Family-Owned Businesses in Italy and Spain: Opportunities and Pitfalls for International Investors

On 29 October 2024, K2 Integrity hosted a webinar focused on the unique dynamics, strengths, and potential obstacles of investment in family-owned businesses in Italy and Spain. The conversation included Jason Wright, senior managing director at K2 Integrity; Edoardo Fiora, senior director at K2 Integrity; José Luis Ortín Romero, corporate/M&A partner at Garrigues; and Giulia Bianchi Frangipane, partner at BonelliErede. Click here to view a recording of the session.

Family-Owned Business Landscape in Italy and Spain

Family-owned businesses make up a substantial portion of the global economy, with approximately 70% of companies worldwide falling into this category. Family-run enterprises in Italy and Spain, in particular, play a significant role within their respective national economies and have attracted considerable interest from international investors. These businesses are diverse, ranging from small, regionally focused companies to large, internationally recognized brands. They are prominent across various sectors, including manufacturing, technology, tourism, and hospitality.

In a 2023 survey from The Family Business Institute in Spain, most of that country’s family-owned companies are quite small, with only 37% reporting annual exceeding €500,000. The survey highlighted that 75% of Spain’s family-owned businesses have 15 or fewer employees and are locally based; approximately 90% have a major focus on a specific region of Spain, and only 7% of their overall revenue comes from international business. Looking at 2023 supplied by the Italian Association of Family Business, Italy has a greater amount of family-owned businesses with significant revenue, with over 11,000 companies having annual revenue of in excess of €20 million. Italian family-owned businesses are generally more profitable, invest more in research and development, and have less debt than non-family businesses. They represent 85% of all the enterprises based in Italy, employ 70% of Italian workers, and produce more than €250 billion in revenue each year.

Key Investment Considerations

Despite governance and generational hurdles, family-owned businesses in Italy and Spain offer several attractive attributes for investors, including the following:

1. Low Debt and Profitability: The conservative financial approach taken by family-owned businesses often results in low debt levels and enhanced resilience during economic downturns. Investors find this trait particularly attractive, as it offers financial stability and flexibility.
2. Long-Term Vision: Family-owned enterprises frequently operate with a long-term strategic outlook and tend to be more courageous in investing. Unlike some publicly traded companies focused on quarterly earnings, these businesses are oriented toward sustainable growth, making them valuable for patient capital investment strategies.
3. Internationalization Potential: Given that many family businesses in Italy and Spain have limited international operations, there is significant room for growth through market expansion. Investors can add value by providing capital and expertise for internationalization efforts, particularly in manufacturing, technology, and hospitality sectors. Spain, in particular, is a good base for investors that want to expand into South America because of the language and into Europe due to the consistency of EU regulations.
4. Corporate Governance: Increased engagement from international investors is driving a gradual shift towards expanded corporate governance. The introduction of external advisors and independent board members can enhance governance, leading to better decision-making and more robust oversight.

There are potential challenges when looking to invest in family-owned Spanish and Italian businesses, including the following:

1. Complex Family Dynamics: Family-owned businesses are often characterized by tightly knit management and ownership structures. These dynamics can be difficult to navigate for outside investors, as familial relationships may influence decision-making, resulting in potential conflicts of interest and a lack of transparency. There also can be a lack of trust of outsiders, particularly those from outside of the country.
2. Cultural and Linguistic Barriers: In both Italy and Spain, cultural norms and language barriers can impact the effectiveness of due diligence and the transparency of operational information. Many business records and communications are handled by long-standing family advisors who may be resistant to external scrutiny.
3. Succession and Control Issues: Succession planning is a pivotal issue in both Italy and Spain, where family businesses often face complex generational transitions. Inadequate succession planning can lead to operational instability and uncertainty. Founders may be reluctant to relinquish control, perceiving external investors as threats to the business, while the younger generation often views institutional investors as a valid source of financing. In such cases, investors must approach potential partnerships with sensitivity to familial roles and legacy values.
4. Legal and Regulatory Complexity: Investors may encounter intricate regulatory environments, particularly with regard to transparency and anti-corruption measures. For instance, public procurement and supply chain due diligence requirements may add administrative burdens and increase compliance costs for businesses.

Strategies for Successful Investment

To navigate these challenges, the panelists recommended several strategies for successful investments in family-owned businesses.

1. Focus on Value Creation through Internationalization: Investors with expertise in international markets can provide strategic value by supporting family businesses in expanding their operations beyond national borders. This approach has proven successful in sectors where Italy and Spain have a competitive advantage, such as tourism, agriculture, and manufacturing.
2. Emphasis on Corporate Governance: Implementing structured governance mechanisms, such as through the formation of advisory boards or the inclusion of independent directors, can help mitigate the risks associated with familial management structures, encourage transparency, reduce the potential for conflicts of interest, and align corporate strategy with investor interests.
3. Gradual Integration of Professional Management: Introducing non-family members into key management roles can enhance operational efficiency without disrupting established family dynamics. This approach can be particularly effective when succession planning is a concern, as professional managers can support a smooth transition while maintaining continuity.

There is also a growing trend towards exploring structured co-investment arrangements among the younger generation of owners of family businesses. This allows family members to retain partial ownership, which can create mutual incentives for growth and foster trust. By allowing family members to remain actively involved, investors may alleviate some of the perceived threats that come with full acquisition.

Conclusion

Investing in family-owned businesses in Italy and Spain presents unique opportunities and challenges. While these businesses offer attractive features such as financial stability, long-term orientation, and growth potential through internationalization, investors must navigate complex family dynamics and regulatory environments. Successful investment strategies are based on a foundation of trust with the family, which takes time to build. As more family businesses in Italy and Spain open their doors to outside investment, these enterprises are likely to play an increasingly significant role in the global economy.