Family businesses outperform non-family; McKinsey reveals why

Between family and non-family businesses, you may assume the latter to outperform the former; however, McKinsey research proves otherwise. The consulting firm reveals that top family-owned businesses (FOBs) grow 20% faster than the average non-FOB.

From 2017 to 2022, FOBs reported around 2.3% higher revenue growth than businesses that are not family-owned. The study shows that FOBs delivered twice the returns to shareholders compared to non-FOBs between 2012 and 2022.

“In India, family-owned businesses (FOBs) contribute more than 75% of national GDP, one of the highest percentages in the world, and this is likely to rise to 80 to 85% by 2047,” says the study titled, ‘Five differentiators of outperforming family-owned businesses in India,’ by McKinsey.

This is primarily because of their operational and capital efficiency, effective transitions, and diversification into non-adjacent sectors to achieve scale and deliver performance. The top-performing FOBs focus strongly on attracting and retaining the best talent. Effective professionalisation and governance mechanisms ensure their continued outperformance.

 The study placed 300 publicly listed Indian family-owned businesses (FOBs) (with annual revenues of over ₹2,000 crore at least once in the last five years) on an economic profit power curve (this power curve by McKinsey is a percentile distribution curve of economic profits) to compare the top 20% (the top quintile) with the rest.

It estimates that improving performance by even one quintile that is moving up from the current performance level to the next higher 20% tier in the economic profit power curve could add an annual economic profit of about ₹100 crore to ₹300 crore (approximately $12 million to $36 million) for an average family business over five years.

Aside from indicating that there remains significant potential for growth for FOBs, the study points out that within these, businesses where the family is involved only in strategic decision-making have about 7% higher capital efficiency and better profit margins than other family businesses and this percentage is about 14% for those where families participate merely as passive investors.

While family businesses face the twin challenge of maintaining high growth and remaining relevant today, the research also points out that as the baton of ownership is passed on to subsequent generations, the performance of the FOBs decreases.

“More FOBs tend to accumulate in the bottom performers (last two quintiles of the power curve) as they progress from the founding generation to subsequent generations,” the study says.

This is attributed to a change in priorities, with a focus more on preserving wealth, and loss of the founder's entrepreneurial drive.