The Benefits of Diversification in Family Businesses

While there’s a tendency to describe family businesses in fluffy and insignificant terms, this selection of ventures remains a key contributor to the UK economy.

In fact, there are now more than five million family businesses operating in the UK, generating slightly more than a third of the region’s total GDP. In 2018, the family business niche paid a whopping £196 billion in tax, while the firms within this space employed 14 million people and accounted for 50% of all private sector employment.

But what exactly is a family-owned business and why is it important to diversify as this type of venture? Let’s find out!

What is a Family Business?

As you can probably guess, a family business operates as a commercial organisation in which decision-making is influenced by one or more generations of the same family (who may be related by blood, marriage or adoption).

In addition to being a highly generative business model, the typical ‘family business’ has also persisted for hundreds of years, providing a steady source of income for shareholders while creating crucial jobs within local economies.

According to a study conducted by the Consulting Group (which canvassed the performance of 149 large, family-controlled firms), the long-term financial performance was higher across the board for this type of venture.

A further study carried out by Credit Suisse analysed the data of 280 family companies worldwide from a single financial year, with this type of venture outstripping public businesses in terms of revenue growth.

What’s more, this was during the fallout from the global recession in 2011/12, highlighting the enduring appeal of the family business model and its fiscal viability during strained economic times.

Why is Diversification Important in Your Family Business and How Can You Achieve This?

While the family business has proven to be highly durable and generative over time, it does face challenges during times of economic downturn or recession. 

The reason for this is simple; as many such firms cater to a local audience and are restricted in terms of where they accrue their revenue. 

So, the notion of expanding and creating diversified economies offers a clear reward, as it provides a viable hedge against localised commercial challenges and regional downturns.

This should be considered alongside more obvious advantages such as increased revenue, as diversification unlocks brand new markets and optimises earning potential across the board.

Of course, the term diversification can also be applied outside of your business, with the key focus being on investing capital as a way of generating greater revenues over time. So, while you can invest directly into the expansion of your business, you can also target the financial market and managed funds that draw from multiple industries and high-growth sectors. 

Through managed accounts, you can quickly access stable and instantly diversified investment portfolios, which create steady and passive sources of income which help to support your business over an extended period of time. 

What’s more, such revenue is not linked directly to your family business, so it can be sustained even if your venture endures difficulties.

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