Family business


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Family business
Presentations By Rajendran Ananda Krishnan,

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Family business

  1. 1. FAMILY BUSINESS AND STRUCTURES Rajendran Ananda Krishnan
  2. 2. SYLLABUS Importance of family business Types, History Responsibilities and rights of shareholders of a family business, Succession in family business, Pitfalls of the family business, strategies for improving the capability of family business, Improving family business performance ngs
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  4. 4. DEFINITIONS Family business is a corporation that is entirely owned and managed by members of a single family. Family firm is a corporation that is entirely owned by members of single family. It is also known as company owned, controlled and operated by members of one or several families. Family business is one in which one or more members of one or more families have ownership, interest and significant commitment towards business. ngs
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  6. 6. CHARACTERISTICS OF FAMILY BUSINESS Family business are ideal in nature as they are loyal to the principles of the founder and thus ensure uniformity in their operations. Succession is one important decision which determines future effectiveness in terms of company operation. family business comprises of family members in business operations ensuring effective utilization of in house talent in family. Single minded dedication of family members ensures survival of family business through toughest times. ngs
  7. 7.  Effectiveness and existence of family business is determined depending on understanding persisting within the family. Family business may be comprised of one or more then one family in business operations. Family members who are not contributing or not involved in business are part of business. Family business values are reflection of values possessed and followed by family members. Members of family have legal control over business. ngs
  8. 8. IMPORTANCE OF FAMILY BUSINESS Contributing to economic development : family business play crucial role in economic development of most of the countries. Retail sector, small scale industry, and service sector are owned by family business. Spirit of entrepreneurship : family business as contributes towards development and has been successful in country like India it paves way to various families to initiate and bring up new ventures in country. Philanthropy : family business in India along with their development have also concentrated towards welfare of general public by investing on hospitals, educational institutions, construction of roads etc. ngs
  9. 9.  Trust Lowers transaction cost : partnership and other forms of business involving outsiders usually leads to conflict in long run. In case of family business as all the parties in family are affected by loss incurred in company do not involve any sought of conflict and difference in point of view arises they try and solve it internally in the family ensuring business is not affected by the same. Small, nimble and quick to react : as managing team size in family business is small compare to other form of business decision making process involves less period of time which helps to take timely decision. Information as source of advantage : as family business is private firm it is not required to take decision in accordance with pressure from other sources and strategies of business need not be revealed to outsiders of business. ngs
  10. 10. TYPES OF FAMILY BUSINESS Family owned business Family owned and managed Family business business Family owned and led business
  11. 11. TYPES OF FAMILY BUSINESS Family owned business : is a profit organization were number of voting shares, but not necessarily majority of shares are owned by members of single extended family but significantly influenced by other members of family. Family owned and managed business : is a profit organization were number of voting shares, but not necessarily majority of shares are owned by members of single extended family but significantly influenced by other members of family. In this business has active participation by one family member in the top management of company so that one or more family members have ultimate management control. ngs
  12. 12.  Family owned and led company : is a profit organization were number of voting shares, but not necessarily majority of shares are owned by members of single extended family but significantly influenced by other members of family. In this business has active participation by one family member in the top management of company so that one or more family members have ultimate management control. But in this method one member has major influence on business activities who in charge of regulating activities of business and members of family business. ngs
  13. 13. 3 CIRCLE MODEL OF FAMILY BUSINESS Ownership Family Business
  14. 14. 3 CIRCLE OF FAMILY BUSINESS Business system : comprises of start up, expansion, formalization and maturity of business. Family system : young business family, entering business family, working together etc. Ownership system : controlling owner, sibling partnership, cousin consortium. ngs
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  16. 16. GOVERNANCE OF FAMILY BUSINESS There are three components to governance of family business :1.Perodic assemblies of family2. Family council meeting : if the size of the family is small in size than members of family can meet on frequent basis, when the operation of the family business expands geographically each team has to choose in representative for every unit who on behalf of every area can meet on regular basis to decode on plans, create policies, and strengthen family business communication. ngs
  17. 17.  Family constitution : family policies and guiding vision and values that regulate members relationship in business. Developed plan may be detailed or simple in nature but every family is benefited by the same. ngs
