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Helping Family Businesses
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When Family Strategy Gives Competitive Advantage

We’ve recently seen several examples of a class of businesses especially suitable and rewarding for family ownership: people-sensitive service businesses in fragmented industries that require well-located real estate. Examples might include medical clinics, local nurseries, shopping centers, funeral homes, auto dealerships, child-care facilities, nursing homes, private hospitals, and private schools. Here are some advantages they offer:

  • Private companies can stockpile attractive properties in specific markets and wait for population growth to create need. A patient private company can purchase when real estate prices are down. Public companies must share consistent earnings and are discouraged from holding non-currently performing assets. Such companies typically seek to assure high profit margins by focusing more on development fees than rental income.
  • Most real estate-based businesses go though entire industry cycles of over-built and under-built. When an industry is over built, prices crash and good deals can be found. Private family companies are the best able to go against conventional market wisdom and short-term perspective.
  • Financing real estate in a down cycle is often difficult as banks’ loan committees aren’t excited by the out-of-fashion collateral. Private companies can use more equity in those times to make financing possible. Or, they can use the ability to obtain conventional bank financing as a check on whether they are really getting a good price.
  • Growing such businesses is not a straight line of acquisition, development and expansion. It’s a very bumpy path that private companies can tolerate better than those owned by the public. Family firms can set a growth pace which is better for the owning family. A controlled growth rate allows the owning family to satisfy occasional family shareholder or estate tax needs without risking the business.
  • These businesses allow wealthy families to take advantage of their multi-generation perspective. They can indefinitely defer appreciation and real estate capital gains tax savings. They can refinance properties from cash flow without selling assets and realizing gains.

Besides the fact that family-owned firms do well in quality-sensitive service businesses because of their culture and hands-on ownership, there’s another important special advantage. The best key managers or professionals in these businesses want to work for firms that they believe are managed consistently and for the long term.

 

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