How Family Businesses Should Plan for Generational Success

Allison Nathan (0:05)

Welcome to Goldman Sachs Exchanges, I'm Alison Nathan. Here's the number that surprised me when I first read it. Companies where a family still holds a significant stake produce 70% of the world's economic output and 60% of its jobs. But only 3 in 10 reach a second generation, and only about 1 in 10 reaches a third. So why is that?

To help me work through that, I'm joined by two people who see opposite ends of this.

FX de Mallmann is Chairman of Goldman Sachs EMEA and Chairman of Investment Banking. He also leads the firm's coverage of large family-owned companies and family offices, which means he's on the corporate side of the table, the capital raises, the IPOs, the sales, and the successions. Tucker York chairs our global wealth management business. He's on the other side, the families, their balance sheets, and the next generation once that capital is created. FX, Tucker, welcome to Exchanges.

Tucker York (1:03)

Thank you, Alison. Good to be here.

FX de Mallmann (1:05)

Thank you, Alison.

Allison Nathan (1:06)

Yes, happy to have you both. So, FX, let's just start with some context here on the size and the scope and the impact of family-owned businesses. I gave a few stats to start us off, but maybe provide a bit more color on that for us.

FX de Mallmann (1:21)

The statistics you quoted are those we included in our recently published report on honoring legacy, which are global statistics. We did dig a little bit deeper into some of the statistics and see how they apply to differ around the world. And what we found is that there is an enormous space on family-owned businesses in all major regions. In the US, for instance, there are over 32 million family-owned businesses, which represent over 80% of all businesses. Those account for over 60% of GDP and over 60% of the overall workforce. If you move from the private company world to the public company world, around 35% of the Fortune 500 companies are family-controlled or have a significant family owner, which is a substantial base. As you move to Europe, there are significant industries that have leaders, companies that are leading the industry that have other family-controlled or significant family shareholder. In luxury goods, in beauty and cosmetics, in shipping, in consumer goods, in retail, in telco, in business services, in industrial, in defense, in numerous other sectors, the size and scale and the success of some of these entrepreneurs has been outstanding.

As you move to Asia, they are countries where you have very large family conglomerate that control many sectors of the economy that are very diversified, not only vertically but also horizontally.

You see many of those in India, in Korea and in numerous other Asian countries where the role that these families play is significant to the economy, but also in their ability to create new businesses and innovate in all the fields where they operate.

Allison Nathan (2:58)

Those numbers are actually absolutely staggering, and I don't think most people think about businesses in that way. If we think about the family-owned businesses, how does the fact of them being family-owned affect how they run and how they operate, if you're inside the business?

FX de Mallmann (3:14)

Well, in the world family-owned, there is the word owned, and therefore each of these businesses tend to be owned or partly owned by an individual or a family, that on average tend to be both invested economically, financially, but also emotionally in the business and very engaged. So we find in our interactions with many of these entrepreneurs that they tend to take a very long-term view on their business.

They tend to be rigorous stewards of their management team. They tend to be disciplined allocators of capital. And they also tend to be prudent with respect to the decision they make, including the investment decision and their use of leverage. And on balance, the statistics that we have access to show that these businesses, when family control, on average, tend to outperform non-family control businesses.

Allison Nathan (4:06)

Tucker, let me bring you into the conversation because you're sitting with these families day to day.

Again, let me ask you a different version of the question. How does the fact that these businesses are family owned impact the way they invest?

Tucker York (4:18)

I'll take a step back saying that I agree that the numbers are staggering when you think about the family connectivity to business and GDP, et cetera.

It's worth putting that in context. In the history of civilization, it used to be a much higher percentage than that. It's only in the last couple of years where we have more of a corporate structure and the scale that comes from that kind of more permanent capital that comes around that, that's led to this. So these concepts are age old, is what I would say. What I find with investors is the moment that you start thinking about next generation, how do you invest, how do you think about those things, as distinct from what do I need to do this week, this month, this quarter, it all turns on a long-term orientation. What do I think is going on in the long term? How do I think about that? And that juxtaposition between those two things is very different for families who are thinking about next generation and what's going to happen beyond me. Have I created something that will go beyond? And that leads you down to make decisions about where do I think this investment that I make today will be 10 years, 20 years from now, as distinct from where do I think this investment made today will be next quarter when some new information comes out, etc. And it goes up or down.