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Global Family Businesses in 2010
 

In later generations, family firms’ financing needs and
funding sources evolve. But key factors remain the same.

 

OVER THE LAST two decades, family businesses have undergone significant transformations, with regard to family composition as well as the challenges faced by these enterprises.

In the late 1980s, most family businesses were still dominated by World War II generation leaders who were generally autocratic and self-assured. The reference book for that generation of business owners was Léon Danco’s masterpiece, Beyond Survival. In the book Danco described the loneliness of the war generation leaders and their trepidations about bringing the baby boom generation on board. Recalling their childhood experiences during the Great Depression, these leaders maintained conservative balance sheets and they relied mostly on the founder’s savings and family loans to bootstrap their businesses.

Founders and their families took personal risks. They pledged personal assets, such as their home, as collateral. To fund expansion of their fledgling enterprise, they plowed internal cash flow back into the business. Along the way, they called on their neighborhood banker for some short-term financing and occasionally turned to a group of their wealthier friends for “angel” equity capital. When the young baby boom generation joined their parents in the management of the family business, their youthful energy was substantially tamed by the lack of financial flexibility; plans were limited and depended on the company’s resources. Navigating the often stormy waters of generational transitions was the most difficult challenge faced by family businesses at the end of the 20th century.

The last two decades were marked by three distinct phenomena that have had a significant impact on the state of family businesses today.

On the business side, due to the fast acceleration of globalization and information flow, family businesses increasingly for the first time are confronted with well capitalized global competitors. Global companies’ access to capital and markets were well above the financial and managerial means of these very conservatively capitalized family businesses. At the same time, customers came to expect companies to meet their global needs, and suppliers began to favor global sourcing. In a global market, growth is no longer a choice but a necessity for survival. For the first time, many family businesses needed access to outside capital and outside global management teams to stay competitive and to grow. The alternative was to sell out or perish.

 

The late ’80s witnessed the liberalization of fi nancial markets across the globe. As private wealth increased, the wealth management industry arose, giving family businesses access to new sources of capital, such as private equity funds, private trust companies and nonpublic equity. Private equity would be deemed very attractive for family businesses as an alternative to selling the company or going public.

Finally, during the last two decades, advising family businesses became a distinct profession of its own. The Family Firm Institute (www.ffi .org) was formed in 1986 along with many other networking and educational organizations and programs. Family business owners and their advisers now had plenty of opportunities to learn from professionals and from their counterparts in other family enterprises.

Global, multigenerational family business owners

In this second decade of the 21st century, it is not unusual to find family businesses with ownership spread among three or more generations. Most of these extended families no longer live in the same town—they may not all live in the same country, or even on the same continent. This diversity among family members creates significant dichotomies in the various shareholders’ control and liquidity goals.

The founder or second-generation owners, now grandparents in their 70s or 80s, are more interested in liquidity than in growth. They need dividends or a full or partial buyout to allow them to retire in comfort. The next generation, in their 50s and 60s, are often still active in the company, but their biggest personal expenses are behind them. (Their homes are mostly paid off; their kids have graduated from college or are nearing that milestone.) But the boomer generation’s kids—in their 20s, 30s or 40s—have those expenses in front of them, and are ready to leap into new technology and new global markets to help the company grow enough to meet their future needs. Smart family businesses in this situation create ongoing liquidity programs to match the diverging needs of owners in each generation.

Globalization—of families as well as businesses—has also substantially changed the role of the family owners in the management of their companies. The better-educated family

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