November 2020 < Back
Why Perpetuity of Family businesses Matters?
A majority of domestic companies in India -big or small- are run or controlled by a family. Family-run enterprises play a significant role in contributing to our economy. Globally, as well as in India, family businesses contribute to over 70 percent of GDP of most developing and developed countries
In the case of India, this could be even more because if you go deeper into the economy almost every small enterprise is family run. 91 percent of the listed firms in India are family- firms (Study by Bang, Ray and Ramachandran in 2017).
Historically, the joint family system was the backbone of businesses and provided the required resources and capital for the cohesion and growth of the firms. Be it the Industrial Revolution of eighteenth century, the license-raj of the early 1990s or the economic liberalization in 1991, family businesses have displayed resilience, character and adaptability over their long history and played a pivotal role in India's growth story.
Apart from superior financial performance and more robust share price returns, family firms have demonstrated stronger revenue growth, higher EBITDA margins and better cash flow returns. According to ET Intelligence Group's analysis (based on publicly available data), family businesses have earned 14 per cent annualized returns between Jan 2017-2020 on the stock exchanges compared with 6 per cent returns generated by their non-family-owned peers. Key reasons for this are due to their longer term outlook, less reilance on external funding and more investments into research and development.
The Indian family businesses also actively engaged in social causes and played a pivotal role in institutional building by partaking philanthropic activities such as setting up premier educational institutes, research, and cultural centers for the progress of the country.Therefore, family firms fulfil a larger socio-economic purpose.
However, they run the risk of premature mortality given their peculiar complexities thereby making it challenging for a micro, small and medium-sized (MSME) in the founder generation family business to grow and progress into a multi-generation conglomerate. Very few family companies sustain beyond the fourth generation, without concerted action to prevent their decline and death.
To conclude, family-run SMEs are the hidden champions who contribute silently yet diligently to fuel the economy through steadfast and focused efforts in innovative products and services. By gaining the right and timely awareness about the complexities of family-run businesses, they will stand to benefit greatly by putting in place adequate measures and processess to address their future growth, harmony and perpetuity.
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