Emotions shape our experiences and influence our decisions, even in areas we might prefer to see as purely rational. One such area is the family business. Can we be emotional about it? Isn’t it just a financial asset?
A paper by Astrachan and Jaskiewicz (2008) argues that for many entrepreneurs, a family business is deeply emotional. It’s often seen as “their baby.” And like any emotional connection, this can lead to good decisions—or challenging ones—depending on our awareness of how those emotions are influencing us.
How Are Family Businesses Valued?
Valuing a family business is part art, part science. While the numbers may appear objective, the methods behind them often involve judgments that don’t fully capture the business’s unique character, especially when family dynamics are involved.
One of the more traditional approaches is the Swiss “Praktikermethode” (or “practitioner’s method”), still widely used in German-speaking countries. This method combines two key components:
- Substance Value – This refers to the book value of tangible assets, such as property, machinery, inventory, and cash. It represents the value of what the business owns, assuming everything could be sold today.
- Income Value – This is calculated by forecasting the company’s future net profits and discounting them to their present value. It reflects what the business can earn going forward.
The “Praktikermethode” gives these elements different weights—typically one-third substance value and two-thirds income value. The formula aims to strike a balance between the stability of the company’s physical assets and the potential of its ongoing profitability.
More advanced valuation methods, like the Capital Asset Pricing Model (CAPM), are often used by investment analysts and in academic finance. CAPM helps calculate the expected return on investment by considering the risk-free rate, the market’s average return, and something called beta, which measures how volatile the business is compared to the market.
In theory, CAPM allows for more precise valuations. But in practice, CAPM can be difficult to apply to family businesses, because:
- There are often no public benchmarks to compare them with.
- Beta values are hard to estimate if the business is private or highly specialised.
- The company’s risk profile may be shaped by family goals, not just market factors.
Another challenge with both methods is that they focus purely on financial performance. Neither can capture the emotional attachment, legacy value, or social standing that a family might assign to the business: factors that can significantly influence decisions like selling, reinvesting, or succession.
That’s where the concept of emotional value becomes an important complement to traditional valuation models.
What Is Emotional Value?
Emotional value refers to the non-financial meaning a family attaches to the business. This might include:
- Personal satisfaction from producing something that reflects the family’s values or taste.
- Family involvement, such as employing relatives.
- Pride or reputation, like being a respected business in the community.
Astrachan and Jaskiewicz suggest a formula to think about this:
Total Value = Financial Value + Discounted Private Financial Benefits + (Emotional Value – Emotional Costs)
We often feel the emotional value instinctively. But we should also be aware of the emotional costs.
What Are Emotional Costs?
Emotional costs are the burdens that come from mixing business with family. These can include:
- Minority shareholder issues: In many family businesses, not all shareholders have equal say, which can create frustration and dependence on the goodwill of the majority of family owners.
- Agency costs: A family member running the business might have different priorities than shareholders. Even with good intentions, this can lead to tension. That’s why it’s important to have systems in place to keep everyone aligned.
- Rivalries and jealousy: Choosing a successor, for example, may leave other family members feeling excluded. A neutral advisor can help families navigate this and support a smoother transition.
- Changing perceptions over time: Emotional value isn’t fixed. As family members grow older and gain new experiences, what they value in the business may shift. A burden in one generation might become a treasure in the next—or vice versa.
Signs That Emotional Value Is Driving Decisions
You might be dealing with emotional value if:
- Investment decisions don’t follow standard financial logic (e.g., ignoring IRR or NPV).
- Hiring or promotion decisions prioritise family dynamics over merit.
- The business holds onto cash or investments that would be better distributed to shareholders, but aren’t, due to tax reasons or emotional attachment.
- There’s a strong reluctance to sell the business, even when the timing or price is right.
- The family emphasises legacy, reputation, or history more than current performance.
These choices aren’t wrong, but they do show that emotion is part of the equation.
How Family Values Shape Emotional Value
In many cases, the values of the business reflect the values of the family. That alignment can enhance emotional value, especially when the business becomes a way to express the family’s ideals through leadership, products, or community work.
But families are rarely monolithic. In larger families with multiple branches, values can start to diverge. When that happens, some family members may no longer feel a personal connection to the business. What once felt like a shared mission can become a source of emotional cost for those who feel disconnected or unheard.
Why Emotional Value Matters
Public companies typically don’t offer the same space for emotional connection. Families that hold majority stakes in private companies have more freedom to embed their values and feel deeply connected to the business. That can be powerful, but it also means they need to be mindful about when emotions help and when they might hinder good decision-making.
Research by Zellweger, Kellermanns, Chrisman & Chua (2012) also points to a roughly 19 % premium that families ask for giving up their family business due to their loss of socio-emotional wealth. Buyers of such family businesses need to be aware of the factors that influence socio-emotional wealth and find ways to incorporate the sensibilities of the family into the purchase agreement if they want to avoid or reduce the premium. That can be as straightforward as guaranteeing employment of family members or staff, retaining the family name in the business, pledges to quality and stakeholders, etc.
Emotional Value in Times of Change
Understanding emotional value is especially important when the family is facing big decisions, like succession, restructuring, or selling the business.
Sometimes a family member’s deep emotional attachment explains why they resist change. Other times, low or negative emotional value might be the reason someone is quietly disengaged. Surfacing those feelings can open up honest conversations about legacy, continuity, and what really matters to each person involved.
Even in divestment, emotion plays a role. As strategic coach Dan Sullivan puts it, selling a business isn’t just letting go—it’s a kind of “buying.” You’re trading the business for something else. The question becomes: Are you getting something of equal or greater value—emotionally, not just financially—in return?
Conclusion
Emotional value is real. It can’t always be calculated in spreadsheets, but it drives many of the most important decisions in a family business. Recognising it—and discussing it openly—can help families make wiser, more honest choices together.
Whether your family is growing the business, preparing for succession, or considering a sale, taking the time to understand emotional value can be the key to preserving relationships while building a lasting legacy.
References:
Astrachan, J.H. and Jaskiewicz, P. (2008) ‘Emotional returns and emotional costs in privately held family businesses: Advancing traditional business valuation’, Family Business Review, 21(2), pp. 139–149. Available at: https://doi.org/10.1111/j.1741-6248.2008.00115.x
Zellweger, T. M., Kellermanns, F. W., Chrisman, J. J., & Chua, J. H. (2012). Family Control and Family Firm Valuation by Family CEOs: The Importance of Intentions for Transgenerational Control. Organization Science, 23(3), 851–868. https://doi.org/10.1287/orsc.1110.0665
