Family Companies Overcome the Crisis, If They Go International
Italian medium and large family companies continue to be resilient: they were disproportionately affected by the crisis, but were better able to rebound from the slump with respect to companies having other forms of ownership structures. This is particularly true for family companies which have internationalized their operations.
These were the main conclusions of the sixth edition of the "AUB Observatory on Italian Family Firms", jointly promoted by AIdAF (Association of Italian Family Firms), UniCredit, the Milan Chamber of Commerce, and the AIdAF-EY Bocconi Chair in Family Business Strategy in memory of Alberto Falck.
This study looks at the balance sheets of 4,100 Italian family firms having revenues equal to or in excess of €50 million, accounting for 58% of Italian firms in the same size class. The AUB Observatory is therefore a very useful tool to seize the main features and dynamics of Italian family capitalism.
The sample, which has been collected yearly since 2007, has seen many new entrants and several exits: 40% of incumbents were substituted by newcomers, showing that a long crisis is a natural selection mechanism, but also that it is an opportunity to change governance and strategy, so to overcome the recession and meet the challenges of ever more global and competitive markets.
After having been disproportionately hit by the 2008-2009 crisis, family businesses were better able to revert the negative trend and blaze the path to recovery, as shown by the +10% differential in sales accumulated by family firms with respect to non-family firms, in the 2009-2013 period. In terms of profitability (ROI, ROE etc.) the picture is less rosy, since family companies haven't yet returned to pre-crisis profit levels.
Family firms find it hard to repay debt, as measured by the PFN/EBITDA ratio, which takes a value of 6.1 (with respect to 4.8 for non-family firms). Nevertheless, AUB data show that one in five family firms has liquidity exceeding its stock of financial debt, and that, proportionally, there are less family firms with negative EBITDAs than non-family firms (6% vs. 11%); also, in the course of 2013, family firms have reduced their leverage without compromising their propensity to invest.
A focus of constant attention for the Observatory has been generational renewal in family firms: comparing ISTAT and AUB data, what emerges is a slowdown in generational change at the top. Possibly this is due to the difficulties and uncertainties of the Great Recession, but the net result is that a fifth of the family firms observed have a man over 70 at the company's helm.
Two other important issues were explored by the AUB Observatory: growth through acquisitions, and internationalization through Foreign Direct Investment (FDI).
Regarding acquisitions, AUB data show that family firms that have made more than one acquisition post higher growth rates. The propensity to undertake such operations is higher in family firms which have non-family leaders, and governance models providing for a lesser presence of family members in company boards.
As far as FDI is concerned, AUB data show that family companies are driving the internationalization process of the Italian economy, since three quarters of Italy's investments abroad were made by them. Also, simple (i.e. a single chief executive in charge) and family-biased governance structures tend to negatively affect the propensity to internationalize.
This year's edition of the study was further enriched by the comparison with the top 300 firms (in terms of sales) headquartered in 5 major EU economies: France, Germany, Spain, UK, and Sweden.
Such empirical comparison leads to interesting reflections. Italy continues to be a country where family firms are dominant (40.7% of total firms), followed by Germany (36.7%) and France (36%). The ability to grow of larger firms is uncorrelated with GDP growth in their country of origin, another confirmation of the fact that companies need to go global if they want to resume growth. In four out of the six countries considered, family firms have grown faster than non-family firms over the 2007-2012 period. Spain is an outlier, since family firms have lagged behind the rest of the economy. In all six countries, the crisis has more negatively affected the returns on earnings (ROEs) of family firms than non-family firms. Benchmarking for leadership and governance highlights the fact that Italy is the country with the highest incidence of family leaders (51.3%, compared to 33% in France and Germany), and that Italy and Spain are the two countries where members of the controlling family are overrepresented in company boards (1/3 as opposed to 1/7 in the other four countries).
Finally, following tradition, the Observatory's researchers concluded their annual study by naming the main challenges that family companies are facing and are likely to face in the near future, as they strive to restore their competitiveness abroad: learning how to manage the complexity of collegial leadership, planning for and execute succession at the top, open the company to young family members and external managers, learning how to grow through acquisitions, investing abroad as much as possible to expand one's family business.
"The evidence collected by the AUB Observatory – says Elena Zambon, President of AIdAF - shows that the Italian family enterprise is solid and better able to withstand difficulty, especially when it welcomes professional managers from outside the family who share the strategy and are able to internationalize the company through acquisitions that are indispensable for growth. Certainly there must be an evolution toward more current governance models, and this is part of our activities at AIdAf: to support the whole entrepreneurial family though exchanges of best-practice experiences. We are persuaded that change can be pursued with courage, if it is shared inside and outside the family and the firm."
"Knowledge about the dynamics of family companies is a strategic asset for us ", says Dario Prunotto, Head of Private Banking at UniCredit Italia. "The data show that Italian family companies must take bold steps to grow in size, first of all on foreign markets, so to have new growth opportunities in terms of expanding demand, as well as to improve their efficiency, innovation, and diversification. These elements of business strategy crucially depend on increasing transnational transactions and operations. We are close to family firms, family entrepreneurs, and their efforts. We support family companies through credit, and provide them with financial and managerial assistance in cross-border M&A operations in all the 50 countries where we are present. We support the family entrepreneur with targeted financial consulting and advisory services, and provide strategic consulting focused on the family-company-wealth triangle".
"Family firms - says Alberto Meomartini, Vice-President of Milan Chamber of Commerce – not only are en element of business continuity and a way to combine innovation with tradition, but also a living example on how to do business and entrepreneurship which have made the history of the Milanese and Italian economy. These are firms that have managed to turn generational renewal into an opportunity for growth, and have met the challenge of globalization by internationalizing their operations. In the current economic predicament, it's all the more important to continue supporting family-owned businesses. At the Chamber of Commerce, we continue to monitor this crucial category of firms characteristic of our economy, by promoting this annual study jointly with Bocconi, UniCredit, and AIdAF".
"With the sixth edition of the AUB Observatory – says Guido Corbetta, Bocconi Professor of Strategic Management and AIdAF-EY Chair of Family Business Strategy in memory of Alberto Falck – we have further refined our analysis by focusing on growth through internationalization and acquisitions. The need to return to growth is acutely felt all across the eurozone: it is the fundamental challenge faced by policy-makers and entrepreneurs alike (both in family and non-family companies), today and in the near future. Through empirical comparisons with five major EU economies, we have sought to highlight the main differences and analogies in international family business, with the aim of providing Italian family companies with a wealth of useful information, and room for reflection and discussion".