Companies having a more distributed ownership structure produce less money than those owned by families. When the economy slumps, however, family businesses outperform their peers. This is because family-owned companies place a greater emphasis on resilience than performance. They forego the higher returns that come with good times to improve their chances of surviving in bad times. So, how do family-owned businesses maintain their resiliency?
They Are Frugal in Both Good and Bad Times
You can identify a family business by going into its headquarters’ entrance. Unlike many giant corporations, most of these companies do not have lavish headquarters. While many corporations use options and stock grants to convert managers into shareholders and avoid the classic principal-agent dispute, family businesses appear to be imbued with the belief that the firm’s funds are the family’s funds. As an outcome, they keep their expenditures in check.
They Are Not in Debt
A moderate level of debt is considered a desirable thing in modern business finance since financial leverage enhances value development. On the other hand, family-owned businesses equate debt with vulnerability and danger. Debt limits their flexibility in the event of a setback and binds them to an outside investor. Most family-owned companies are less leveraged and, as a result, do not have to make significant financial concessions during a recession.
They Buy Fewer (And Smaller) Businesses
A dazzling revolutionary acquisition may be the most difficult to reject of all the moves management can make. It comes with a lot of dangers but also a lot of rewards. However, many family-owned firms choose smaller acquisitions related to their core business or transactions that require basic regional development. Instead of acquisitions, family-owned firms seek organic development and will frequently pursue joint ventures or partnerships.
Many Exhibit Some Degree of Diversity
Some family businesses have expanded naturally into new industry lines; others have purchased tiny businesses in new industries and developed on them. Diversification has been a critical tool to preserve family wealth as recessions have gotten deeper and more frequent. When one industry experiences a slump, enterprises in other industries might create cash, allowing a business to build for the future, whereas its competitors cut back.
As economic cycles shift from good to unfavorable, family businesses’ resilience-focused strategies may become increasingly appealing to all businesses. Accepting a lesser return in good times to assure survival in tough times could be a trade-off that executives are happy to undertake in a global economy that regularly moves from crisis to crisis.
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