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It is this peculiarity which is hard to get a handle on if we reduce family businesses to particular definitions of size, which is why this thesis comes before all the others. Family businesses of different sizes, from artisan businesses to multinationals, are the product of the often productive, sometimes destructive synergy of business and family logic. The conflicting set of priorities which this produces have two poles which can be characterised as follows: In families, the focus is on the individual person with all their strengths and weaknesses. They are valued simply because they belong to the family. Fairness in this context is understood mainly in terms of equality of claims, rights, duties and expectations. Membership of a family is for life, because you cannot hand in notice on blood ties. Giving and taking are often asymmetrical (parents-children), and immediate or medium-term reward is not expected for work done.

And indeed, the profit obtained from these relationships is more emotional and non-material than it is material. Communication is primarily verbal and less formalised. In a business, however, the primary focus is on the development, production and sale of products and/or services. People are only important in terms of objectively justifiable functions they fulfil for the organisation. In principle, they have to be replaceable in the roles they fill, which means they must be terminable. Their value is derived from the work they do, which is compensated directly and materially through wages and salaries. Fairness here is defined as a balance between performance and material reward. Communication is formalised, and mostly even fixed in writing – contracts are sealed by a signature on paper, not by a shake of the hand. These two very different sets of logical working principles belonging to family and company influence each other reciprocally, thus shaping the particular properties of a family business.

It is precisely this linking of different logics which leads to shareholder disputes and disruption in the business family, fuelling generational conflict and so on. At the same time it is precisely this linkage which can give a family business its special competitive edge over a company led by the principle of shareholder value, since the family which owns the business often imparts values that can give the business meaning beyond that of short-term financial profit expectations and promises. “Family businesses don’t consider the market and values as alternatives. They say: both.” From this viewpoint, the aim is not, as is often demanded, to quickly and completely decouple the family and company, it is to promote precisely that positive interaction between both systems in order to achieve synergy effects and the concomitant competitive advantages.

Human capital:

The family can provide a pool of special knowledge and aptitudes which it makes exclusively available to the company.

Financial strategies:

A conservative monetary policy encourages long-term financial strategies. The yield expectations of family shareholders are generally well below what is usual in the shareholder value mindset, and family members are more willing to put up additional private assets in the event of a crisis.

Networks:

Families’ longevity and ability to inspire commitment are also revealed in the quality of the networks they develop, which are often cordial and therefore very sustainable.

Branding:

The name of the company, which is the same as the family name, is often a powerful symbol of identification both for the product and the workforce. Belonging is valued in itself.

If the far-reaching, complex linkage of business, family and ownership – and the problems and conflicts it entails – can be managed successfully, then family businesses have a decisive advantage over non-family ones. It is therefore unsurprising that the 30 biggest family businesses achieved almost twice the turnover growth that the 30 DAX companies did last financial year (+ 9.7% compared with + 5.4%). Employment growth figures differ even more dramatically. The big family businesses took on 9.2% more people, compared with their DAX equivalents (1.6%). It is the family that provides the company with the beneficial ‘familyness factor’, which can manifest in such things as people’s ability (including non-family members) to identify strongly with the company. But achieving these qualities requires special forms of management, since every family business sets its own particular priorities when it comes to balancing family and interests. Not nearly enough use has been made of the opportunity to regulate these reciprocal interests by means of a family constitution, which defines things like the role of family members by marriage and other people joining the family, family conferences, and de-escalation arrangements in the event of family conflicts, as well as formulating ethical principles.

Another area in which the ‘family/business’ configuration can be very vulnerable is company succession. Whether internal (by a family member) or external company succession, a shortage of people willing to succeed to the business remains a controversial point. The latest research reveals that 150,000 jobs are endangered by difficult business successions in around 43,000 businesses in Germany. Many family businesses continue to find it difficult to regulate business succession favourably, despite the wide range of support on offer (such as founder networks). Older generations generally want very much to place their businesses in the hands of their own offspring, and not into the hands of others, but this seems to be happening less and less. One of the reasons may be that those involved see themselves confronted with multiple paradoxes. These are emotive situations in which there is no one clear solution and you can ‘only do the wrong thing’. For instance, if the father says that his son should follow the career path of his choosing and seek his own way, while at the same time telling him how important it is to him personally not to be disappointed, and that he sees in his son the ideal successor – this can be experienced as a predicament which can be summed up as: “You are free to choose the solution I want!” But the opposite can also be an aspect of obstructive familyness, if the owner, at an advanced age, cannot find a way of letting go of the business and handing it over appropriately, leaving the following generation in a wearing, demoralising holding pattern.

In critical situations, especially ones without governance rules, the family and company are often confronted with two options. ‘Family first’ or ‘business first.’ Studies on the longevity of family businesses show that the latter strategy is more sustainable. It gives the interests of the business absolute priority over all others, such as when family membership is not the sole criterion for employing, rewarding and promoting family members. But this is by no means about neglecting the family or forcing it out of the business. That is why a ‘family business first’ strategy is often pursued. Its job is, in dialogue with the family, to clarify the interests of the business, negotiate priorities, and seek mutual alignment. This approach is intelligent because it does not seek to play the interests of one side off against the other’s. Instead, it is about deferring family interests in the knowledge that they themselves will benefit from this way of thinking in the long term.

