by A family business is a commercial organization in which decision-making is influenced by multiple generations of a family, related by blood or marriage or adoption, who has both the ability to influence the vision of the business and the willingness to use this ability to pursue distinctive goals. They are closely identified with the firm through leadership or ownership. Owner-manager entrepreneurial firms are not considered to be family businesses because they lack the multi-generational dimension and family influence that create the unique dynamics and relationships of family businesses.
Family business is the oldest and most common model of economic organization. The vast majority of businesses throughout the world from corner shops to multinational publicly listed organizations with hundreds of thousands of employees can be considered family businesses.
The economic prevalence and importance of this kind of business are often underestimated. Throughout most of the 20th century, academics and economists were intrigued by a newer, “improved” model: large publicly traded companies run in an apparently rational, bureaucratic manner by well trained “organization men.” Entrepreneurial and family firms, with their specific management models and complicated psychological processes, often fell short by comparison.
Privately owned or family-controlled enterprises are not always easy to study. In many cases, they are not subject to financial reporting requirements, and little information is made public about financial performance. Ownership may be distributed through trusts or holding companies, and family members themselves may not be fully informed about the ownership structure of their enterprise. However, as the 21st-century global economic model replaces the old industrial model, government policy makers, economists, and academics turn to entrepreneurial and family enterprises as a prime source of wealth creation and employment.
In some countries, many of the largest publicly listed firms are family-owned. A firm is said to be family-owned if a person is the controlling shareholder; that is, a person (rather than a state, corporation, management trust, or mutual fund) can garner enough shares to assure at least 20% of the voting rights and the highest percentage of voting rights in comparison to other shareholders.
The three circles model
The challenge for business families is that family, ownership and business roles involve different and sometimes conflicting values, goals, and actions. For example, family members put a high priority on emotional capital the family success that unites them through consecutive generations. Executives in the business are concerned about strategy and social capital the reputation of their firm in the marketplace. Owners are interested in financial capital performance in terms of wealth creation.
A three-circle model is often used to show the three principal roles in a family-owned or controlled organization: Family, Ownership and Management. This model shows how the roles may overlap.
Everyone in the family (in all generations) obviously belongs to the Family circle, but some family members will never own shares in the family business, or ever work there. A family member is concerned with social capital (reputation within the community), dividends, and family unity.
The Ownership circle may include family members, investors and/or employee-owners. An owner is concerned with financial capital (business performance and dividends). The Management circle typically includes non-family members who are employed by the family business. Family members may also be employees. An employee is concerned with social capital (reputation), emotional capital (career opportunities, bonuses and fair performance measures).
A few people for example, the founder or a senior family member may hold all three roles: family member, owner and employee. These individuals are intensely connected to the family business, and concerned with any or all of the above sources of value creation.
Characteristics
- Members: Family business management is conducted by a group of individuals who are also the members of a single family is the owner and runs the enterprise.
- Mutual Interest: The family members who hold key positions in the business are supposed to influence the business policies as determined by the mutual interest of the firm and the family.
- Position of members: The role and position of the family members in the business enterprise depend upon the relationship between the members.
- Control: The family exercises control over the enterprise since the family is the major shareholder in the company.
- Involving Multiple Generations: The family looks after the business management and operations, and thus the ruin is passed from one generation to the next.
- Integrity and Transparency: These characteristics are built by strong moral principles and determination toward business goals and honesty in transparency in business.
- Mutual Trust: All family members must have mutual trust in every involved member since they have a mutual origin, the same values, business orientation and ethics.
Types of Family Business
- Family Owned Business: This kind of business refers to the one which controls the size of the significant and controlling ownership stake. This stake is controlled and owned by the family members.
- Family Managed and owned Business: In these businesses, a single family or an individual member of the family owns the controlling stake of the business. The major owner allows the family to create and decide upon the objectives, policies and methods.
- Family Led and Owned Business: In this kind of business, while the owner can belong to the family or a member of the family, at least another family member should be a member of the company’s board of directors. The family member can therefore influence major strategies, direction and plans.
Structure of A Family Business
The first circle refers to ‘ownership’, the second circle symbolises ‘family’, and the third circle stands for ‘businesses. The different entity definitions are as follows:
- Non-family non-manager owners: These kinds of owners are external investors who own a particular proportion of the entity but do not work.