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  19. 19. BENEFITS OF CONDUCTING FAMILY ASSEMBLY OR COUNCIL MEETING Develop clarity on roles, rights and responsibilities of family members. Encourage members of family, family employees and owners family to act responsibly towards the family and business. Regulate appropriate family and owner inclusion in business discussion. ngs
  20. 20. DUTIES PERFORMED BY FAMILY COUNCIL MEETING Plan assembly meetings, which otherwise has to be arranged by CEO in company. discuss current business, ownership, family issues and keep family informed about the issues. help family reach decisions and collectively focus on attainment of single goal. Keep the board of directors informed about family views on company and keep in touch with the board about key business policies and plans. Develop plans and policies in line with the board, that regulate family activity with business. ngs
  21. 21.  Try avoiding issues in family while seeing that key family goals are satisfied. Develop loyal, informed and contributing family shareholders. Scout the family for business talent. Create educational events to encourage education of family members towards family business. Plan family social gatherings and rituals which help to create healthy, harmonious relationship within the family. ngs
  22. 22. REASONS FOR CONDUCTING FAMILY BUSINESS planning employment standards for next generation Career development policies for family employees Family employee compensation Succession process, including retirement ages Ownership agreements which comprises of buy and sell agreements dividends ngs
  23. 23. HISTORY OF FAMILY BUSINESS History of family business refers to reason why business came into existence, vision and mission of company, people contributions towards success of business and contribution of business towards development of society on the whole.REASONS TO CREATE HISTORY OF FAMILY BUSINESS1. Founders vision and mission : refers to reason why business came into existence, operations of company under various leadership and insight about founder and his vision and mission. ngs
  24. 24. 2. Historical accuracy : without valid information about family business customers, employees of business may be biased by wrong information through other sources about purpose of business and its contribution towards society to avoid these problems details of business should be documented on timely basis.3. Honouring long time employees : long-time or retired employees who have contributed towards success of family may have feeling that that efforts towards business have been forgotten. If proceedings of business are recorded in form of document past employees of company develop form of belongingness towards company. ngs
  25. 25.  Thanking customers and vendors : maintaining good relationship with customers and vendors specially the ones who have supported during critical situation is very important. Owners by documenting these peoples contribution get way to publically thank these parties contribution. Background for the uniformed : new hires, potential clients, bankers and investors may not know the companys background during which documented data of company will suffice to their needs. ngs
  26. 26. BENEFITS OF HISTORY OF FAMILY BUSINESS Interdependence between company and community is documented as is the owners individual contribution and involvement in community affairs. Succeeding family members have valid resource from which they can rely on for suggestion to overcome persisting problems. Documenting companys contribution and commitment to the community builds sense of confidence among clients, potential clients which helps in strengthen relationship between business and key individual related to the business. ngs
  27. 27.  Content created for books can be recreated for other media including company brochure, websites, press release, news letters etc. Family business that create quality hand book will always be valued and treasured. ngs
  28. 28. RESPONSIBILITY AND RIGHTS OF FAMILY SHAREHOLDERS Be knowledgeable about company operations ( products, services, locations top managers, industry, competition, measure of performance ) Have information about basic company finance, and be able to read and ask questions about the income statement and balance sheet of their company. Attend shareholders meeting. Understand board member qualification and participate, in screening of board members. Constructively question management and offer suggestions to management. ngs
  29. 29.  Publically support management decisions Keep appropriate company information in strict confidence and recognize that shareholders are not entitled to all company information on demand. Where possible and useful, generate business leads. Try and provide additional investment capital. ngs
  30. 30. Expectations of family shareholders from managers of business Timely information on company strategy, important organizational changes and company’s basic financial status before information being released to general public. Openness by company board and management to shareholders on the above mentioned information. Ability to participate in the election of board members. Fair policies that protect shareholders interest but also requires their cooperation and risk taking. Acceptance economic performance by the company, including reasonable dividends and capital gains. ngs
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  32. 32. SUCCESSION IN FAMILY BUSINESS1. First family succession plan, then business succession plan : family business plan must recognize and accommodate the needs, goals and objectives of each member of family. Family succession plan has to be developed first as if business plan is designed in advance it proves to be difficult for owner to coordinates goals of family members towards business. ngs
  33. 33. Family business plan should include following dimensions strategies to put business interest ahead of family business. Emphasise merit over family position Income for working members of the family and shareholders. The business environment during transition Treatment of loyal customers Tax consequences. ngs
