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Financing decisions and strategic change: not always a positive story

Money is needed to implement strategic changes. This money can either come from internal financing, or from various external financing sources such as bank loans, leasing and capital increases. Our research has shown that the use of financing sources differs between family and non-family firms. In 2020, 29% of family firms indicated that they will not apply for external financing. This percentage is 27% for non-family firms. When external financing is attracted, 58% of family firms opt for short- and/or long-term debt, while this is only 51% for non-family firms. The use of equity (such as capital increases or venture capital) as well as the use of quasi-equity (such as subordinated debt) is significantly lower in family firms. Only 1% of the family firms opt for an increase in equity, while 6% of non-family firms prefer this option.

Why is it that family firms use fewer external sources of financing?

  • A first explanation may be that family firms are not willing to give up control and therefore attract less external equity.

  • A second explanation can be found in the observation that family firms try to build up more financing reserves compared to non-family businesses. These saved resources ensure that the need for external financing is reduced. This is clearly visible in the numbers. When family firms are offered additional financial resources, 41% of these family firms choose to save these resources instead of using them for investment and innovation. This is only 32% for non-family firms.

  • A third possible explanation can be linked to the problems of access to this external financing. About one in six companies indicate that access to finance was a major problem in 2020.

Not applying for external financing and saving up financial resources has consequences for the strategic changes in a family firms. It can jeopardize the growth and even the continuity of the organization. There is a negative relationship between keeping financing reserves and the strategic changes in a company. These reserves mainly act as a buffer against environmental turbulence and economic uncertainty, which means that companies are less likely to use these resources for strategic changes.

Companies that do not use external financing initiate and implement much less strategic changes. This is clearly reflected in the figures when we compare these firms with firms that have acquired external financing. When companies use debt, we see clearly higher scores on the extent to which strategic changes are initiated and implemented compared to the group that does not use external financing. However, we see the biggest difference in the group that uses additional equity or quasi-equity. They score twice as high on the extent to which strategic changes are initiated and implemented than companies that do not acquire external financing. Family firms choose more often not to apply for external financing, which is therefore disadvantageous for initiating and implementing strategic changes. Their limited use of equity or quasi-equity also means that they miss out on a strong positive effect. This is partially compensated by the proportionally more debt that is attracted, since this also has a positive effect on initiating and implementing strategic changes.


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