C&B Notes

All in the Family

The presence of a controlling family in a company’s ownership table is not, on its own, a sufficient marker of strong governance.  It does include a good place to look, however, especially among the types of companies that meet our business quality standards.  Many of our best investments have been in companies with significant family ownership 

Credit Suisse has compiled research that argues family-controlled businesses — defined as founders or their dependents controlling at least 20 per cent of the equity — generate faster sales growth, higher margins and use less debt to achieve this than regular listed companies. Family owners, the argument goes, can take a more long-term view because they do not need to worry themselves with month-to-month management of the fickle concerns of the stock market. Most importantly, their vast fortunes depend on not blowing up their business. Outside investors can buy shares in their companies safe in the knowledge that if they wake up one morning to news of some ugly event, such as an accounting fraud, it will cost the family far more than a minority shareholder. 

Yet investors who conclude that just because a business happens to be family-owned it will do better than average, are making a risky bet. The reason many of these family-owned multinationals do so well is often because they are great businesses, with valuable brands, high barriers to entry, large returns on capital and are hugely cash generative. It is precisely for this reason that these businesses are able to stay under family control. Bad businesses in general consume capital and require constant access to it. Businesses that require ever greater amounts of capital are forced to either take on large amounts of debt, or dilute their shareholders, meaning founders eventually lose control. 

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