Fewer Branches, Stronger Roots: Why Family Businesses Consolidate Ownership

By: George Stalk, Jr. and Mariana Restrepo

Consolidating ownership is not a symptom of family failure. As generations multiply, ownership disperses faster than the business grows. A structure designed for a handful of owners becomes one that cannot decide, slowing the pace of operations.

Consider the leadership team of a Latin American aluminum manufacturer, owned by the second generation (G2), that is considering building a new facility to increase local production. In the country where they operate, their only competitors are imports. This looks to be a winning strategy, but the investment required is very high.

Dividend payouts to G2 will need to be constrained for many years to help finance the investment in the new facility. While there are seven members of the second generation who own the business, only two of them are working in the business. These two sense the opportunity. Many of the five who don’t have operational roles in the business are more interested in receiving dividends than helping to finance the expansion strategy. The challenge now is how to consolidate control to pursue long-term growth when the bulk of shareholders are only interested in short-term value.

What Does Pruning Mean?

In horticulture, pruning is defined as the “removal or reduction of parts of a plant, tree, or vine that are not requisite for growth or production or are injurious to the health or development of the plant.”1 Family businesses grow like trees, forming branches across nuclear families and growing farther from the root.

As families grow, so does the level of complexity, defined as “the number of family members and the kind of relationships established among them.”2 Complexity also increases with a divergence in interests, abilities, and ambitions. Some see the family business as just a source of continuous profits during their lifetime, while others see it as an asset for ensuring wealth for future generations and passing knowledge along.

“Pruning the tree” is the deliberate reduction of the size of the ownership group by buying out some owners or changing the criteria by which ownership is bestowed. Pruning serves three purposes: it aligns incentives by reducing the number of financial stakeholders, strengthens governance by concentrating decision-making, and improves performance by making meritocracy the criterion through which people are appointed to roles.

Family vs. Business Growth

Ari Axelrod’s “Respecting the 5% Rule”3 argues that a family business’s growth rate and dividend policy are linked, and that family demographics drive both. The analysis assumes that family members have, on average, three children each. Under this assumption, the number of relatives expecting to benefit from the business grows from 4 to 468 over five generations. Just to preserve wealth per person, the business must grow about 5% a year in real terms. Growth and payouts are tied by one equation: sustainable growth = (1 − payout ratio) × return on equity (ROE). This formula can be expanded to:

What combination of the factors in the sustainable growth rate (SGR) calculation (return on assets, interest rates, debt-to-equity, and retention) will yield the growth rate needed?

As Miller and Le Breton-Miller observe, another potential problem “as generations progress is the growing demand for dividends from a greater number of family members who no longer directly work for the business. In modest-sized firms, this can represent an important drain of capital that hobbles capability development and constrains growth.”4

Pruning the tree is how families can proactively restore alignment before a crisis prompts them to do so. Drawing on our experience and research across family firms around the world, we set out four principles for pruning the tree.

The Right Approach

1. Right Time

Whatever negative dynamics a family leaves unaddressed in the current generation will inevitably move to the next. The right time to break those patterns is now.

Consider a founder who built six business units and had an “open arms” approach, inviting all six of his children to manage one each regardless of merit. Over time, performance diverged. The textile manufacturing unit became a great success and four other business units followed, growing year by year. However, the fast-food chain, the original venture of the founder, was struggling to make money. This legacy business received capital because of the founder’s strong emotional attachment.

The five siblings running more profitable business units grew resentful, both at subsidizing the fast-food chain and at the double standard it created, with employees held to different performance expectations depending on which unit they worked in. Rather than leave that question for the succeeding generation to settle, they bought out the sibling running the lagging unit. The lesson is that unresolved structural problems, such as an open-arms policy, compound with time and may create an expectation among future generations that they will have a role in the business regardless of merit or qualifications.

2. Right Structure

Pruning concentrates decision-making power in those involved in day-to-day operations, or in a reduced number of active owners who possess sufficient knowledge of the strategic direction of the family enterprise to have an informed opinion. These individuals are directly exposed to operations, understand the practical realities the firm faces, and are better positioned to act in the firm’s best interest.

Dettori and Floris also show that failing to prune in time can hurt business performance, increase costs, and impede growth.5 The root cause is misalignment. Some owners want earnings reinvested to expand operations and enter new markets, while others expect a quarterly distribution on the grounds that their capital is invested in the business. There is also the problem of “too many cooks in the kitchen.” Past a certain point, more opinions and more approvals become detrimental to the pace at which the business operates.

