What Is the Formula for Maintaining a Business Legacy?

All parents think about their family's legacy. Like their fathers and grandparents, each generation seeks to improve the opportunities of the next and contribute something that will last over time. In the case of those families that founded and maintained a company, that legacy is materialized in an organization that concentrates the effort and dedication of past generations and that grants opportunities and responsibilities to the following generations. 

In the case of these companies, governance and succession often lead conversations related to the issues they face in achieving that legacy, but they are not the only ones. The recipe for success is holistic and includes other equally relevant ingredients, such as strategic planning, operational efficiency, and talent management. The best family-owned businesses stand out not only for their cohesion and harmony but also for their mindset and the concrete actions they take in business. 

To put their impact on the Mexican economy in context, family-owned businesses, which technically are those in which the founders or descendants own significant capital stock or voting rights, represent 9 out of every 10 companies, contribute more than 80% of gross domestic product, and generate almost 70% of the jobs in the country, according to the National Institute of Statistics and Geography (INEGI).

However, we are at a critical moment for family-owned businesses in the country. According to COPARMEX, 40% of companies in Mexico face a generational transition, which puts their business continuity at risk. Globally, 2 out of 3 family-owned businesses survive the first generation, 22% the second generation, and only 10% pass the third generation, a figure that falls to 5% in Mexico.

Therefore, it is essential to understand the factors that contribute to the outstanding performance of family-owned businesses, which keeps their legacy alive.

To explore the keys to success, we conducted a McKinsey analysis of 600 publicly traded family-owned companies from 10 different industries and 75 countries and compared them to the same number of non-family public companies. In addition, we surveyed 600 other family-owned companies globally. 

Part of what we learned is that the levers of value generation change according to the size of the companies; for example, medium-sized organizations tend to be better investors, while large companies turn out to be better operators. However, these are not rules that apply to everyone, since Grupo Bimbo has different attributes and challenges than Coppel, or a maquiladora in Chihuahua. So, the question is: what distinguishes the best family-owned businesses?

By examining the similarities between the best-performing companies, a "value creation formula" can be identified that posits four key mindsets and five strategic actions. The four mindsets are: focus on purpose beyond results (although results are critical), long-term orientation (higher reinvestment), a conservative financial profile (lower leverage), and centralized decision-making. 

Outstanding family-owned businesses complement with five strategic actions focused on their business practices. 

They diversify their portfolios. Forty percent of the best family organizations generate 50% or more of their revenues outside their core business. To this end, they actively seek to expand inorganically, executing smaller M&A transactions, but which generate more value. As a family business industrialist once told me, this is key to avoiding "everyday myopia." The current economic scenario also presents opportunities for organic growth. Nearshoring is an  example.

They (re)allocate resources actively. Successful family-owned companies are agile in their use of capital; they are three times more likely to have shifted more than 30% of their capital to new businesses or regions in recent years. Importantly, there is a positive correlation between levels of capital reallocation and average returns to shareholders, as well as a lower risk of bankruptcy or acquisition. 

They operate and invest exceptionally well. As I mentioned, young family-owned businesses generally deploy capital more efficiently, and as they "mature," they tend to become better operators. But the best ones are good at both, with better capital turnover and operating margins, for two reasons: rigorous management models and a greater focus on performance measurement.

They are obsessed with talent, reflected in the fact that 86% of the best family businesses claim to attract the best talent, and 9 out of 10 say they are good at developing it. This is a product of their concrete actions, such as high investment in training programs. 

They ensure good governance, which is a fundamental element. Most of the best companies document roles and responsibilities, and 90% have independent boards of directors. Multigenerational companies are meritocratic, and almost all of them involve external executives in their management. That is, they prioritize the survival of the business, even if it means entrusting the reins to someone else.

These five actions are not a guaranteed recipe; judgment and adaptability are essential. For example, companies facing generational transitions may focus on governance, while those in low-growth or vulnerable industries may prioritize venturing into new businesses. 

Whatever the sequence, family-owned business success is the product of a holistic formula. In our study, companies that leveraged their elements achieved up to four times the growth in value generation. Others can do the same for the sake of their families, their companies, and, consequently, Mexico's sustainable economic growth without forgetting the goal of their parents and grandparents: to maintain their legacy.