Are family businesses really that important?

The answer to this question is yes as family businesses represent the most enduring business model in the world. Continuous success of family firms through generations relies on ensuring that the next generation, in which the baton will be passed on to those who are motivated to take up the challenge and who are fit for the job (Drake, 2013). 

Whether the firm is private or public, family businesses constitute a major segment of the American economic system (Dreux, 2012). The greatest part of America’s wealth lies with family owned businesses. They comprise of 80%-90% of all the business enterprises in North America (Family Firm Institute, Inc. 2014). A great example of an American family owned business is Wal-Mart. Figure 1 shows a family tree of the Waltons, who are one of the richest and most powerful families in the world, own Wal-Mart and according to Bloomberg the family controls more than 50% of the Wal-Mart Corporation. Similarly, based on Forbes’ wealth estimates they have a combined net worth of at least $150 billion. So why does this company matter?  Even though the Walton’s are building billion-dollar museums, driving million dollar cars, Wal-Mart is the country’s largest private employer and pays its employees an average of $8.81 an hour. As a consequence, this company significantly impacts the US economy as growth, increased stability and wealth can be achieved (Willett & Nudelman, 2013).

Figure 1. 

Other famous and successful family businesses include Mars Inc. which is one of the world’s largest companies as it operates in six segments: Chocolate, Petcare, Wrigley Gum and Confections, Food, Drinks, and Symbioscience (Forbes, 2011). It is the 7^th largest private company in the USA and has an income of over $15m. According the President of Mars Incorporated, the company has an objective to create long lasting, mutual benefits for all those involved in the business success. They strive to create positive social impacts, minimising environmental impacts and also create economic value. Therefore companies such as Mars help to increase the prospects of the economy. 

So how are family owned businesses financed? 

It is does not come as a surprise to me that the most popular forms of finance for family owned businesses are self-finance and debt finance. Both forms of finance do not alter the share ownership of the company and so therefore preserve family ownership and control. Though family businesses tend to steer away from equity finance in order to try and retain ownership of their business. However, there is also the case of external investors are often deterred from offering equity finance to family-owned ventures due to the limited opportunities to secure an exit. If family businesses are not able to source finance and capital then how will they grow? This is a key limitation that can affect their ability to continue in an upward track. 

Although family businesses may be successful, problems may occur in larger family firms. Family businesses that wish to obtain outside equity capital will face agency problems. This may cause conflicts, as what the family members wish to achieve may be different to what the investors wish to achieve. Therefore, this may lead to the investors not trusting the family business and their wealth, which can therefore lead to wealth constraints preventing family firms from undertaking activities that can increase growth. Other problems such as conflict between family members and believing in different values may also be a concern when making financial decisions. If a company has generations of family members involved, generational differences can occur as the younger generations can have a different view compared to the older generations. 

Therefore, to sum up family businesses around the world are very important to the global economy as they bring a lot of wealth and growth. As a result they are really important and we must not forget them.