Family Business As An Investment Idea

In a business, how long is the long term and why does that question matter?

KPMG Family Business recently published a piece on Family Business Long-Termism.  The point is that family businesses are not driven by quarterly results.  They protect longer visions.  The founder’s ideals and the family brand.  Neither can be enhanced by micromanaging and short term advantage.

Compare this to public corporations that report every ninety days.  They are followed by a herd of analysts whose reports are influenced by tiny variations from expectations. Investors respond accordingly. 

People are driven by their dominant thought.  If quarterly results matter to managers, they will concentrate on the short run and by default, ignore the rest.  Same for investors.

Many family businesses are unaffected by annual changes from their expectations.  Few, if any, make strategic changes as the result of such variation.  Again the dominant thought.  Build the brand.  Provide worthy products and service because the family name is on the label.  Pass a vibrant asset to the next generation.

As an investor, there may not be the option to create a family business.  Even though it makes long term economic sense, few participate. Those that do and are successful, often draw attention from better financed, predatory competitors.  Good strategic ideas are not necessarily riskless.

There is a compromise position.

About a third of all businesses in the S&P 500 are family controlled.  Some of these  tend to outperform their competitors and it is possible that they do so because of their instinctive long term approach.

Several years ago, Business Insider did a story about this.  Some of things they mentioned:

  • They are more stable
  • They inspire more trust and commitment from employees

They are very large too.  The top 100 collectively generate more than a $1 trillion in sales.

Business is about strategy, tactics and logistics.  Logistics is about efficiency.  Strategy is about effectiveness.  Tactics are how they connect and they have some of each aspect.  Short term is dominated by efficiency, but you cannot derive a sound strategy from looking at the daily minutia.

As an investor, it is profitable to join with people who have long term appreciation of the nature of business and behave to build rather than administer.  Look for opportunities where the founders ideals persist, where strong brands dominate, where loyalty to all stakeholders (shareholder, employee, supplier, lender, community) matters.

Be a little cautious though.  An IRCC study in 2012 shows an interesting anomaly on page 8. Family controlled businesses with multiple share classes do significantly worse than ones with a single class over a 10 year period.  They do better in the short run.

It is hard to put a reason to that, but as a suggestion, managers who are in it together with the rest of the stakeholders do things differently.  And better.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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