The Secrets of Outperforming Family-Owned Businesses

The Resilience and Impact of Family-Owned Businesses In a business world characterized by constant disruption and change, family-owned businesses (FOBs) stand out as paragons of resilience and adaptability. Unlike many organizations for which resilience might be a relatively new focus, FOBs—defined as companies where founders or their descendants hold significant share capital or voting rights—have often practiced it as business as usual for decades, sometimes even centuries, as exemplified by enduring companies like Levi Strauss and L’Oréal. The significant role FOBs play in the global economy is often underestimated. They account for over 70% of global GDP, generate $60 trillion to $70 trillion in annual turnover, and are responsible for approximately 60% of global employment. Furthermore, they play a crucial role in supporting education, healthcare, and infrastructure development within their communities worldwide. Recent McKinsey research confirms this adaptability, resilience, and impact, highlighting that FOBs possess the structures and best practices needed to navigate business challenges in uncertain times. The Performance Edge: By the Numbers The study reveals that FOBs generally exhibit stronger performance than non-family-owned businesses, although the extent and drivers of this outperformance vary. Between 2017 and 2022, FOBs posted a higher average total shareholder return (TSR) (2.6% vs. 2.3% for non-FOBs), achieved greater average economic profit ($77.5 million vs. $66.3 million), and generated an economic spread that was, on average, 33% higher than non-FOBs. Deeper analysis shows performance variations based on company size and age. Midsize FOBs (annual revenues $150 million to $5 billion) outperform by being more efficient investors, delivering 10% higher capital turnover compared to their non-FOB counterparts. This is attributed to their long-term focus and streamlined decision-making, allowing them to identify and act on investment opportunities aligned with their goals more effectively. In contrast, large FOBs (revenues $5 billion to $100 billion) tend to excel as efficient operators, achieving operating margins 1.5 percentage points higher, likely benefiting from generational efficiencies and supply chain relationships. The research also indicates that younger FOBs (under 25 years old) often display an aggressive growth mindset, doubling the revenue growth rate of non-FOBs, fueled by the founder's entrepreneurial energy. However, as these businesses mature and transition leadership, growth can slow, sometimes aligning more closely with non-FOBs as the focus shifts towards value preservation. Unique Challenges Despite their outperformance, FOBs face distinct challenges. Succession-related issues across generations, balancing the founder's vision with subsequent generations' priorities, are a constant hurdle. Their typically cautious financial approach, while beneficial for weathering economic shocks, can sometimes hinder timely investment in innovation, expansion, or necessary process changes. Furthermore, a tendency to underinvest in R&D can limit long-term innovation and competitiveness. The Outperformance Formula: 4 Mindsets + 5 Strategic Actions The study identifies that the highest-performing FOBs (over 120 companies in the research base, representing the top two quintiles of economic profit) don't succeed by chance. They uniquely combine four critical mindsets—present to varying degrees in all FOBs but more pronounced in top performers—with five specific strategic actions. The Four Critical Mindsets: 1. Focus on Purpose Beyond Profits: A significant 93% of top-performing FOBs believe their company has a clear purpose beyond shareholder value creation (compared to 86% overall). This purpose can be internal (legacy, reputation, culture) or external (customer value, community impact). Crucially, they implement formal mechanisms to embed this purpose within the organization. 2. Long-Term View and Reinvestment Focus: These businesses operate with a multi-generational perspective, prioritizing reinvesting profits back into the business for sustainable growth over short-term gains. 3. Conservative and Cautious Financial Stance: Maintaining a strong balance sheet and avoiding excessive debt provides a safety net during downturns, though it requires careful balancing to avoid missing growth opportunities. 4. Processes Enabling Efficient Decision-Making: Streamlined governance structures and processes allow for swift, decisive action, particularly regarding investments and resource allocation. The Five Strategic Actions: 1. Actively Diversify Portfolios: Continuously seeking opportunities to diversify across different sectors or geographies to mitigate risk. 2. Dynamically Reallocate Resources: Agility in shifting resources quickly towards the most promising businesses, regions, and channels. 3. Efficient Investing and Operating: Excelling at both identifying and executing value-creating investments and managing daily operations efficiently to achieve strong margins. 4. Relentless Focus on Talent: Recognizing human capital as key to sustained success and investing significantly in attracting, developing, and retaining talent. 5. Continually Review Governance Mechanisms: Ensuring governance structures remain fit-for-purpose and effective in supporting strong business performance across generations and as the company evolves. A Path to Multiplied Value The McKinsey study concludes that FOBs successfully implementing this "4+5" formula have the potential to increase their economic profit by 2.5 to 5.5 times, potentially quadrupling their value over the next decade. These lessons are not exclusive to family businesses; non-FOBs can also leverage these insights to enhance their performance and resilience. Understanding and applying these principles can empower companies to achieve sustainable success, bolster their resilience against future challenges, and amplify their positive impact on the economy and society. Source: McKinsey & Company