  34. 34. 2. Family first business or business first family : important issue to be determined before beginning family succession plan is whether yours is family first business or business first family. It is often seen that most of the business fail to succeed when managed by second and third generation of business.3. Succession management : business families take advice of business advisory board who suggest on eligible person for transition. Advisory board are not experts in managing business but are consultants who suggest strategies for effective succession management. ngs
  35. 35. 4.Business valuation : may not be formal written report but is required as part of annual strategic planning process. Reasons for valuing family business are as follows : Buying or selling shares to employees Retiring or selling to other family members Planning gifts for hires Anticipating estate tax problems Providing adequate key man insurance coverage Tracking of business plan towards achievement of results. ngs
  36. 36. 5. Bur or sell agreement : is used to transfer share owownership for buy and sell agreement. This agreement is established between related parties and shareholders in family. It is an agreement to transfer a business interest to hires for less than fair market value The agreement is real ; it is part of bona fied business arrangements ngs
  37. 37. KEY POINTS TO BE CONSIDERED BEFORE SUCCESSION PLAN Quick decision on business plan process will provide more alternatives to the process. A child than having right to inherit business should have ability to manage family business. Childrens must be encouraged to out of family business so that they have better insight about competition persisting in market and accordingly develop strategies for development of own business. Establishing an outsider as advisor for family business may prove to be risky for which experts in succession planning should be chosen from management team with in the family business. ngs
  38. 38.  Conducting family meeting on regular basis will help establish and keep the family focused on rules, goals and objective Develop non business interest Develop financial resources that are independent of business Evaluate component successor : which requires to assess whether person to be chosen as successor has potential to lead the business, will he be accepted by all members in family, check his willingness to control the business. Person who will be chosen as successor should be give an appropriate standard to be achieved which will help him deign effective strategy and have yardstick to compare his actual performance with expected one. ngs
  39. 39. WAYS TO EASE TRANSITION PROCESS Hire most competent advisors ( attorneys, accountants, financial planners, and business consultants for succession planning. Succession planning is complicated process and requires advice of expertise on the same. Business valuation : when business transition takes place it leads to change in controlling hands and accordingly even present situation may change in business. Depending on the purpose of the valuation, cost vary accordingly. Usually business owners value family business for purpose of strategic planning of their business. ngs
  40. 40.  Funding to be considered as part of succession plan : it is important to understand that business may need to grow significantly in order to pay the transition cost which includes which includes tax , insurance, professional advisors. Funds available for expansion should be retained in the process for transition. ngs
  41. 41. PITFALLS/ DEMERITS /PROBLEMS OF FAMILY BUSINESS lack of focus and strategy : family business initially perform in effective manner but at later point of time when aspect of transition comes into picture family business tends to lose its track from its actual vision . Lack of professionalism : data maintenance practice in family business usually will not be in par with that of private companies which proves to be major hurdle during decision making process. Difference in educational levels of family members which drives some people to follow obsolete method while others may focus on implementing latest technology and practices in business. ngs
  42. 42.  Rivalries between sibling in company which may end up in separation of family business. Difference of attitude towards employees in company Inability to separate family interest from the interest of business Short term approach towards business , leading to an absence of investment in employees and product development. Insensitivity towards customers due to uncompetitive market resulting in weaker market skills. ngs
  43. 43. APPROACHES TO AVOID CONFLICTS IN FAMILY BUSINESS Coping approach : which involves adopting to negotiation among family members try and resolve conflict and agree on common terms. Arbitrary approach : in this approach the elder person of the family will be allotted with the power to frame rules and control business activity. But this approach has not proven to be successful as most of the time elder person in family may not prove to be effective manager for business. Managed approach : this approach states that person who has ability to maintain better relationship with key individuals of business and have ability to understand business and manage the same should be appointed as lead person for the business. ngs
  44. 44. STRATEGIES FOR IMPROVING CAPABILITY OF FAMILY BUSINESS Inculcate professionalism in family firms : professionalism in business refers to retaining of effective talent in company, proper documentation of business transaction, planning and implementation of efficient strategies for success of business. Replenishing entrepreneurship : basically refers to expand existing business and be role model for their families to open business of their own. Good management : refers to proper communication of information among family members about present business and utilization of available resources in business. ngs
