The life cycle of family ownership

When UK family businesses decide to increase their fortunes, they send out an invitation to buy equity stock. But family businesses in Continental Europe seldom acquire new investors through equity financing. This finding, one of several surprises to be found in this article, disproves the common perception that the longer a family operates a business it founded, the greater the chance that it will become a professionally managed, publicly owned firm (if not one absorbed into a larger company via a merger or acquisition). That perception holds only if the family and its business is in the ‘right’ country.

The authors (Julian Franks and Paolo Volpin of London Business School, Colin Mayer of the University of Oxford, and Hannes F. Wagner of Bocconi University) explored how, why and when family businesses changed ownership between the years 1996 to 2006. The scope of their research included 4,654 firms in Europe’s four largest economies (the UK, France, Germany, Italy). They also examined a cross section of 27 European countries via data collected on 27,684 firms. A family was deemed to have lost control of its business when family control fell below 25 per cent of the voting rights.

The major value of this research is in the conclusions the authors drew after discovering, for example, that 53 per cent of family firms in Italy remained so even if the company had existed a century or more. Conversely, only 21 per cent of family firms remain under family control in the UK. Why? According to the authors: “Family firms evolve into widely held companies as they age only in countries with strong investor protection, well developed financial markets and active markets for corporate control. In countries with weak investor protection, less developed financial markets and inactive markets for corporate control, family control is very persistent over time. This happens for both private and public firms.”

To determine investor protection, the authors aggregated three measures and assigned a score. Higher scores indicated stronger investor protection, greater financial development and more active markets. The UK, Switzerland, and Ireland scored very high. The Ukraine, Hungary and Austria scored very low. France, Germany and Italy fall within an average range.

Countries that operate similar to the UK’s economic patterns seem to be distinct from those on the Continent. UK firms raise capital by issuing new equity; Continental Europe eschews this option. (That appears to be the primary reason why family ownership has a shorter life cycle in the UK than in France, Germany and Italy.) Nonetheless, the study suggests that countries can possess unique traits. One example: Germans seem inclined to grow firms by acquiring other family-owned companies.

Curiously, family-owned businesses tend to be in industries that do not depend as much on investors’ capital for growth. There are fewer of these in the UK than in the other countries, suggesting that the UK economy is more investment-friendly and, as a result, relatives have incentive to sell their stock.

In an era when the health of European businesses seems tied to the health of Europe itself, the reader of this study is bound to ask whether loyalty to Old World business traditions is holding back market growth in a New World economy? This is no small question considering that private firms account for more than 80 per cent of the top 1,000 firms in France, Germany and Italy.