Joseph Jr. and Carole Levy Chair in Entrepreneurship; Clinical Professor of Finance
Several months into the coronavirus pandemic, it’s become clear that economic pain is not being distributed equally, even within individual industries.
A business’s size does not necessarily predict if it will thrive or suffer. Many smaller businesses are getting hammered: a full third of all small businesses in New York City, for instance, may never reopen. But plenty of large, publicly traded companies are also experiencing hard times. Heavily indebted companies such as Hertz, J-Crew, GNC, and Cirque de Soleil have all declared bankruptcy.
But what about family businesses?
This important category of business has been largely left out of the public discussion, says José Liberti, a clinical professor of finance at Kellogg. This is in part because detailed data on family businesses can be tough to come by.
But the data that do exist suggest that family businesses are experiencing the current crisis in a fundamentally different way from other businesses, large or small. Liberti explains how their experience is shaped by long-term horizons, which often lead to less debt, a surprisingly diversified portfolio, and, sometimes, a nonmonetary definition of success.
There are many reasons why family businesses aren’t regularly discussed in conversations about the economy. But a lack of economic might is not among them.
By all accounts, family businesses are a major economic force around the world. Liberti points to data from McKinsey, which show that family-owned businesses in the U.S. contribute 57 percent of GDP. And across Southeast Asia, Latin America, and India, more than 70 percent of companies with revenues greater than a billion dollars are family owned.
Still, family businesses as a category remain surprisingly under-analyzed. Part of the problem is that data on private companies—family owned or not—can’t be easily found or even pieced together from different sources. But another challenge is that not everyone agrees on what counts as a “family business.” Does a couple who owns a food truck count as a family business? What if their son helps out on weekends? And even if the whole family is employed, does this fledgling small business belong in the same category as a century-old family enterprise?
Liberti tends to think about multigenerational family businesses as distinct from first-generation family businesses—if nothing else, because they, by definition, are survivors.
“They’re really resilient. If you start thinking about families that are four generations, three generations, they have learned through experience and faced hardships through time,” says Liberti.
Even this group can be divided into those enterprises that are family owned and those that are family controlled. Take New York Times Company, which is publicly traded, but most of the voting shares are owned by the Ochs-Sulzberger family. This ownership gives them control of the company.
All of these factors make it exceedingly challenging to come up with useful statistics, such as how often multigenerational family businesses fail, or whether they are more successful than other kinds of businesses.
Still, however exactly you want to define family businesses, there is intriguing evidence that multigenerational family businesses are experiencing the pandemic differently from nonfamily businesses.
Liberti points to recent results from the family business advisory firm Banyan Gobal, which surveyed 190 family businesses from over 20 countries in 25 industries. Seventy-five percent of these businesses were at least in their second generation and 13 percent were in their fourth generation or older.
Most family businesses reported being negatively impacted by the pandemic. But Liberti was struck by what these businesses were—or weren’t—actively worrying about. Nearly all leaders were concerned about their short-term revenue loss and cash flow. But surprisingly few had deeper concerns about their survival and well-being as a family business.
“Shareholders penalize you for investing in something because they care about profits. Now, on the other hand, a family will invest because they have this dream.”
— José Liberti
This is different from the challenges facing many other companies, says Liberti.
“I see it as in some ways almost the opposite,” he explains. “They do not worry that they are going to lose their company. They do not worry about preservation of the culture. They do not worry about losing control.”
Rather, he says, they seem to implicitly know that they’re going to continue existing.
Liberti is quick to point out that he doesn’t know exactly why these businesses feel so confident about the survival of their firms, their family’s control, and their culture.
“The truth is I cannot quote a single well-done academic article that tells me why,” he says.
But in his view, it likely comes down to long-term horizons, meaning that multigenerational family businesses tend to define success in ways that go beyond short-term profits. For some families, success means providing family members with long-term employment or a way to pursue their interests; in other families, it means leaving a positive legacy. But it almost always includes an emphasis of longevity, which can provide enduring advantages during a crisis.
For one, long-term horizons make family businesses more risk averse and less likely to be weighed down with debt. This can make it easier to weather rainy days.
A long-term horizon also makes family businesses more likely to branch into new areas of business, particularly areas that are unlikely to pay off for years or decades. As an example, Liberti describes a former student—a fifth-generation member of a family business based in Nicaragua.
For generations, the family was focused on its sugarcane farms. But eventually, a family member said, “I want to have a rum company and to be one of the best in the world,” says Liberti. “As you can imagine, rum requires a long-term horizon, yes? To produce good rum, you need a minimum 25-year run.”
His students’ family was cross-subsidizing the liquor division—up until the day it finally produced a good rum. “It was the sugar division that was producing money and financing, basically, the rum,” says Liberti.
Small, fledgling businesses rarely have the capital to take on such long-term endeavors, while most public companies face shareholders unwilling to move profits from one part of the business to support a less profitable division.
“Imagine you’re in a public company, and a division is losing money. This is when you’re going to start hearing people say, ‘No, you need to spin off that division,’” he says. “Shareholders penalize you for investing in something because they care about profits. Now, on the other hand, a family will invest because they have this dream.”
And ultimately, he says, that dream may save them.
When a crisis hits, these businesses, spanning multiple unrelated divisions, tend to be far more diversified than public companies, which are only likely to invest in areas where they have a short-term competitive advantage.
“What you see is that these companies invest much more in divisions that are not related,” says Liberti. “You diversify into things that may not look very profitable in the short run but may look profitable in the long-run. So they are more able to diversify away the systemic risk that comes from the pandemic.”
Liberti points out that it is impossible to say which of these many factors and strategies—from diversification to risk aversion to the commitment to a family legacy—is most important for keeping family businesses afloat during the COVID economy.
“Disentangling which weighs more in the success of family firms is still an empirical question for scholars,” says Liberti.
But together, he argues, they give family businesses the edge over firms with more dispersed ownership structures. “They all prove to be important key success factors in times of crisis,” he says.