Financial Management of Family Businesses

The best justification for addressing family businesses from a scientific perspective seems to stem from their economic significance. The fact that these businesses make up more than 85% of all businesses and around 70% of all jobs globally appears to be reason enough to give the topic more thorough consideration. However, this motivation is not entirely compelling as previous business studies, which did not specifically focus on family businesses, must have covered the topic as well. This means that there might not be much new to learn.

Knowing how to manage private companies is a broad field: start-ups, private equity transactions or even a partial IPO, the typical one-, two- or multi-generational company, single-family offices. Where could one determine a common denominator or a common ‘unité de doctrine’ in financial management?

The CFO of the medium-sized mechanical engineering company has just successfully placed its first promissory note financing. The company was able to optimally complement its maturity profile with long maturity profiles of five, seven and ten years and establish a second financing pillar alongside its existing syndicated loan. The (unsecured) promissory note also enabled the company to tap new lenders from the savings bank, Volksbank and insurance sectors. Maturity profile optimised, capital provider circle expanded, favourable financing conditions secured: All this was also described to the company in the banks’ presentations as advantages of the new financing structure.

The board of directors of a hidden champion in the German-speaking region with a turnover of over one billion euros meets for one of its four annual meetings. The chairman is a co-owner and family member and has been with the company for over 30 years, including having an operative position in the firm. He wonders how to deal with new technological challenges and future technologies. And anyway: Are virtual or augmented realities (VR/AR), artificial intelligence (AI) applications and blockchain solutions relevant to his company? At first glance, no. After all, the company operates in a rather traditional business segment. But is that the case? Not by a long shot—as you have indeed already guessed. Technologies of the future not only enable entirely new business models but also offer all companies—regardless of their field of activity—the opportunity to gain advantages: cost savings, efficiency, speed, innovation and more (Fig. 4.1).

Family offices have increasingly established themselves as wealth management vehicles for wealthy entrepreneurial families in German-speaking countries over the past ten years. However, these organisations do not limit themselves to core tasks of asset and investment management, but also provide accompanying services, such as tax and legal advice, depending on the scope of services. Compared to traditional bank-related institutions, the range of services offered by family offices is characterised by the fact that, in addition to wealth management, they also address the non-financial needs of wealthy entrepreneurial families.

The view of the entrepreneur as well as the family accompanying him or her on the entrepreneurial activity is inseparably linked to the concept of wealth. It is a prerequisite in the sense of risk capital as well as a measure of success. In the cycle of its development, the spectrum ranges from the enterprise as the main cause and original source of wealth to diversification considerations to ensure a sensible spread of risk outside the enterprise. The further this development progresses and the original enterprise increasingly becomes only an asset in the portfolio of the entrepreneurial family, the more important considerations become to create wealth-preserving competences in an entrepreneurial family in addition to skills that concern the original core of its entrepreneurial activity. These are quite regularly to be understood as being cross-generational and can over a longer period of time only be provided for with the support of non-family employees and/or service providers. Cross-generational wealth preservation within the company and/or in structures outside the company is undoubtedly one of the major tasks of every entrepreneurial family.

In our opinion, the core objective of a family office should be a clear separation of private assets and operational activities. If well organised, this can also bring advantages in terms of content and taxation, among other things. In addition, in the event of legal proceedings or civil disputes, a mixing of business and private assets can be prevented (Fig. 7.1).

The new CFO is here. The arrival of the new chief financial officer has generated excitement within the company. With his impressive education, exceptional communication skills and diverse international experience, he is seen as a valuable asset. The veteran employees warmly welcome the new CFO and assure him that everything is running smoothly.

A very critical business process is planning. There are companies that only complete their planning when the next cycle begins: the company is caught in the hamster wheel. On the other hand, there are industries whose business success absolutely depends on good planning, e.g. out of stock or working capital management—a topic for experts.

Every company must ultimately deal with the principles of corporate management, its governance, i.e. the totality of all regulations, values and principles that constitute corporate management. The CFO, as the ‘guardian’ of good, forward-looking, responsible governance, has a certain key role to play. A key element of good governance is transparency, both within the company and vis-à-vis external stakeholders and the public. If a CFO defines his area of responsibility, from the perspective of financial management the improvement of transparency in a comprehensive sense is the central task and the first step for a system breakthrough (cf. Fig. 2.1 ).

