Introduction to Family Businesses

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The foundations of family-owned businesses

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Introduction to Family Businesses

  1. 1. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Entrepreneurship & Family BusinessAn Introduction to Family Business
  2. 2. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED An Overview of the Course
  3. 3. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Entrepreneurship & Family Businesses are two of the most important parts of the economic map of nations.
  4. 4. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Without entrepreneurs, innovations don’t come to market leading to employment opportunities, capital creation and solutions to consumer’s needs and wants.
  5. 5. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Without family businesses, a great deal of resources and wealth would be lost to future generations because they would not have been channeled properly.
  6. 6. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Both these business types are significantly different while intimately integrated.
  7. 7. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Through this course, I will take you through a guided tour from the origins and impact of family business on the global economy.
  8. 8. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED We will cover a number of different aspects of running family businesses effectively so that future generations can be involved in the foundations built by the original founders
  9. 9. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Additionally, I will introduce you to the concept of entrepreneurship and how it interlinks with family business to help it grow, develop and innovate.
  10. 10. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED My Background
  11. 11. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED My Background Educational Background Central Michigan University – 1991  Bachelor of Business Administration - Marketing  Bachelor of Computer Science University of Michigan – 1995  Masters – Computer Systems Engineering Kellogg (Northwestern Univ.) – 1997  MBA - Marketing Professional Background  SAP America – 7 years  Cisco UK – 2 Years  emagine group – 8 years  Sit on Boards of Directors and Advisories for organizations around the world  Have consulted for companies across multiple industries and regions  Speaker at regional and international conferences on Marketing, ERP, incubation and venture capital
  12. 12. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED emagine group  Founded in 2003  Global venture development firm with investments in 15 countries across multiple industries  Since 2005, we have worked with entrepreneurs in every stage of business development from brainstorm to private equity investment both in our incubation center and as independent ventures
  13. 13. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED At emagine, we aren’t just venture capitalists, we are venture catalysts.
  14. 14. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Our Venture History Our Venture Portfolio  Fashion Houses (2)  Hollywood Movies (3)  Game Development Houses (2)  Massive Multiplayer Online Gaming Platforms (2)  Search Engine  Restaurants (3)  Manufacturing Company (2)  Furniture Company  Biotechnology Company (2)  Medical Equipment Company (2)  Telecommunications Company  Mobile Payment Provider Recent Investments  Middle Eastern Airline  2 Hotels in Europe  A Pakistani Fashion House  Hydro Electric Company  Mobile Company
  15. 15. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Our History In Venture Capital  In the past 6 years – Heard over 1500 elevator pitches – Received over 500 executive summaries – Assessed 200 business plans – Invested over USD 700 million in industries ranging from technology to fashion and publications  Current investment portfolio stands at USD 970 million  We have a special understanding of entrepreneurship and how to build successful businesses
  16. 16. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED How to Contact Me  email – khalid@emagine-group.com  cell – 0333 229 1234  Web – http://www.emagine-group.com/  Facebook – http://www.facebook.com/khalid.muhammad – http://www.facebook.com/emaginegroup/
  17. 17. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED What is a Family Business? The Different Definitions
  18. 18. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED There are 21 different definitions of a family business, each taking in different aspects and characteristics
  19. 19. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Forms of a Family Business  Sole Proprietorships  Partnerships  Limited Liability Companies (LLC)  S Corporations  C Corporations  Holding Companies  Publicly Traded Companies Worldwide, estimates of all enterprises considered to be family businesses range between 80% and 98%
  20. 20. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Family firms are different from other closely held firms because of the relationship between the shareholders and the management.
  21. 21. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Two Things That Make It Different  Family firms are differentiated by both: – Active involvement of family in firm management – Intent of family members to retain ownership of the firm
  22. 22. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Definition 1: A family business is an enterprise in which two or more family members own 15% or more of the shares, family members are employed in the business, and the family intends to retain control of the firm in the future.
  23. 23. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Another Consideration  Another aspect that must be accounted for is the influence the family has on: – Ownership – Governance – Management participation through strategic direction – Direct family involvement in day-to-day operations and/or – Retention of voting control
  24. 24. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Our Definition of a Family Business A Family Business is any enterprise in which an entrepreneur or next generation CEO and one or more family members significantly influence the firm. The influence can be managerial or Board of Directors participation, ownership control, the strategic preference of shareholders, and the culture and values family shareholders impart to the enterprise.
  25. 25. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Our Definition of a Family Business The influence can be managerial or Board of Directors participation, ownership control, the strategic preference of shareholders, and the culture and values family shareholders impart to the enterprise.  Preference – nature of involvement of family members in the enterprise  Ownership Control – rights and responsibilities family members derive from significant ownership of voting shares and the governance of the relationship.
  26. 26. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Our Definition of a Family Business The influence can be managerial or Board of Directors participation, ownership control, the strategic preference of shareholders, and the culture and values family shareholders impart to the enterprise.  Strategic Preference – risk preferences and strategic direction family members set for the enterprise through their participation in top management, consulting, board of directors, shareholder meetings, or family councils
  27. 27. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Our Definition of a Family Business The influence can be managerial or Board of Directors participation, ownership control, the strategic preference of shareholders, and the culture and values family shareholders impart to the enterprise.  Culture – collection of values, defined by behaviors, that become embedded in an enterprise as a result of the leadership provided by family members, past and present. Family unite and the nature of the relationship between family and the business also define this culture.
  28. 28. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Our Working Definition of Family Business  Ownership control (15% or higher) by two or more members of a family or a partnership of families  Strategic influence by family members on the management of the firm, whether by being active in management, by continuing to shape the culture, by serving as advisors or board members, or by being active shareholders  Concern for family relationships  The dream (or possibility) of continuity across generations
