Family Business Needs to Manage their Capital Better


I ran an article on my CEO Newsletter which goes out to owner managed businesses and family businesses with the lead story headline:
Why 90% of Businesses in the USA are Still "All in the Family"

I got back many repsones asking about this number and whether Canada has that many owner managed companies. I tried contacting Family Business research centres and CAFE to get figures but Canada also comes in pretty high at about 75% of business owned by a family. I got an interesting reply from a finance expert in South Africa who said:
Because the returns are generally too low to cover a true imputed cost of capital (currently some 9% (3.5% risk free rate plus 5.5% equity risk premium) for an ungeared company) - markets would not stomach such underperformance....

So, do family businesses understand EVA or cost of capital? Is this why they benefit so much by partnering with the private equity teams who bring their market expertise to their business? My book, Money Magnet, will cover these points for owners and founders. Tom Deans, author of Every Family's Business, says that family businesses need to run their companies as if they did not belong to the family. This could also be a factor in why family businesses are not as efficient as they could be. Money Magnet will cover this controversial topic.

1 comment:

Anonymous said...

I agree - do many owners even discuss EVA?ty
If no one is watching it, cot of capital is just not the priority. Family businesses are about managing the cash flow.