While the term ‘compliance’ can be described as adherence to legal regulations and generally accepted rules, it is the task of the internal control system (ICS) to help ensure this. However, the ICS goes further, because compliance with internal guidelines is also to be ensured through the establishment of an ICS. An ICS provides sufficient security for the management and contains the procedures, methods and measures defined by the company. The aim is to ensure the effectiveness of business processes, the accuracy of financial reporting and compliance with laws and directives.

Employee fraud and theft are sensitive issues that can affect all companies. Rarely, however, is it reported because it is unpleasant to talk about. Companies have a duty to prevent this, as the saying ‘opportunity makes thieves’ is of central importance in this context. This applies just as much to family businesses—especially those that operate internationally and have reached a certain size in terms of employees, profit centres and subsidiaries.

Holidays at last! The suitcases are packed, the skis are stowed away and off we go on a well-deserved holiday. The Group CEO of a food production company with 20 locations worldwide and 30 international sales units is looking forward to relaxing days with his family. It is day 3 of the holidays, shortly after Christmas. The CIO’s call comes at 3:45 in the morning. For 30 minutes, all the company’s servers have been encrypted, the ERP system is no longer functioning, e-mails can no longer be sent, and even the telephone systems are out of action. In the emergency, the entire IT network has been shut down, with the consequence that production has come to a standstill worldwide.

In view of these descriptions, one might think that all those companies are lucky whose CFOs have also been IT managers at some point in their careers—but this is not often the case in practice. And even if they had been: Even that is no insurance against cyber risks. And then there are all the other dangers that make the topic of compliance and co. so sensitive. The risks are often also of a personal nature, and obviously liability issues are involved in many cases. The attitude of our major family companies is clear, as revealed by our interviews:

The topic of ‘agility through digital transformation’ is an enormously broad field. It already starts with the question of who to look at: the company that wants to optimise its processes? To the employee, who should be relieved of administrative or repetitive tasks in order to deliver more ‘added value’? Or perhaps it would be better to focus on the customer, who in the end is actually the most relevant stakeholder? Or on one of the many failed projects, such as recently at Haribo (Kroker, 2018)?

Many CFOs of larger companies may be familiar with the following ‘spectacle’: It is budgeting time again, and after a target and many, difficult, energy-sapping bottom-up planning rounds, top management sits in the final budget approval discussion and listens to number-heavy lectures about planning and budgets for the next few years by the respective business managers. They use more or less tactical skill to keep the ‘budget bar’ low over which they have to jump at the end. After all, they also want to receive a bonus next year. The spectacle then regularly ends with the CFO or the CEO—in the case of a well-coordinated team of both—announcing that X million still has to be improved on the bottom line. The lowest denominator in the agreement is then regularly the infamous ‘lawnmower approach’, i.e. everyone has to contribute proportionally to fill the gap. By now at the latest, those who have worked with open sights or tacticked less well feel they have been treated as losers and unfairly and resolve for the next round to prepare themselves better for the game and now also or even more tactically.

The COVID-19 crisis has forced medium-sized companies to implement harsh adjustment measures, particularly those with limited innovative cultures. Such companies face more significant challenges during these difficult times. However, those with a strong innovative culture have found it easier to navigate the pandemic’s turbulence. These companies are also in the Top 100 competition, which Manager Magazin awards every year (Buchhorn, 2020). In 2020, it was evident that nine out of ten competition winners had established innovation teams with employees from all departments. Their suggestions contributed 2.5% to the overall turnover. The winner of the Top 100 for the second consecutive year is Heraeus Medical Components, an innovation leader formed from the merger of Heraeus Medical Components and Contract Medical International. The company specializes in the development and production of catheter systems used for minimally invasive interventions. They are experts in the entire process chain and assist their customers in completing approval procedures. The company is already a top innovator for the second time.

As with all businesses, the owners of family businesses provide the capital for the successful management of a business, supplemented by outside capital if necessary. In the past, capital was always a very scarce commodity. In today’s zero interest rate era, capital can be had much more cheaply, but must still earn interest from the business, namely, through a dividend distribution of the profit to the family business owner(s). This means that the entrepreneur likes to finance his business adequately, but does not want to have too much capital tied up in a possibly inefficiently run business. In addition, the aspect of risk diversification of assets outside the family business often plays a major role for family entrepreneurs. Furthermore, the family entrepreneur expects an appropriate return on the capital invested. The appropriate level is usually determined by the company- and sector-specific risk profile, which is mathematically incorporated into the calculation of the cost of equity capital via the beta. This calculation mechanism shows that the less equity is tied up in the company, the higher the return for a given profit/dividend. This is an important incentive to set up a company in a capital-efficient way.

