Speaking of family firms

The Dutch economy is built on family businesses. But what is a family firm anyway? How to they differ from other, non-family businesses run by entrepreneurs? They get a lot of airtime, but no one is clear on who exactly belongs in this illustrious group.

Text: Mr. Simon van den Boomen

It has to do with business, of course. Because without enterprise, there is no family firm. It also has to do with multiple generations of involvement – otherwise we’re simply talking about any entrepreneur. And yet, no single definition of ‘family firm’ exists. The Chamber of Commerce, the tax man, the banks, politics and universities all have their own criteria and take on it.

For me, there’s one aspect that jumps out: i.e. that family businesses are in principle, finite. Just like people, family businesses have a finite existence. They end when family stops running them. Sometimes that’s because the company collapses due to lack of leadership, a sale, merger or bankruptcy. It could also be that ‘the family’ represents such a big group that the only trace of family remaining is in the name, and the blood ties are very distant. Barring the odd exception, the pool of successors is in many cases too limited to enable the firm to continue on generation after generation.

Family firms are fighting against the clock in a race that theoretically, they can’t win. Once again: there are exceptions. With each generation, the likelihood of succession dramatically declines. And the likelihood of the line ending exponentially increases at generation three. Never mind at generation four. In practice, it seems that the fifth generation family members (we’re talking cousins twice removed here) are more or less strangers to one another. Add new relationships and households that are the result of divorce into the mix and the question arises as to who is whose family?

Most of all, it is the underlying emotion – sometimes even drama – that differentiates family firms from non-family firms. They involve emotions in the business process, where they don’t really belong. Companies need to make money. Otherwise they perish. Economics rules. It’s common to see the company there for the family rather than the other way around. This is putting the cart before the horse in my opinion.

Healthy principles like making a profit, innovation and professional management should be guiding, and not the family’s private interests. Families that are flexible in that sense hold out the longest. They are the ones most able to delay splitting up the company.

Darwinism is an integral part of the survival of a family firm. If the family is unable to adapt to the shifting circumstances, survival becomes challenging. Business can hit the end of the road sooner than expected in those cases. Sometimes both the family and the firm go under together. The rift tears both apart. That is certainly a low point in the world of family businesses.

‘Most of all, it is the underlying emotion – sometimes even drama – that differentiates family firms from non-family firms.’

The question we should be asking is, why the principles of a family firm can’t be engrained in any regular firm? HEMA was a good example, albeit an old one. The HEMA of recent years is another ballgame altogether, with private equity managers taking over. But prior to that, it was run by the actual HEMA family. Just like the old Philips.

In order to survive as a family firm, the owners need to keep reinventing themselves. A small family circle will by definition have to open themselves up. And family firms can’t stand that. They’d prefer to continue to build with a small circle of family players instead of replenishing the team in time.

When family firms truly embrace Darwinism, future generations have a far better chance of success. If they don’t, there is no future and a family firm will usually run its course after multiple generations. That isn’t necessarily a bad thing: selling a family business can be very sensible. Especially in the long-term.

Experience shows that people are keen to continue family businesses. The legacy should be preserved, but the emotions often prevail. That’s okay. Just try to avoid the reptilian brain taking over, embrace Darwinian principles in a changing corporate world, and stay on track by respecting the familial triangle of staff, customers and owners. They are the true foundations of a healthy family firm. Only then will the family-firm fairy tale live on happily ever after.