  45. 45.  Ability to change : business environment is dynamic in nature for which business have to renew their strategies on regular basis to meet demand of changing situation to compete in market. Have strategic plan : situations of business are unpredictable in nature in nature so present plans of business should be designed keeping in point about future strategy in picture. Have active board of directors : refers to have competent employees in business who can assess future requirements and accordingly management business resources and take decisions in business. ngs
  46. 46. IMPROVING FAMILY BUSINESS PERFORMANCE Core value of family business act like yardstick for family members to act accordingly towards business. Core values are comprised of training of family members newly entering family business, future, finance and accountability of these members towards the business. Impact of family values on business performance : when members of family are clear about business expectation they can formulate their strategy well in advance which helps them enhance quality of their performance towards business. Training : members of family business should be trained about thee family values, competition existing in market and skills required to be possessed by in order to have competitive advantage in business market. ngs
  47. 47. MANAGEMENT DEVELOPMENT PLAN IN FAMILY BUSINESS Management development plan is generated by top management people in company. The purpose is to predict staffing needs and plan in for career growth and development for family as well as non family members in business. Management development plan identifies the key jobs in the current company and career aspirants of all key mangers. It predicts what jobs will or should be vacant in future. It has to focus on balancing development of hires in business and encourage protective teamwork. ngs
  48. 48.  Who should create the plan : business plan should be created by owner manager, human resource person and top managers from key functions in business ngs
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  50. 50. CREATING A BUSINESS PLAN Draw companys five year organization chart. circle position of future organization chart, at all levels and the most critical ones for the business. List the names of individuals in those jobs, their age now and in five years. List set of employees who may retire and who are planning to leave organization in future. What is the age of owner manager and he should be doing in future five years. What is the age of successor and where should he or she be in five years. What is best career path for the person in next five years What policy or policies ca be derived from these discussions ? What should be communicated to the successor , manager and employees. ngs
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  52. 52. FAMILY REUNION GAMES TO PROMOTE FAMILY VALUES Family reunion basically refers to coming together of family member for occasion ,event in family. These kind of events give platform to family members to have discussion on various matters in relation to family and family business.. Family bonding : is crucial component of every successful family. It leads to family communication system that encourages growth and prosperity for business while building good bonding among family members in business. Family values : influence the way in which family business is managed and operates. Ethics of family business are shaped by values of the family. ngs
  53. 53.  Family religion : plays important role in operation of business. Business may not prefer market in certain products which their religion do not permit for. Family secrets : may be in form of core values, ethics and beliefs followed by family members of business which is not preferred being revealed to general public or media channels. Family rules : are implemented in business and are to be followed people in charge and family members of the business. These rules regulate activities of members and family business on the whole. ngs
  54. 54. RULES TO SAVE FAMILY BUSINESSRule 1 Formulate policy frame work rulesRule 2 Families must serve the businessRule 3 Future outlookRule 4 Accountability addressing the issue Addressing the issueRule 5Rule 6 Creating shared vision
  55. 55. RULES TO SAVE FAMILY BUSINESS Formulate policy framework and rules : succession plan is one of the important aspect for formulating policy framework and rules. Succession plan should outline exactly how the transfer of leadership will occur and should establish the criteria that hires must meet before moving to role of leadership. Families must serve the business : members of the family should give their best performance as per the expectation of the company. Members of the family business should perform as effectively as non family members of the business. ngs
  56. 56.  Future outlook : business firms should have proper core values which prove to be yardstick for performance of business. Family members should believe that present strategy prove to be obsolete in long run for the same company should be flexible in nature in terms of adjusting to changes taking place in business environment. Accountability : should be one of the major criteria for transition process in family business. Family members should be made clear about what is expected from them by family business and they are required to prove their efficiency through effective performance. They should be responsible for decision taken by them during time of their leadership. ngs
  57. 57.  Addressing the issue : family business who focus on improving their overall company performance should take structured approach through addressing the issue by careful examination of its core values. Members of the family are required to evaluate their core value and understand their relevance in relation to success of business. Creating shared vision : it refers to communicating vision , objective of the company to family and non family members of business. Communication of information takes place through various sessions of meeting in company. All the family members should have common and shared vision towards goal attainment in company. ngs
  58. 58. THANK YOU