Dr. Peter Zattler, CFO of Munich-based Giesecke & Devrient, puts it in a nutshell: ‘For us, ROCE is strategically the top ratio, because it links profit with capital employed, i.e. the P&L with the balance sheet. Net profit or EBIT alone are not very meaningful if you don’t know how much you had to invest for it. Ultimately, it is about the comparison between the return on capital employed and the cost of capital. Our return exceeds the cost of capital, which in our case is 10.7% before tax (Haaß, 2019)’. Well, the CFO, along with the CEO, is the one who looks holistically at the company. He has a dual role: on the one hand, his task is to measure and report, i.e. to focus on the facts. In this context, he provides the methodological framework for corporate management and must define the global guidelines for it. But of course he also has to evaluate these facts and thus ultimately also influences decisions. The CFO has a strong joint responsibility for performance.

All organisations make decisions, sometimes on a daily basis, about their further development direction. Some of these decisions are regularly prepared, discussed and approved by the management and the supervisory board. Other decisions have to be made situationally due to external developments in one of the various competitive forces (Porter, Five Forces). Examples of this are changing customer needs, M&A opportunities, competitor behaviour, etc. There are many approaches to strategy development. They all have in common most or some of the elements of the Strategy Excellence Landscape shown in Fig. 20.1:

In established family businesses, the owner family has usually shaped the company culture, the basic strategic direction and the company values for decades or sometimes even more than a century. As a rule, this is also associated with a long-term, clear orientation, which can be evaluated as a success factor of family businesses. This is also confirmed, for example, by an empirical study of Austrian family businesses (Pernsteiner & Weclawaski, 2016, p. 246).

Although the COVID-19 pandemic has significantly curtailed economic activity, the merger and acquisition (M&A) industry seems to have been only partially affected. Especially the M&A market in the DACH region shows clear resilience and remarkable dynamics. With 1696 transactions in the first half of 2021, the M&A market in Germany, Austria and Switzerland is on a record course despite the pandemic (PwC, 2021).

I have experienced the role of the M&A function in the company very differently during my many years of professional activity as an investment banker, mentor and also corporate M&A’ler. As a frame of reference for these very different experiences and observations, the following representation of the ‘life cycles of a company’ is suitable. Although this concept primarily focuses on the raising of equity capital, I would like to use it in consideration of related M&A aspects.

The economy of the German-speaking world is characterised by family businesses. Many of these businesses do not limit themselves to the domestic market, but have been growing for decades through internationalisation. Globalisation, which has been advancing for years, has for the most part left medium-sized family businesses with no other option than to expand into foreign markets and regions. These have also been growing faster in recent years. Focal points include India, China and the USA. For a long time, medium-sized businesses have been considered export-oriented. The long-term horizon and unbureaucratic decisions help, even if the financial possibilities remain limited. Our recent study at the University of Eichstätt, on which this article is based, showed that a large number of family businesses from German-speaking countries have already achieved a high degree of internationalisation through an international presence (e.g. M&A, joint ventures and alliances). In addition, however, there is further growth potential abroad for these companies according to our analysis.

Even in family businesses, there is sometimes a tendency, encouraged by past successes, to be a little too production-heavy. They still like to invest mainly in ‘bricks and mortar’—expanding capacities and building factories. Of course, many family businesses were founded on the basis of an invention or technological development. But what do the customers of today or tomorrow want? What does the next generation want when the baby boomers step down? It is true that the Family Business Review dedicated an issue in 2011 to the topic of customer orientation and brands—but in practice the issue has not been solved. Storck KG is an exception. Here it has long been a mantra to put the consumer at the centre of considerations and also to clearly differentiate between consumers and trade customers. Storck is represented in over 100 countries with its brands Nimm 2, Merci, Werthers Echte and Toffifee: With three production and administrative locations in Germany, including its headquarters in Berlin, and 21 other international sales locations, Storck is close to partners and consumers and can respond flexibly to regional needs. Segmentation based on criteria that go beyond purely demographic ones is also common.

The topic of sustainability has now arrived in almost all companies. Initially often perceived as a customer request that should be served as best as possible or as a voluntary commitment, sustainability has now become an existential issue in many industries. Existential because sustainability standards no longer just offer competitive advantages, but are the basic prerequisite for participating in public tenders—or for winning supply contracts.

