Why do family firms enjoy higher margins?

Family firms score above their peers in terms of capital allocation. They seem to be especially good at focusing on their core business, with more than 50% of our sample judged best-in-class in this area by UBS analysts, and only 10% of family firms ranking below average.
We analysed the links between governance factors and profitability metrics. We found that capital allocation is the governance factor most correlated to higher margins and return on equity. There are slight regional differences. In Europe, focus on the core business seems to be the key to higher profitability, while in Asia, returning cash to shareholders is what matters most. What do family firms do differently in practice? According to a study from the Boston Consulting Group, families are quite cautious in terms of capital spending. It may sometimes lead to missed opportunities but also helps families avoid costly mistakes, which in our view leads over time to better returns:
- Family firms keep the bar high for capex. They carry little debt and as a result have to be very selective with how they allocate free cash flow.
Family firms acquire fewer and smaller companies. The BCG found that family firms spent on average 2% of revenues on acquisitions, while non-family businesses spent 3.7%.