Investors benefit from sustainable value creation in family businesses
With their clear focus on creating long-term shareholder value, family businesses not only provide substantial added value to investors, they also tend to be more sustainable than non-family businesses.
It’s no coincidence that the world’s highest revenue company is a family business.
Alex Martens, Fund Manager at KBC Asset Management
“Family businesses are all too often underestimated. They are regularly overlooked by investors as they make distinctly long-term, not-so-sexy decisions. But in the end, they show higher levels of growth than non-family businesses – an important leverage for profit growth,” says Alex Martens, Fund Manager at KBC Asset Management. It’s no coincidence that the world’s highest revenue company is a family business: US supermarket chain Walmart. The company has headed the list of largest companies since 2014, even outranking technology giants such as Amazon and Apple. “So it’s a huge misconception that all family businesses are SMEs,” says Martens.
Healthy balance sheets
Family businesses annually yield around 3 per cent more than non-family businesses. Martens believes there are good reasons for this. “They focus on creating long-term shareholder value, which means they look beyond the next quarter.” Family businesses generally pursue a five- to eight-year plan that they stick to, even if a few quarters are less profitable. “And, paradoxically, choosing not to maximise profits in the short term is precisely why they successfully generate more profits in the long run,” says Martens.
This long-term vision helps family businesses generate about 2 per cent more revenue growth than non-family businesses. At the same time, their debt ratio is three times lower on average, which means that their balance sheets are perfectly healthy. “Family businesses tend to be less reliant on external capital. That’s a major advantage. They are able to overcome adversity in times of crisis and often still have sufficient financial resources to continue to invest where other companies might find themselves in need of financing.”
Paradoxically, by choosing not to maximise profits in the short term, family businesses successfully generate more profits in the long run.
Alex Martens, Fund Manager at KBC Asset Management
Sustainable returns
Studies have revealed that family businesses score better on corporate sustainability, especially in environmental and social terms. “Sustainability is deeply embedded in the DNA of most family businesses,” says Martens. Family businesses evolve across generations and every generation wants to pass down a healthy and strong business to the next generation. “Moreover, most family businesses are firmly rooted in the local community and have a great sense of social responsibility.”
The focus on sustainability increases with every generation. “A new, more digitally savvy, generation often gives fresh impetus to the family business. The younger generation has a strong focus on sustainability and continually seeks opportunities for the permanent integration and improvement of sustainability strategies in the business,” says Martens.
Family businesses have a distinct entrepreneurial mindset, recognising innovation as a possible solution to major social and environmental issues.
Alex Martens, Fund Manager at KBC Asset Management
Full speed ahead
When family businesses take the step towards sustainability, the impact is instant and significant. In Belgium, nearly 45 per cent of the working population are employed by family businesses, which together make up nearly 60 per cent of GDP. “Family businesses have the financial clout needed to take corporate sustainability up a notch.”
And, contrary to common perception, family businesses are often highly innovative. “Family businesses have a distinct entrepreneurial mindset, recognising innovation as a possible solution to major social and environmental issues.” Innovative ideas generally emerge spontaneously and are put into practice much faster. This is partly because family businesses don’t adhere to a strict hierarchical structure, but also because they are committed to their employees’ well-being, which helps them retain these employees for a longer period of time and keep the accumulated knowledge in the company. “Although they invest less in absolute terms, family businesses do generate a higher return on research and development, and market more new products or patents than non-family businesses,” says Martens.
Active management is key
No two family businesses are the same. “Family businesses provide investors with opportunities, but there’s no one-size-fits-all solution that works for everyone all the time. An active investment approach is key to selecting family businesses that can truly create sustainable value in the long run,” Martens concludes.
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The information contained in this publication is for information purposes only and should not be considered as investment advice.
