Emeritus Professor of Management Sciences
University of Bordeaux
*Faculty member of the Business Science Institute.
Article originally published on The Conversation France.
This article is published as part of the first festival of the Revue Française de Gestion, "Finance, strategy, governance: 40 years of Revue Française de Gestion" organized on November 17, 2017 at the IAE of Grenoble in partnership with CERAG, The Conversation France and XERFI Canal Productions. The authors of the special issue of RFG "Reconciling finance and management" published in 2009 and coordinated by Michel Albouy, were invited to speak on the theme: "A decade after the financial crisis: what view, what developments...?"
Is it possible to reconcile finance and management in family businesses? The article in the Revue Française de Gestion (G. Hirigoyen, 2009) concluded that the answer to this question depended on the way in which the specificities of these companies were managed and, more broadly, on the way in which they were subject to appropriate governance by their managers.
Almost a decade after the financial crisis, what is the situation? What changes can we detect? How should we look at it?
The post-crisis period is indicative of the continuing duality in the behavior of family businesses: on the one hand, the persistence of behaviors rooted in a desire to maintain control of capital by the family nucleus and strategic independence. On the other hand, the emergence of behaviors that reflect an adaptation or even an inflection with respect to the traditional criteria of capital control, independence, and information retention.
Control of capital and information...
In family businesses that emphasize capital control, independence and information retention, financing options remain limited.
The specificity of their governance model implies a natural reluctance to let go of the control they have over the company without mortgaging the need to finance long-term investment. In the KPMG-EFB European Family Business Barometer published in June 2014, 87% of companies say that maintaining control is a key factor in their success, up 15% from 2013.
This raises particular issues once these companies have to find financing that meets the identified needs. They explain short-term needs by current management (39%), internal growth in existing markets (32%) and the creation or improvement of their products and services (17%). In the long term, their needs are due to acquisitions (22%), the conquest of new geographical areas (18%) and new sectors (16%).(KPMG, 2014) (Cf. "Financing of mid-sized family businesses: private investors, key to their growth?")
To finance these needs, companies resort to traditional financing methods, mainly bank financing (30% of companies surveyed according to KPMG) or self-financing (28%). The increase of capital by family members is 4%.
For growing family businesses, short-term debt is an essential aspect of financing, particularly because of higher working capital requirements. This use of short-term debt in turn contributes to their growth.
It should be noted, however, that while bank loans remain an essential source of financing for family businesses, they have tended to decline since the crisis. This is without resorting to alternative financing, such as crowndfunding or the inter-company loans provided for in article 167 of the Macron law.
This persistence of family shareholding by linking family assets and company performance leads to a preference for long-term asset enhancement over short-term performance. However, such behaviour may prove to be too cautious and lead to restructuring operations, notably through mergers and acquisitions, which would be relevant for the growth of the company, being left aside.
However, the above-mentioned KPGM survey shows that more than one out of two companies is considering opening up its capital in the long term, indicating that family managers are interested in new methods of financing such as the contribution of capital by private investors, investment funds or a call on the financial market through an initial public offering.
Opening of the capital... private equity and stock exchange
In family businesses that accept the opening of their capital, the financing options are diversifying.
There are many reasons why family businesses turn to private investors for financing. Many of them consider that the criteria imposed by banks are excessive and that the level of constraints imposed by private investors in terms of information to be provided is lower. Finally, that private investors think, like them, in the long term, and that beyond financing, they are able to bring expertise and experience while being more inclined than other categories of investors to keep their holdings in the minority.
The financing of family businesses by private equity funds has seen strong growth in recent years in most developed countries (up to 40% of investments by investment funds in the United States, were minority in 2013 according to the Global private equity Region); a trend confirmed by the Bain and Co report published in 2017.
However, such a financing method is not without its questions, particularly with regard to the exit procedures of the funds. Indeed, when the latter decides to withdraw, this exit from the capital in certain cases forces the sale of the company, which makes this type of partnership not necessarily appropriate for the family business.
Family businesses turn to the stock market to raise the funds necessary for their growth. By agreeing to open up their capital in a reasonable way, the company can obtain the means for its development, without incurring debt to a bank or a fund. An IPO can also help crystallize part of the capital gains of the previous generation, with a view to transferring or passing on the company.
They represent about 20% of the companies listed on the Euronext markets (France, Belgium, the Netherlands and Portugal), even if only a dozen family businesses have gone public since 2011. This means a total of around 200 companies with a market capitalization of some 850 billion euros.
To increase the visibility of listed family businesses among investors, on February 21 Euronext launched Euronext Family Business, the first European index dedicated to family businesses (including 90 companies present in the four countries covered by the exchange).
In addition, in January 2017, to promote financial and stock market education for these companies, Euronext launched the so-called "Family Share" program aimed at all stakeholders whether family shareholders, managers, directors and key employees.
In sum, the post-financial crisis period has not altered the conclusions of the 2009 article, even if some changes are emerging in relation to the behaviors observed.
Two types of family firms coexist: those that remain anchored in their specific characteristics, mainly the maintenance of capital control by the family nucleus, which makes it difficult to set up disciplinary governance, and those that limit their financing options to bank financing. And companies that agree to open up their capital by taking minority stakes, or even going public, reconciling finance and management and thus following best governance practices.
Article translated from French with https://www.deepl.com/translator
Gérard Hirigoyen's articles on The Conversation France.
Gérard Hirigoyen's articles & books via CAIRN.Info.