3. Right Price

Experience has shown that valuing the family business is often the hardest task. The emotional weight owners attach to a business with such deep-rooted history can make its value feel immeasurable. Family members are rarely equipped to do this impartially, which is why an external valuation is essential.

There is a second difficulty. A valuation based on today’s performance prices in the value the buyers themselves created, so they pay a premium for their own work. Montemerlo argues that the price should “not punish the remaining owners of the company who are doing the buying out by burdening them with a high buy-out amount.”6 Pruning also demands liquidity, raising questions about whether buying out a family member will put financial strain on the family business.

The process through which the price is reached matters as much as the number. François de Visscher, whose firm provides investment banking services to family-owned companies, shares that “there’s a natural resentment that people promoting the pruning—the reduction in expenses or dividends—are the managers, who are the most informed about the business.”7 Guarding against that perception means relying on an independent valuation, transparent access to relevant financial information, time for the seller’s advisors to assess the offer, and a documented process.

Lambrecht and Lievens call this “procedural justice.”8 As evidence of the advantage of doing things right, a family member in their study reported: “The buyout has had no impact on the family relations, which were and remain very good. The good family relations were an important condition for making the acquisition possible.” A seller who understands what they are selling, and why the number is what it is, can leave without feeling taken advantage of. That is the difference between a buyout that preserves the family and one that fractures it.

4. Right Incentive

In a soccer match, a player who doesn’t give their best effort is replaced by someone on the bench. Family members working in the business should also be aware that performance is their responsibility, and the enterprise cannot serve as a safety net for underperformance. However, players who win expect a reward. When ownership is dispersed across every descendant, dividends flow to committed operators and disengaged shareholders equally.

Consolidating ownership ties reward to contribution by removing entitlement. An example in the Dettori and Floris study shows that the incumbents selected the successor(s) mainly on the basis of “commitment, efforts, and competencies.”9 Vilaseca found that an owner’s level of commitment is negatively correlated with the number of shareholders of the family business.10 The owners who remain in operational roles are the ones making decisions, taking the risk, and living with the consequences.

Examples of Families That Pruned the Tree

Pruning the tree is not a twenty-first-century invention. Business-owning families around the world have long used this strategy. In some cases, pruning is a deliberate and established business policy. In others, it happens when an inflection point is reached.

The Jebsen & Jessen families use a “one captain–one ship”11 model. Each generation selects a principal shareholder, who must purchase rather than inherit shares. Requiring the successor to put their own capital at stake creates a deep commitment, and concentrating ownership narrowly has kept the family nimble and entrepreneurial.

The House of Camus, a French cognac maker, has followed a policy of sole ownership since 1863. In each generation, the designated owner must buy the shares held by the rest of the family. The reasoning is that concentrating ownership in one person has limited the amount of conflict around decision-making. However, the drawback is that there is a narrow pool of potential successors and fewer external perspectives.12

The Moreira Salles family, owners of Itaú Unibanco, began restructuring ownership in 2022. Two active brothers bought out two passive ones, whose roughly 10% stake in the bank was then valued at about $4.6 billion.13 A family-controlled investment firm structured the purchase as multi-year installments rather than a lump sum, which eased liquidity pressure on the buyers, gave the exiting siblings a steady income stream, and protected the business’s cash flow.

The Agnelli family has controlled Fiat across five generations and today holds a $40 billion portfolio through Exor. Fiat was in financial distress in 2003 when patriarch Gianni Agnelli died. Gianni had skipped the next generation and designated as successor his grandson John Elkann, who became vice-chairman at 28 the following year.14 Gianni’s daughter Margherita sold her stake for €1.2 billion.15

Under Elkann, holdings grew substantially through moves like acquiring Chrysler after the 2009 recession16 and merging with Peugeot to create Stellantis.17

Margherita sold when Fiat looked worthless, and the better Elkann performed, the more she regretted her decision. She experienced what we know as seller’s remorse, the guilt or regret that follows parting with something that later proves valuable. The matter is now being litigated, as Margherita contends she was cheated. In our experience, bought-out owners often feel cheated long after the deal is consummated, and this should be expected. The lesson is that success itself can breed conflict when some benefit far more than others from an earlier choice.

There is no universal approach to pruning the tree. Each family is unique and must find a process that fits its own needs.