- Family owners: These set of groups consist of family members who own a certain portion of the business yet do not participate in its operations.
- Family owner-employees: This kind of ownership involves owning and working as an employee in the company, mostly as a top managerial position-holder.
- Non-family owner’s employees: This is a group of individuals who are not family members, yet they are working employees in the firm and own a specific portion of share capital.
- Family members: This group consists of all family members who work for the company but do not have any share in the company’s capital.
- Non-family employees: These employees of the business firm work under the employment contract, and they are not members of the family and do not own shares in the firm.
Advantages
Commitment
Family firms tend to have a greater sense of commitment and accountability at their heart than non-family firms, as it is not just the needs of the business at stake, but the needs of the family too. This desire for both the family and business to stay strong fosters additional benefits, including a greater understanding of the industry, the organisation and the job; stronger customer relationships; and more effective sales and marketing.
Elsewhere, the Ford Motor Company managed to stay afloat during incredibly tough economic times, when other large businesses like Chrysler and GM were desperate for bailouts. It is likely that there are several reasons for their success, but with the Ford family’s name, reputation and financial standing on the line, it is likely that this encouraged their fighting spirit.
Stability
The leadership of a family business is normally determined by the position of each individual in the family. As a result, there is generally longevity in leadership, which ensures overall stability within a family-run business. In many family-owned companies, the business leader will stay in the position for many years, with life events such as illness, retirement or death being the trigger for change at the top.
Flexibility
Working in a family-run firm requires a lot of flexibility. While non-family businesses tend to have very clearly delineated responsibilities for every role, family members will sometimes be required to wear several different hats, taking on tasks outside of their formal remit where needed.
Long-term outlook
Non-family firms draw up their goals for the next quarter. Family firms, however, think years or even decades ahead. A longer-term perspective is a good way to foster a culture of clear strategy and decision-making throughout the business.
Decreased cost
Economic downturns and other challenging times can be a struggle for many businesses, where the board of directors needs to work out how to keep the business afloat while still paying staff. In family firms, however, it will often be the case that family members are willing to contribute financially to keeping the business afloat during times like these.
It may be that this involves taking a temporary pay cut, contributing some of their own finances, or pausing the payment of dividends while the company gets back on its feet. For the family behind the business, long-term business success is crucial to their financial survival, which gives more flexibility where finances are concerned.
Disadvantages
While it is clear that there are plenty of benefits to family-owned companies, they also have their downsides:
A lack of family interest
In a family business, there can be a great deal of pressure on future generations to keep the business going, even if they have no real interest in doing so. This can result in a workforce or worse, a management – consisting of family members who are apathetic, unenthusiastic and disengaged.
In any other business, it is likely that such an approach would see employees having their contracts terminated. In a family business, this is more of a challenge.
Conflict between family members
The dynamic between different family members, family (and business) history and a blurred boundary between family life and work life can all cause conflict within any family-run business. And the family connections can often make such issues difficult to resolve.
A lack of structure
Family businesses rely firmly on trust but trust alone may not be the best way. It is still vital to take rules seriously both internal rules, and external corporate law.
Nepotism
Some family businesses can fall into the trap of promoting family members to senior management roles, even when it may be clear that the individuals within these roles do not have enough education, experience or skills to fully embrace their responsibilities.
While it can be a challenge to balance family relationships and expectations with finding the right person for the job, a lack of competence at a senior level can have a huge impact on a company’s success, as well as on talent retention.
Succession planning
Research reveals that 62% of employees say they would be “significantly more engaged” with their role if they knew their employer had a clearly defined succession plan in place. However, many family business owners fail to create succession plans, be this whether they feel that it is not needed until further down the line, or because they refuse to admit that the time will come when someone else will need to take the reins.
The reality is that illness, death or even scandal can require a family business to appoint a successor in a very short space of time. Without the right plans in place, it can be very hard for a business to move forward in such an event.
While family-owned companies clearly have plenty of advantages, their very nature can also make sustaining them in the long-term a challenge. The goal for any family business owner should, then, to be clear about what the strengths and weaknesses of a family business can be, in order to determine how to ensure future success.
