Investing in Family-Owned Controlled Business can Reap Huge Benefits
Although the exact definition of a family controlled business company is not clear, it is one where the founder or his descendants have an economic stake and enough voting power to influence the board. These voting stakes can be augmented by prominent positions within a company, such as a C-suite or board seat.
Research over the last 10 to 15 years from Credit Suisse, Boston Consulting Group and McKinsey & Company suggests that family-controlled business outperform their non-family-controlled peers.
Where does patience come in? Family-owned businesses CBC Business tend to take a long-term view of their business. They are often conglomerates. They look for investments that may not provide compelling returns in the next quarter, or even the next twelve months. The best investments will provide real value over time. They are careful with borrowing and don’t take unnecessary risks.
Although they might be more concerned with long-term capital preservation and creation of value, well-run businesses don’t just sit on their assets. They take advantage of opportunities and think about how they can alter the business’s trajectory to increase value.
These families and their companies like to manage the company’s capital and make it grow over time. This is for the benefit of investors.
Faith is also important. This is due in part to the long-term track of family-controlled business, which often spans several generations. However, they also have a different attitude towards shareholders than their non-family-controlled counterparts.
The focus isn’t on satisfying shareholders’ needs. Instead, the focus is on building and growing the wealth of the family. They are less transparent than other businesses, and research has shown that family-owned businesses are more likely to have a higher number of interested board directors. This often includes family members.
Many family-owned businesses don’t disclose long-term plans metrics, and many do not include financial targets.
This lack of transparency can frustrate shareholders. They don’t want to wait for all the details to become available over time. They want to see it all the way.
For the patient investor who can put their faith in the CEO’s vision and business acumen the payoff is the chance to ride the coattails of the family’s efforts to increase value over time and compound wealth.
However, family-owned businesses can be risky and not all are created equal. It is important to examine the family’s transactions with the company throughout the years. Are they good stewards for the company’s capital? This is a red flag if they treat the company like their personal piggybank.