Do you know what companies like Ford Motors, Lotus Bakeries, Nike, and Walmart have in common? They are all family businesses. Does this matter to investors? Absolutely. In general, family-run businesses think more long-term, have healthier balance sheets, are more profitable, and perform better on the stock market.
We’ll start from the beginning. When can we speak of a family business? In general, this term is applied to companies of which the founder or his/her descendants own at least 20% of the shares or voting rights. “Family first” is a statement you hear often. It is natural to usually prefer your own family over someone else's and it is no different at corporate level. One of the major difficulties of investing is that interests of shareholders and management are not always aligned. Self-interest can sometimes prevail when making business decisions. Does sponsoring a cycling team really add value to the company? Or is the CEO mainly doing it because he is a big cycling fan? Are the management's private jets really necessary? These are critical questions that you can and should ask yourself. At Econopolis we only invest in companies with good corporate governance. A strict screening of the management is crucial. Family businesses have an advantage in this. These types of companies usually have one goal: get their company bigger, stronger, and more robust for the next generation. You benefit from this as an investor, as the focus is on long-term value creation for the shareholders. The interests of the management and shareholders are often in line, which brings all kinds of advantages.
Higher profitability and faster growth
It has been proven by hard figures that long-term thinking pays off in entrepreneurship. For example, a study by Credit Suisse shows that since 2006 the annual turnover growth of family businesses has been 2 percent higher than that of other companies. In addition, family-run businesses are also generally more profitable. Their return on invested capital (ROIC) is significantly higher. In concrete terms, this means that these companies can make more profit with the money that shareholders give them. This phenomenon is observed in Europe, Asia and North America.
Achieving good returns without taking excessive risks. That's what investing is all about. It is also the case for entrepreneurs. Can you guess which companies have the most debt? Family or non-family run companies? Companies in which the founding family still has a significant interest, generally finance themselves more with internal resources. This is called auto financing in the jargon. Companies will use the profit they have already made to reinvest it in themselves. Non-family-run companies, on the other hand, rely more and more on debt. The healthier the balance sheet, the healthier the company. It prevents future liquidity and solvency problems.
Stock market performance
So, we have already put forward a better long-term vision, healthier balance sheet , higher profitability and growth. The key question is, of course, whether this also translates into better stock market performance. It should come as no surprise that this is effectively the case. For example, Credit Suisse concludes that since 2006, family businesses have outperformed non-family businesses by 3.70 percent annually. In Europe and Asia there is even an annual outperformance of no less than 4.70 percent. That makes a world of difference. To better understand: if you invest 1 million euros today and achieve a return of 5% or 9.7% over the next 20 years, at the end of the day you will have a capital of 2.7 million euros and 6.9 million EUR. A difference of no less than EUR 4.2 million. Family businesses also generally perform better in the private equity landscape (non-listed companies). Again, the principle applies: what you do with passion and for yourself, you usually do better. To illustrate: there is a clear difference between the behavior of the driver of a company car and someone who bought his car himself. For example, company cars cause significantly more accidents than an identical personal car (same brand, power, color, etc.). You can also translate this fact to the stock market: the more the management owns the company, the greater the chances to create shareholder value in the long term, and therefore the better for you as a shareholder.
At Econopolis we strongly believe in the importance of family businesses. They are a structural part of our asset allocation. For example, in Switzerland, we invest in Roche, a strong listed family business. We also offer our professional and institutional clients the opportunity to invest in unlisted family businesses.
Portfolio Analyst at Econopolis