They always tend to ask how much a decision will contribute to their long-term existence. This is how family businesses (provided the financial basis exists) can hold on for decades to business areas even if they only produce meagre profits for long periods. And when an industry revives again, this holding on can prove highly profitable. Because their thinking goes beyond single economic cycles, expertise that exists in the business is looked after, because of which, a crisis may well serve to build up their market position instead of leading to their demise.

This long-term strategy often goes together with a strategy of diversification: family businesses often position themselves broadly in the market and spread their risks in a very particular way through diversification. Intentional investment in multiple non-synergetic areas of business allows businesses to survive slumps in the industry. In the long term, the areas that produce profits tend to change. In family businesses, this generally means a greater likelihood of survival, unlike publicly owned businesses. There is another aspect that needs considering in this context: a family, focussed on building up long-lasting relationships, will employ people on the basis of different factors. Because they are interested in keeping their personnel on for many years, family businesses secure themselves against loss of knowledge.

This means that variable experience as well as pure technical knowledge can be passed on to subsequent, upcoming managers who are internally promoted, which provides an answer to the scarcity of manpower. It also prevents valuable staff from migrating to rival companies (see also Theses 6 and 7). By building up a long-term outlook for shareholders, the business liberates itself from owners’ exaggerated yield expectations, which places it in a position to intelligently implement the strategies mentioned.

The capital requirements of Basel II proposed and already enacted by banking regulatory authorities, and the uncertain market situation that has come about in recent years, have caused many large banks to shy away from financing SMEs (meaning businesses with less than €50 million annual turnover and less than 500 employees).

This initial overreaction, which many banks have since reversed, has caused lasting distrust in banks among many family businesses; they have, initially out of need, turned to new forms of finance, such as private equity. There are many options available in equity (such as investments), outside capital (such as bond issues) and mixed forms (‘mezzanine capital’).20 As we have said, there are both opportunities and risks in this sector. Public discussion of this has been heavily influenced by critical opinions of financial investors whose concerns are purely fiscal, who buy up family businesses using borrowed money, then saddle the companies they have bought with the debts. But as well as them, there are an increasing number of more long-term-oriented investment companies who pursue an aim of stable value creation and place value on successful collaboration over decades.

Moreover, family businesses are (still) affected by inheritance taxes, unlike non-family businesses. The 2007 inheritance tax reform is expected to yield considerable tax relief for family businesses. The accretion model announced in the coalition agreement, which envisages inheritance and capital transfer tax on business assets being deferred over a period of ten years and reduced by a tenth for every year that the business continues to operate, aims especially to give small and medium sized family businesses the opportunity to secure jobs and make new investments. The intention of this tax measure is to establish competitive equality between publicly owned and family businesses. The way this law is developed in its details will determine whether the gap will be successfully bridged.

The key is to balance the charged relationship between continuity and reorientation. The long-term nature of a family business’ ties is also evident in its relationship with its workforce. They can trust in the foresight of family businesses – to secure them long-term jobs – and are not subjected to constant fear of cost-cutting. Furthermore, the fact that in Germany, 70% of all employees and 80% of all trainees work at small and medium sized businesses lends these considerations a lot of importance in society as a whole. Again there is a potential downside, because this behaviour can mean new employees are rarely brought into the company from outside and ‘fresh knowledge’ never finds its way into the family business.

If the family name is used as a brand, then it is recognisable and identifiable not only for people on the outside, but also to the workforce. The family, if it conveys its own values credibly through consistency of thought, speech and action, and builds transparency towards everyone in the organisation, receives a very special resource from its workforce in return:  trust, which forms a foundation of a corporate culture based on trust. A long-term outlook is often linked to a close commitment to the region in which the family business is active – and that in turn influences their corporate culture. “If you’re really rooted in that community, it’s going to have a big impact on the way you are.” Regional commitment is demonstrated in a special willingness to take responsibility for social and community affairs. Their values prompt them to respond to acute social misfortunes and help to rectify them. They often demonstrate the same entrepreneurial energy that they do in their business: opportunities are recognised and taken. That is why family businesses bring a particular kind of presence to the region where they are from and where they are rooted.

With every new generation, the ‘centrifugal force’ increases as each core family is newly founded; commitment among a consortium of cousins is markedly less than ties between siblings. Care must be taken to ensure that despite this, even distant relatives develop a shared identity with the business family. And it is especially important to ensure that a configuration does not emerge in which loyalty to the tribe is placed above loyalty to the business.

Successful multi-generation family businesses therefore treat the extended family in a very particular way by constantly reproducing new, small family structures and providing opportunities for contact and relationships at many different levels, thus preventing the deterioration of the sense of family. At an ownership level, this leads to a concentration of mutual interests rather than those of individual investors. What is more, intelligent governance rules prevent the blocking of decisions and the selling off of shareholder stakes. By maintaining a sense of family, the business produces new strength for innovation. Employees of family businesses who are not from the family often highly appreciate the sense of family and close commitment described above, but it can also impact negatively on their career paths, especially if it prevents their own advancement. This happens if young family members and shareholders are shoehorned into leadership positions, regardless of competence. It has proven propitious only to appoint family members to the business if they are at least as suitable as candidates from outside the family.

