We all know that family businesses are traditionally conservative on how they finance growth. They like to use internal cash flow or bank loans when they need capital to expand. Recent EY research backs up this trend.
EY found that 61% of family businesses in 2012 financed their growth by traditional bank loans; that compares with just 36% of all companies surveyed in our recent report, entitled The vital entrepreneur: high impact at its best.
And when it came to internal cash flow funds, 58% of family businesses said they reinvested retained earnings, compared with the overall figure of 50%. As expected, private equity finance has been shunned by family businesses, with only 12% financing growth through this method, compared with the overall rate of 29%.
In the future, I envision family businesses will look at more alternative ways to finance growth, including working with investment banks and even private equity. That’s partly because these groups increasingly want to invest in family businesses. Their longer-term growth mentality is viewed in the financial sector as virtuous, particularly because many family businesses continued to grow during the difficult period of the financial crisis and its troubled economic aftermath. Their stability is fashionable these days.
But family businesses themselves will seek out new ways of financing growth, not least because of these factors:
- The traditional investment into physical plant and fixed assets will be accompanied by additional investment into technology and human capital. Family businesses will need new ways to finance expansion into these areas.
- Many family businesses will seek to expand abroad to grow their markets. They will need innovative financial options to do so.
- Family businesses will also need to manage risk more, particularly reputational risk.
But this development doesn’t mean family businesses want to change their business models. They will continue to be safe and reliable, and consistently perform, regardless of what is happening in the economy. That’s why they’re so essential – they balance volatility with stability and provide an anchor during periods when others are flailing.
Yet innovation is key to a family business’s long-term development – and this is why changes will happen, even if that means working with groups with whom they historically have not, like investment banks and private equity groups.
Carrie G. Hall, Partner, Family Business Leader – Americas, EY