The danger of running a family business as an investment

Very successful multi-generational family businesses are increasingly been run as an investment by owning families. But that might not be such a good idea. Here’s why.

Recently, Family Capital spoke to a fourth generation member of a family that owns a majority of the voting shares in one of Europe’s biggest family businesses. Family Capital can’t disclose who he is, because that would breach his confidentiality.

He said the usual stuff about stewardship and long-term approach to returns – the standard information you get from successful family business owners – interesting, but not hugely original.

But Family Capital’s ears pricked up when he talked about being the owner of a family business with no involvement in operational management of the company. He said that if the family only see the business as a financial investment they might lose the love for it. He added there needs to be an intimate relationship between the family and the business, and this needs to be worked at. He was concerned that his family may be losing that connection.

This, Family Capital, reckons is a concern of many successful owners of multi-generational family businesses. Many of them have implemented exemplary governance structures – outside managers, supervisory boards, family constitutions, etc – but find that improved governance may actually create a ring fence around themselves and the business. The business becomes an investment for the family, rather than something they are intimately connected to, or at least not as much as previous generations of their family were.

Some families, of course, might find this remoteness to the family business completely acceptable, and are quite happy with receiving nice dividends from their shares in the business. They don’t want anything more. But others may not be happy with such an outcome. The sad thing is for these families, the more they professionalize the business, and bring in robust governance structures, the more difficult it might be for them to become involved in the operational-side of the business. And that remoteness will probably increase as the next generation take over the ownership of the business.

Indeed, family owners in such a situation become like a constitutional monarch, with all the symbolism of ownership, but with little say in the running of things anymore. And without the ability to ever come back to run things ever again.