Family Fortune

While the German economy might be humming along nicely right now, the years 2003 to 2005 were not particularly memorable ones. The country's gross domestic product actually shrank in 2003 by 0.2 percent. It rebounded somewhat in the following two years, but growth rates of 1.6 and 0.9 percent aren't much to write home about.

The slump was reflected in the personnel policies of Germany's 30 biggest companies trading on the Frankfurt Stock Exchange -- companies like Adidas, Bayer and Lufthansa, also known as the DAX 30. Overall, they reduced their domestic employment rolls by 3.5 percent. But during that same period, 500 of the country's biggest family-owned companies increased their workforces by some 10 percent.

These are some of the findings released this month in a study carried out by the Institut für Mittelstandsforschung (IfM), which conducts research on the country's small and medium-sized enterprises, a category including most family-owned businesses. IfM classifies as small and medium sized enterprises those firms with sales up to 50 million euros ($67.7 million) a year.

About 95 percent of the 3.2 million German companies fall in to the category of "family owned," according to the Family-Owned Business Foundation, which financed the study. They generate 41 percent of the sales volume of all German companies.

The study's results point to the fact that family-owned businesses are a key motor in the German economy. While the big shareholder-owned multinationals might get much of the press, those companies still in the hands of one or a few families are showing that they have plenty of muscle, and could show the big DAX companies how to better weather tough economic times.

DAX companies did see a nine percent increase in sales volume over those three lean years, but family-owned businesses, according to the study's findings, saw a 16 percent jump in sales in the same period.

"Family-owned businesses did do something better, somehow better positioned themselves," said Frank Wallau, IfM's interim director. "Although it's difficult to determine a direct causal link between being family owned and being successful."

Different philosophy

But Stefan Heidbreder, director of the Family-Owned Business Foundation, says he believes that the success has a great deal to do with the character of many family-owned businesses. He points out that there is often a different management and business philosophy at play than at large companies owned by anonymous shareholders.

In a family-owned business, at least 50 percent of the company is owned by one or several families. The owners and managers are often the same people, or the owners hire outside managers. In either case, according to Heidbreder, it leads to a different kind of strategic thinking -- one that focuses on long-term interests instead of quick results.

"A family-owned business thinks in generational terms," he said. "They're not only concerned about making as much cash as quickly as possible or surviving the next shareholders meeting."

He compares it to two scenarios of buying a car. If someone were told to buy a car and simply given the money for it, he would think differently than he would if he were spending his own money on the car.

"He would ask himself, 'Is it a good car for the money?' 'Will it last?' 'What if something happens to my kids tomorrow?'," he said. If someone else is fronting the cash, the risks taken are different, and perhaps not as well thought out.

International, but home ties strong

The term "family owned" does not have to mean a mom and pop operation -- the study looked at companies employing from 20 to 256,915 workers -- and included big players such as Würth, a maker of fixing and assembly materials which operates in 83 countries, Sennheiser, which makes audio equipment, and Trumpf, a leader in laser technology. Many have found success in specializing in high-quality products for niche markets and have become export champions.

While these firms are all active internationally, many still have ties to the region where they are based. Many owner-families have run the companies for generations, and have closer links with employees. That can result in a greater sense of responsibility for their well-being unlike at the giants, where increasing shareholder value often trumps any other concern.

Other advantages family-owned business can enjoy are increased flexibility, and with owners and managers being either the same person or enjoying a close relationship, they can make business decisions responding to market developments often much faster than large concerns, where decisions often have to work their way through committees and boards.

Not all rosy

Despite the good performance, Heidbreder says family-owned firms still face hurdles that others do not, particularly in the areas of international accounting standards and inheritance taxes.

When the owner of a family-owned business dies, the firm can be faced with a tax bill of up to 50 percent of the value of the company. That has led to many, he said, having to sell the business or simply shut their doors.