5 Ways Family Businesses Outperform Non-family Firms
14th September 2018
Since 2006, family businesses have been outperforming non-family ones in every sector and across the world, according to the new Credit Suisse Family 1000 in 2018 report.
The reasons behind this trend? The “family-alpha” factor, a winning mix of higher research and development (R&D) and capital expenditures, and less cash taken out through dividends and share buy-backs.
The report has analysed family and non-family businesses’ performance across a variety of metrics, and in all of them the family business model has proven to be more efficient.
They grow faster
Whilst both family and non-family firms have experienced a visible improvement in 2017 compared to previous years, family businesses continue to generate higher revenue growth than their non-family peers.
They make better profits
Family businesses have been found to outperform non-family ones also when it comes to generating profitability, with margins particularly striking among smaller family firms.
The have less debt
Family firms have also lower net debt to EBITDA. This is a distinctive trait of family-owned companies, who usually rely less on debt funding than their non-family counterparts. This also provides them with a better degree of insulation during financial crises.
Credit Rating
Interestingly, the report analyses if, and how, the ‘family-alpha’ factor is also acknowledged by external credit rating agencies. This seems to be the case. For example, according to Standard & Poor the credit quality of US family firms is better than non-family ones, with 24% being rated A-, almost double the percentage of non-family firms.
Long-term horizon: what does it mean?
Whilst confirming that the key reason behind family firms’ better performance is their long-termism, the 2018 CS report also offers a new perspective into the metrics defining it. They do so by defining four key indicators: capital expenditure as a percentage of depreciation, R&D as a percentage of revenues, growth of gross investment and buy-backs as percentage of cash flow. Across all four, family firms have indeed scored higher levels of long-term philosophy.
Crucially, this provides them with the flexibility to move away from quarter-to-quarter calendar and focus on long-term growth.
If you want to find out more about the keys behind successful family enterprises, don’t miss our upcoming event How To Build a 100-Year-Old Family Business on 31st October.
