Top family-owned businesses have reported higher revenue growth and twice the shareholder value, compared to businesses that are not family-owned, according to a new McKinsey research.. The research analysed 300 public-listed family-owned businesses (with revenues of more than ₹2,000 crore achieved at least once in last 5 years)

The report projected that family-owned businesses (FOBs) in India contribute over 75 per cent of national GDP, one of the highest in the world and this is likely to rise to 80-85 per cent by 2047.

FOBs reported about 2.3 per cent higher revenue growth between 2012 and 2022 than businesses that are not family-owned. Additionally, in the same period FOBs’ returns to shareholders were twice as high as those of non-FOBs

The research analysed 300 public-listed family-owned businesses with revenues of over ₹2,000 crore achieved at least once in last 5 years.

Accelerating technology trends, such as AI, mean that businesses are shorter-lived and more dynamic and they face greater competition than ever before.

Twin challenges

In this landscape, FOBs in India face the twin challenges of maintaining higher growth rates and remaining relevant in the face of increasing disruptions.

If FOBs are to continue to power growth, it is imperative for them to be bold and their owners understand what drives distinctive performance, it said.

Adopting to the changing world, the top-performing FOBs enjoy 2.9 percentage points higher revenue growth, have an economic spread of 11.0 percentage points and have operating margins 6.3 percentage points higher than other family businesses.

McKinsey estimates that a performance jump of just one quintile could translate to additional annual economic profit of about ₹100 crore to ₹300 crore for an average family business over a five-year period.

Focus areas

The top-performing FOBs focused on core operational distinctiveness, effectiveness of the transition to the next generations, the level of diversification of portfolio and robustness of governance besides talent, capabilities and culture. Although FOBs are the lifeline of India’s economy, not all achieve the level of performance and scale they desire.

Top family-run archetype FOBs outperform primarily by pursuing operational excellence and deliver operating margins about 7.8 percentage points higher, said the study.

Leading family-governed FOBs differentiate themselves in terms of capital turnover in addition to operating margins and deliver about 7 per cent higher capital efficiency. This difference jumps substantially, to about 14 per cent, for top family-ownership FOBs.

On effective transition, the report said beyond the founding generation, the generation leading the business has a profound effect on sustaining performance. As generations pass and business complexity grows, it is vital to ensure effective transitions. Having an external viewpoint also helps to separate the owner’s perspective from the business perspective, it added.