There are limits to people’s commitment in non-family businesses, whereas family members (as well as employees) who work together in family businesses are more willing to go beyond them. In very traditionally led family businesses, the position of the businessman’s wife reveals how she plays a prominent role in balancing the inward and outward tendencies of family and company, and therefore safeguards the sense of collectiveness, even in critical situations. Most family businesses have recognised that the divergent logics of family and company require special attention.

In Germany, women may generally play a lesser role in corporate leadership than men, but they are highly successful in their own leadership positions in family businesses. Flat hierarchies in such companies facilitate short decision-making channels and eliminate time-consuming holding patterns. Customers appreciate this a lot, and so do suppliers and employees. Yet the strong entrepreneurial orientation associated with a strong personality also has its downside. When crises arise, it can become critical. All of the aforementioned benefits can turn into their opposite if, for example, the businessman is suddenly absent, be it through illness, accident or death; if they experience payment difficulties or the threat of insolvency; or if a succession process fails, leaving the company ‘headless’. A person who has shaped a business for many years can often lose, towards the end of their professional life, that sense of the market which has so long defined them. A company’s fate can be decided by whether its entrepreneurial authority has been concentrated too much and for too long in one central personality, and whether the principles of entrepreneurial action have been consciously passed on and institutionalised.

Given the aforementioned conflicting priorities between family and company, escalating disputes of this kind are not uncommon. Conflicts can arise within the family between branches of the family, between successors and relinquishers, between major and minor shareholders and between owners and outside managers, and they can cause extremely strong feelings and financial damage.

It is not for nothing that family disputes in family businesses have been referred to as the “biggest destroyer of value in the German economy.”. Family businesses often procrastinate for a long time before seeking support, despite dramatic escalations and shareholder conflicts that can drag on for years. “It’s nobody else’s business what goes on among us.” – Management and banking advice is met with reserve. ‘Weak signals’ are ignored, crises intensify and even dangerous shifts such as a lack of liquidity can be ignored, as an analysis of numerous family business insolvencies shows. Appearances are kept up on the outside, while the crisis becomes all-consuming inside the family. Once a crisis has manifested, the balance between familial and business interests is lost – old conflicts emerge and accusations are levelled about who is really responsible. Events begin to spiral and become very difficult to stop internally. Shareholder conflicts hinder the progress of the business, and tense business circumstances also aggravate the family.

In the worst case, the business and the family can go under. If the situation becomes very fraught, an insolvency crisis can sometimes be averted by recourse to networks of friends and by the family’s willingness to sacrifice – in which case ‘familyness’ has once again proved a lifeline. But despite this, many family businesses still tend to draw too firm a boundary around themselves and the business, and to seek support too late. This is an absolutely fundamental aspect of this form of business. But despite all the criticism of their resistance to advice, one ought not to forget that many family businesses have become successful precisely because they have not allowed themselves to be advised, precisely because they have not followed the recommendations of consultants and stubbornly pursued their own line instead. This strengthens their historical resolve to adopt a critical attitude towards external advisors.

The focus there is not on equality, it is on expertise, performance and responsibility. According to the logic of the family, it is only fair for every family member to be given a position in the business, whereas in the logic of the business, leadership succession is all about selecting the best candidate according to their performance, and thus securing the continuity of the company. This is where the importance of careful paradox management becomes clear: you have to recognise the conflict between these two logics, endure it, and find a solution which is compatible with business and family alike. The paradoxes cannot be eliminated, but they can be defused through understanding. Benefits particular to the business and the family can be gained through active family management, seeking one’s own method of diffusing paradoxes, identifying taboos, confronting conflicts, and by the entrepreneur analysing his or her own anxieties, wishes and aims. Multi-generation family businesses which survive the critical third generation by transferring certain decision-making patterns and behavioural rituals to subsequent generations have demonstrated this successfully. They show that it is possible to constructively steer the conflicting priorities of family and company, thus making this very particular form of business into a fundamental source of strength – for many generations to come. Predicting whether a family business will succeed in the long term is approximate at best. But there are certain indicators on the route to success, and we will name a few. For example, family businesses have to subsume their own particular family and owner interests beneath the company’s need to survive. The principle of ‘family business first’ applies.

Furthermore, ‘professional ownership’ should be practiced, which means the proprietor family needs to be very consciously managed, as does the organisation itself. A high level of identification with the company can be achieved if all of the family members and shareholders are given an experience of being an accepted member of the proprietor family. One way of achieving this is to create frequent opportunities for the family to gather. Achieving lasting success requires a leadership which subscribes by its authority to a written and unwritten code of conduct. Ownership disputes and the associated legal conflicts need to be prevented using established conflict solution mechanisms that are accepted by everybody.