditional sector faces technological challenges where developing solutions “in-house” would be significantly more expensive than the acquisition of another supporting business. As a result, family businesses generally benefit nearly twice as much financially from purchases than their more aggressive counterparts. Still, given a choice between strategic partnerships and outright acquisition, most family-owned businesses would prefer the organic growth that partnerships engender. Despite the fact many family businesses are reluctant to make outright acquisitions, they tend to show a surprising level of diversification.

Because of these attributes, many family businesses tend to expand internationally and attract and retain talent better than their competitors do. It is no wonder then that more than 30% of all companies with sales above $1 Billion are family-owned businesses. Running leaner, being more frugal, watching expenses, and carefully planning purchases that make the most sense are typical attributes common to family businesses. With unique ownership structures, most family businesses have a long-term orientation that traditional firms often lack. The nature of family-owned companies is especially beneficial in economic slumps when family businesses outshine their peers.

Family-owned businesses make up a vast majority of small businesses comprising 99% of all U.S. business according to the Small Business Administration and create jobs for 58.9 million workers. Family businesses account for 64% of the U.S. GDP and generate 62% of the country’s employment, accounting for 78% of all new job creation and employing over half of U.S. workers. Other sources cite that mid-sized businesses represent about 3% of all companies and that the middle-market businesses in America contribute to 34% of all private employment, roughly 41 million jobs. Either way, it is apparent that these kinds of family-owned businesses bolster our economy and are critical to the sustained growth of the U.S. GDP.

According to the Journal of Business and Financial Affairs,

” The family business is the most frequently encountered ownership model in the world, and their impact on the global economy is considered significant. It is estimated that the total impact of family businesses to global GDP is over 70%.”

Pollsters asked whether or not family-owned businesses were a thing of the past, and of over 200 mid-sized business owners, 70% surveyed reported revenues of $200 million or more, while 25% reported $500 million or more in revenues. Earnings like these constitute a 6.65 percent greater ROI than non-family firms.

According to the Economist,

“America has around 197,000 medium-sized firms, defined as those with annual revenues between $10m and $1 billion…”

A significant factor in the profitability and growth of middle-market companies comes from the willingness of the leadership of these companies to embrace disruptive innovation. Because of the leanness of family-owned businesses, they are often more streamlined and tend to innovate more quickly than larger companies gaining critical advantages in competitive markets. In an article on Business.com one company, Ratheon,

“… turned aircraft design and construction on its head. Private jets were traditionally designed and built in sequential development phases, but this team instead chose to bring designers and builders together under one roof, leverage advanced 3D all-digital design and utilize state-of-the-art composites. The result was a lightweight aircraft constructed in two carbon composite fuselage sections which were connected to the wing with just a few bolts in a fraction of the time and cost. The project was completed in 38 months, shedding years off the typical design and construction process.”

Innovation and disruptive practices are the cornerstone of many middle-market, family-owned companies. In many cases, necessity is, indeed, the mother of invention. Smaller companies, like family-owned businesses, adapt for survival and as is often the case, the adaptations and innovations lead to advantages that larger companies leave to chance.

Smaller, family-owned businesses tend to encourage creativity, which leads to innovation. Because of their frugal nature, they will evaluate projects carefully and more intentionally identify flaws while adding value to their changes. Family-owned companies tend to treat their employees like family and value the inspiration and innovation that comes from among the ranks. They are less likely to push a top-down agenda, and instead, create cultures that tap into the experience of their employees. Instead of relegating innovation to R&D solely, a collective think-tank is born as innovators from within improving products and practices which make family-owned businesses even more successful.

At a glance it appears that the unique dynamics of family owned businesses are the both the factors that set them apart, but also the very same distinctions that make them so important to our economy. With the number of jobs they create and the shear volume of these kinds of entities, it is clear that small to mid-sized companies, many of which are family-owned and operated, play a significant role in thriving economies. The hurdles that these kinds of businesses face can often seem insurmountable, and only those who adapt and confront internal and external opposition head-on survive. To this end, many small to middle-market companies understand the need for trusted advisors, mentors and allies to help them understand their weaknesses and adapt accordingly, while at the same time capitalizing on their strengths and maximizing their potential for higher profitability.

As important as family-owned business are to the U.S. economy, ensuring that these kinds of companies remain healthy and viable is paramount to the continued growth of our country. The demise of these kinds of businesses can have troubling consequences. When you consider that of those mid-sized, family owned businesses that fail, a majority do so because of intrinsic problems as opposed to those brought on by external issues. What many of these kinds of businesses need to remain viable, is an objective resource to help them identify the kinds of problems which they might be unaware of.

Ferguson Interests LLC is one of these advocates for small to middle-market companies and is helping these family-owned businesses learn what it takes to understand how the intrinsic components of their business can be optimized to maximize the growth of a company. This gestalt approach to business acumen lends itself nicely to analysis providing tangible evidence of areas which are culpable while giving credit to facets of the business which are meritorious having the highest potential for promoting growth.

Rob Ferguson is passionate about helping family businesses move through their maturation cycles and avoid or recover from a declining phase. With a unique understanding of family businesses Rob has been very successful in helping these companies grow while seeing them through difficulties that encumber many other businesses. Rob has ten years of CEO experience with public companies and multi-generational family owned businesses. Rob has successfully conducted more than $100 million of acquisitions and has grown revenues from $30 million to $350 million. Rob has successfully managed the restructuring and sale of a $100 million revenue family business. Rob Ferguson is dedicated and helping middle-market companies reach their goals. Through business assessments, leadership development, M&A and capital, and restructuring consulting, Ferguson Interests is helping middle-market companies continue to be the force behind our thriving economy.