Are you aware that the most common strategy methodologies (BCG Matrix, McKinsey Matrix, Porter Logic, etc.) are based on insights from the 1960s and 1970s, even though the business environment has changed completely? Can we finance people contribute something to the modernisation of the methodology here? We think this would be one of the ‘noble’ tasks: to ensure the state of the art. The CFO must be involved in the strategy process and has the following tasks, among others:

Family businesses evolve from generation to generation in terms of their characteristics, which also has an impact on the adequate design of the supervisory function in each case (Gersick et al., 1997). In truth, however, we know that each case is somehow very specific, with individual processes, organisations and people holding the supervisory role (Kormann & Suberg, 2021, p. V). We have seen and heard many things over the years: boards of directors that only rattle off formalisms for the sake of appearances, family strangers who bring in their own agenda, a lack of qualifications or diversity—and optimally organised governing bodies that help management and ownership achieve top performance. Many companies in Germany have always worked in the classic, dualistic model over the years. Here is the conclusion of one CFO: ‘A few years ago we also discussed the idea of a monistic system with our owners, but then rejected it. It didn’t fit into our structure’.

Family businesses are the defining type of company in the German-speaking world. More than 90% of German companies are family businesses. They provide almost 60% of all jobs and prove to be a stabilising factor on the labour market even in economically difficult times. This is the result of research by the Stiftung Familienunternehmen (Family Business Foundation). However, family businesses are also particularly caught between the conflicting demands of economic success, family expectations and social environmental factors. If an entrepreneurial family decides today to hand over the family business to only one child and consequently to place this child in a better position materially than the other children, then this contradicts the current concept of justice in the family on the one hand. On the other hand, this solution is historically influenced because in earlier times this was how the functioning of a business was maintained (Felden et al., 2019).

After studying law, Beatrice Wenzel-Lux-Krönig’s career began as an international lawyer in Berlin. Today, she is Senior Vice-President and Chief Human Resources Officer at a world-class, family-run luxury fine jewellery and watch manufacturer. Prior to that, she was Senior Vice-President of Human Resources at another world-leading luxury group. In this role, she primarily promoted the ‘human factor’ and is a recognised expert in the implementation of high potential development and leadership programme as well as innovative training programme. Here she shares with FBXperts her thoughts on human resources management in times of change.

‘The future will never be as slow as this specific moment’—right now we are all experiencing the slowest moment of the rest of our lives. How does Ray Kurzweil, one of the two founders of Singularity University in Silicon Valley and author of numerous bestsellers (Kurzweil, 2014), arrive at this statement (Fig. 31.1)?

Very few family businesses survive as family businesses in the long term. Those that develop over several generations are significantly more successful than non-family businesses, according to a study by the Credit Suisse Research Institute in 2020 (Credit Suisse, 2020) (Fig. 32.1).

The intricacies of governance in family businesses make the progression through the five-step model crucial. Only after substantial progress has been made through the first four steps over a prolonged period can the governance step be effectively developed. However, there are no straightforward solutions as every family business is unique in its own way.

The essence of FBXperts is to share experiences and knowledge, and that is how our story began, albeit in a different form than it is today. In 2004, Dr. Patricio Ohle sought a discussion with Klaus Köster, the Managing Director of Intersnack (Pfeifer & Langen Group, a family-owned company) and his former supervisor.

The news was devastating. In the end, however, it only confirmed his own fears, because as a world-renowned professional athlete who had been successful for a good decade, he had the necessary competence and also his own body awareness to assess his health situation appropriately. For almost two years, he had had this stabbing and recurring pain in his wrist, especially during rest and regeneration phases. Targeted training according to the principle of ‘try harder’ was hardly possible and the side effects of the unavoidable painkillers were already becoming apparent. The self-imposed odyssey through the practices of renowned orthopaedists, physiotherapists and chiropractors using the latest technology had not yet led to success and had cost one thing above all: time and money. On the contrary, one’s own insecurity grew, the number of, certainly well-intentioned, recommendations was hardly manageable and managers, trainers and friends outdid themselves with ever new ideas for the ‘right measures’. The latest MRI result was clear, however, and the long-delayed surgical intervention was inevitable. The wrist specialist consulted described the chances of success as ‘tricky, but medically feasible’. In fact, there would probably be some risks and complexity drivers in such an operation and the steps to be decided would only emerge during the operation and would have to be assessed in the process. What now?