Conclusion

As the Jebsen & Jessen and Camus families show, pruning can be part of an entrepreneurial policy. In other cases, it comes at a time when incentives are not aligned, an inflection point is reached, and the status quo needs to be redefined. It may be because family members outgrow their shared values, have different objectives, and no longer want to be partners in a shared endeavor. Change is daunting, and raising the question of how to buy out a family member is a difficult conversation.

The four principles above outline the right approach to pruning the tree. Above all else, recognizing that the family and the business are distinct, even though they are deeply interconnected, is important. A change in ownership is not a change in family membership. Buying out a family member must not translate into broken relationships or lost contact. The greatest asset of a family is the family itself, and keeping that at the forefront creates the conditions for a fair, transparent, and amicable process.

Footnotes

  1. Encyclopaedia Britannica. (n.d.). Pruning. Retrieved September 8, 2026, from https://www.britannica.com/topic/pruning ↩
  2. Gimeno Sandig et al. (2006, p. 147), as cited in Dettori, A., & Floris, M. (2022). Improving continuity by simplifying the structure of family firms: A replication study. Management Review Quarterly, 73, 635–660. https://doi.org/10.1007/s11301-021-00255-4, p. 636. ↩
  3. Axelrod, A. (2013, November). Respecting the 5% rule. Family Business Magazine, 6–7. ↩
  4. Miller, D., & Le Breton-Miller, I. (2006). Family governance and firm performance: Agency, stewardship, and capabilities. Family Business Review, 19(1), 73–87. https://doi.org/10.1111/j.1741-6248.2006.00063.x, p. 83. ↩
  5. Dettori, A., & Floris, M. (2022). Improving continuity by simplifying the structure of family firms: A replication study. Management Review Quarterly, 73, 635–660. https://doi.org/10.1007/s11301-021-00255-4 ↩
  6. Montemerlo, D. (2005). Family ownership: Boost or obstacle to growth? [Paper presentation]. FBN-IFERA World Academic Research Forum, Brussels, Belgium. As cited in Lambrecht, J., & Lievens, J. (2008), Family Business Review, 21(4), p. 306. ↩
  7. Pearl, J. A. (2010, April 5). Should you prune your family tree? Family Business Magazine. https://www.familybusinessmagazine.com/ownership/dividends-and-distributions/should-you-prune-your-family-tree/ ↩
  8. Lambrecht, J., & Lievens, J. (2008). Pruning the family tree: An unexplored path to family business continuity and family harmony. Family Business Review, 21(4), 295–313. https://doi.org/10.1111/j.1741-6248.2008.00131.x, p. 307. ↩
  9. Dettori, A., & Floris, M. (2022). Improving continuity by simplifying the structure of family firms: A replication study. Management Review Quarterly, 73, 635–660. https://doi.org/10.1007/s11301-021-00255-4, p. 645. ↩
  10. Vilaseca, A. (2002). The shareholder role in the family business: Conflict of interests and objectives between nonemployed shareholders and top management team. Family Business Review, 15(4), 299–320. ↩
  11. Leleux, B. F., & Widz, M. (2017, January). Jebsen and Jessen Family Enterprise: Masters of entrepreneurial partnerships. IMD. https://www.imd.org/research-knowledge/corporate-governance/articles/jebsen-jessen-family-enterprise-masters-of-entrepreneurial-partnerships/ ↩
  12. IMD. (2026, February 3). How to future-proof your family business. https://www.imd.org/blog/family-business/future-proof/ ↩
  13. Marques, F. (2022, February 24). Brothers behind $46 billion bank begin restructuring empire. Bloomberg Law. https://news.bloomberglaw.com/banking-law/brothers-behind-46-billion-bank-begin-restructuring-empire ↩
  14. Hooper, J. (2004, May 31). Fiat gets new chair but loses chief. The Guardian. https://www.theguardian.com/business/2004/may/31/italy ↩
  15. Sciorilli Borrelli, S. (2024, March 4). The 20-year, multibillion inheritance feud dividing the Fiat dynasty. The Australian Financial Review. https://www.afr.com/companies/transport/the-20-year-multibillion-inheritance-feud-dividing-the-fiat-dynasty-20240304-p5f9l4 ↩
  16. Jewkes, S., & Seetharaman, D. (2014, January 1). Fiat strikes $4.35 billion deal to buy rest of Chrysler. Reuters. https://www.reuters.com/article/fiat-strikes-435-billion-deal-to-buy-rest-of-chrysler-idUSL6N0KB13V/ ↩
  17. BBC News. (2021, January 4). Fiat Chrysler and PSA shareholders approve merger. https://www.bbc.com/news/business-55526360 ↩
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