  29. 29. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Characteristics that Define a Family Business  The presence of the family  The overlap of family, management, and ownership, with its zero sum (win-lose) proposition, which in the absence of growth of the firm, render the family business vulnerable during succession  The unique source of competitive advantage derived from the interaction of family, management, and ownership, especially when family unity is high  The owner’s dream of keeping the business in the family (the objective of business continuity from generation to generation)
  30. 30. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Characteristics that Define a Family Business  The fact that the family business managers are dealing with their own money and the inheritance of their children and are not as subject to the quarterly whims of Wall Street allows for more patient capital  They will act intelligently but boldly at critical junctures, knowing that the benefit or loss will directly affect the family  That knowledge keeps family managers making decisions that steadily contribute to the family’s incremental and long-term wealth  The goal is for each generation to grow the company’s value leaving behind a stronger and better than the one they inherited  This makes them more imaginative, innovative and progressive in their decision making
  31. 31. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Family Business Worldwide Impact of Family Businesses
  32. 32. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Entrepreneurial companies often become family-owned businesses
  33. 33. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The real transition from an entrepreneurial to a family business typically happens when the children of the company founder join the business as employees.
  34. 34. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The business may continue to be an entrepreneurial company and may prefer to be known that way because owners are concerned with the perception of nepotism and lack of professionalism associated with family businesses.
  35. 35. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Once “next generation” family members join the ranks of employees and/or shareholders, the nature of the firm changes, as do its challenges and its unique competitive profile
  36. 36. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Family-owned and family-controlled firms account for approximately 90% of all incorporated businesses in the United States
  37. 37. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED That is the equivalent of 17 million family firms in the US economy today
  38. 38. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED 1/3 of all Fortune 500 companies are family-controlled and about 60% of publicly traded firms are under family influence.
  39. 39. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Most family businesses are small, but there are about 138 billion-dollar family firms in the United States alone.
  40. 40. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED 19 in France 15 in Germany 9 each in Italy and Spain 5 each in Canada and Japan
  41. 41. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED In the US, family firms account for 64% of the Gross Domestic Product – about $6 Trillion
  42. 42. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED 85% of Private Sector employment and 86% of all jobs created in the past decade
  43. 43. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED In Germany, about 80% of all businesses are family firms and employ 80% of the working population
  44. 44. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED In Spain and France, about 80% of all companies are family owned and account for 75% of employment
  45. 45. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED In Italy, India and Latin America, estimates are skyrocketing with 90 – 98% of all companies being family firms.
  46. 46. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED So as you can see, family-owned and family controlled firms have had a huge impact on the global business environment
  47. 47. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Now, many people believe that family firms are nepotistic and conflict ridden underperformers, family firms perform better than non-family firms.
  48. 48. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED 35% of the Standards & Poor 500 firms are family controlled and have outperformed non-family controlled firms by 6.65% in return on assets during the past decade.
  49. 49. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Family firms were also responsible for creating an additional 10% in market value between 1992 and 1999, compared to the remaining 65% of S&P firms.
  50. 50. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Research shows us that family firms are the primary engine of economic growth and vitality not only in the United States but in free economies all over the world.
  51. 51. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Outside of financial outperformance, families are a significant factor in the creation of new ventures.
  52. 52. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED While the venture capital industry is usually credited for its role in the growth of new ventures, it is the wealthy individuals and families in business that provide the large share of seed capital and early-stage funding for large segments of the entrepreneurial population.
  53. 53. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Of the 286,000,000 entrepreneurs worldwide who launched new ventures since the mid-1990s, only 19,000 were financed by venture capital firms, totaling US$ 59 billion.
  54. 54. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Families provided US$ 271 billion in the same period of time
  55. 55. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Drawbacks of the Family Business
  56. 56. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED While we can see a great deal of advantages with the family business, there are also a number of factors that have a negative impact
  57. 57. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Approximately 85% of all new businesses failing within the first 5 years of operation.
  58. 58. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Among the 15% that survive, only 30% are successfully transferred to the 2nd generation of founding family owners
  59. 59. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED This high failure rate amounts to the wastage of opportunities for job and wealth creation in many communities.
  60. 60. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Not all family businesses that are not passed down to the next generation go on to close their doors, but many do.
  61. 61. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The odds get worse between the 2nd and 3rd generations – 12% & the 3rd and 4th generations – 4% remain in the family.
  62. 62. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Today, there is a widespread belief that a company is prehistoric and on the road to extinction unless it is “high tech” or has grown to be a very large, diversified multinational corporation.
  63. 63. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The Myth There is a widespread myth that a company is prehistoric and on the road to extinction if it is not “high tech” or has grown to be a very large, diversified multinational corporation. Murdoch Graham Sulzberger
  64. 64. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Some Family Businesses
  65. 65. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Next Week’s Lecture
  66. 66. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Next Week  We’ll look into the family business culture, stewardship and relationships  We will also look at the different types of family businesses that are created and managed in today’s economic marketplace
  67. 67. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED

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