Family-owned businesses in India

Family-owned businesses (FOBs) contribute more than 75 percent of India’s national GDP (p.1), one of the highest percentages in the world, and this is projected to rise to 80 to 85 percent by 2047 (p.1). McKinsey research shows that, from 2017 to 2022, FOBs reported around 2.3 percent higher revenue growth than non-family-owned businesses, and from 2012 to 2022, FOBs’ returns to shareholders were twice as high as those of non-FOBs (p.1).

Outperforming FOBs

To understand how the best-performing family businesses create value, McKinsey analysed about 300 publicly listed Indian FOBs (p.2). Top-performing FOBs — defined as the top quintile on an economic profit power curve — enjoy 2.9 percentage points higher revenue growth, an economic spread of 11.0 percentage points, and operating margins 6.3 percentage points higher than other family businesses (p.2). A performance jump of just one quintile could translate to additional annual economic profit of about 100 crore to 300 crore Indian rupees (approximately $12 million to $36 million) for an average family business over a five-year period (p.2).

Top-performing FOBs: Five differentiators

1. Core operational excellence

Top-performing FOBs deliver value-accretive growth by maintaining high profitability alongside high revenue growth. Family-run top-performing FOBs deliver operating margins approximately 7.8 percentage points higher than those of other FOBs in the same archetype (p.5). As families transition to strategic roles, capital efficiency becomes an additional differentiator: top-performing family-governed FOBs achieve approximately 7 percent higher capital efficiency, rising to about 14 percent for top-performing family-ownership FOBs (p.5).

2. Effective transition from one generation to the next

The proportion of top-performing FOBs remains broadly consistent across generations at 20 to 25 percent (p.5), but the share of bottom performers grows — from about 33 percent of first-generation-run FOBs to about 43 percent of the second generation and 46 percent of the third generation or beyond (p.7). To sustain performance, FOBs need to groom the next generation, build the right talent and culture, and bring in professional executives who complement the owning family’s capabilities.

3. A diversified portfolio to scale the business

Diversification across non-adjacent sectors is a key enabler for FOBs to achieve substantial scale. Most “at scale” FOBs — those with annual revenues of more than 6,500 crore Indian rupees — achieve this through a highly diversified portfolio (p.8). FOBs with external executives (family-governed or family-ownership archetypes) are significantly more diversified than family-run FOBs across all sizes (p.8).

4. Talent, capabilities, and culture

According to a McKinsey survey of about 600 FOBs, 86 percent of respondents at top-performing FOBs agree or strongly agree that their company attracts the best talent, and more than 90 percent either agree or strongly agree that their company successfully identifies, trains, and develops their best talent (p.9). FOBs often only appreciate the value of professional executives by the third generation. Promoters are encouraged to view themselves as stewards rather than controllers of their companies.

5. Professionalization and robust governance for sustained success

Top-performing FOBs use a governance approach that regulates company, ownership, and family topics, avoiding too much or too little formality. Robust governance also entails succession planning, including preparing the next generation, establishing clear development and transition plans, and giving executives an equal opportunity to run the business. Multiple experts highlighted the significance of a non-family confidant — the most trusted non-family member — to whom families look for an external perspective.

Balancing the interdependent interests of the business and the family

Promoters are encouraged to reflect on three questions: how to manage the current core business while building intergenerational value; how to diversify to create value across generations; and how to balance family governance with business. With additional annual economic profit of about 100 crore to 300 crore Indian rupees over a five-year period at stake (p.10), FOBs are advised to plan early, make timely decisions, and execute flawlessly.