A family business is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business
A family business is a business in which one or more members of one or more families have asignificant ownership interest and significant commitments toward the business’ overall well-being.In some countries, many of the largest publicly listed firms are family-owned. A firm is said tobe 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 othershareholders.Some of the worlds largest family-run-businesses are Walmart (United States), Samsung Group(Korea), Tata Group (India) and Foxconn (Taiwan).Contents 1 Definition 2 Problems 3 Structuring 4 Scenarios 5 Succession 6 Success 7 Examples of family businesses 8 See also 9 References 10 External linksDefinitionIn a family business, two or more members within the management team are drawn from theowning family. Family businesses can have owners who are not family members. Familybusinesses may also be managed by individuals who are not members of the family. However,family members are often involved in the operations of their family business in some capacityand, in smaller companies, usually one or more family members are the senior officers andmanagers. Many businesses that are now public companies were family businesses in India.Family participation as managers and/or owners of a business can strengthen the companybecause family members are often loyal and dedicated to the family enterprise. However, familyparticipation as managers and/or owners of a business can present unique problems because thedynamics of the family system and the dynamics of the business systems are often not inbalance.ProblemsThe interests of a family member may not be aligned with the interest of the business. Forexample, if a family member wants to be president but is not as competent as a non-family
member, the personal interest of the family member and the well being of the business may be inconflict.Or, the interests of the entire family may not be balanced with the interests of their business. Forexample, if a family needs its business to distribute funds for living expenses and retirement butthe business requires those to stay competitive, the interests of the entire family and the businessare not aligned.Finally, the interest of one family member may not be aligned with another family member. Forexample, a family member who is an owner may want to sell the business to maximize theirreturn, but a family member who is an owner and also a manager may want to keep the companybecause it represents their career and they want their children to have the opportunity to work inthe company.StructuringWhen the family business is basically owned and operated by one person, that person usuallydoes the necessary balancing automatically. For example, the founder may decide the businessneeds to build a new plant and take less money out of the business for a period so the businesscan accumulate cash needed to expand. In making this decision, the founder is balancing hispersonal interests (taking cash out) with the needs of the business (expansion).Most first generation owner/managers make the majority of the decisions. When the secondgeneration (sibling partnership) is in control, the decision making becomes more consultative.When the larger third generation (cousin consortium) is in control, the decision making becomesmore consensual, the family members often take a vote. In this manner, the decision makingthroughout generations becomes more rational (Alderson, K., 2011).ScenariosBalancing competing interests often become difficult in three situations. The first situation iswhen the founder wants to change the nature of their involvement in the business. Usually thefounder begins this transition by involving others to manage the business. Involving someoneelse to manage the company requires the founder to be more conscious and formal in balancingpersonal interests with the interests of the business because they can no longer do this alignmentautomatically—someone else is involved.The second situation is when more than one person owns the business and no single person hasthe power and support of the other owners to determine collective interests. For example, if afounder intends to transfer ownership in the family business to their four children, two of whomwork in the business, how do they balance these unequal differences? The four siblings need asystem to do this themselves when the founder is no longer involved.The third situation is when there are multiple owners and some or all of the owners are not inmanagement. Given the situation above, there is a higher chance that the interests of the two sons
not employed in the family business may be different than the interests of the two sons who areemployed in the business. Their potential for differences does not mean that the interests cannotbe aligned, it just means that there is a greater need for the four owners to have a system in placethat differences can be identified and balanced.These three scenarios can be mitigated by following the guidelines of TMP, or "The MariaPrinciple"SuccessionThere appear to be two main factors affecting the development of family business and successionprocess: the size of the family, in relative terms the volume of business, and suitability to leadthe organization, in terms of managerial ability, technical and commitment (Arieu, 2010). Arieuproposed a model in order to classify family firms into four scenarios: political, openness,foreign management and natural succession (See Succession planning).One of the largest trends in family business is the amount of women who are taking over theirfamily firms. In the past, succession was reserved for the first born son, then it moved on to anymale heir. Now, women account for approx. 11-12% of all family firm leaders, an increase ofclose to 40% since 1996. Daughters are now considered to be one of the most underutilizedresources in family businesses. To encourage the next generation of women to be valuablemembers of the business, potential female successors should be nurtured by assimilation into thefamily firm, mentoring, sharing of important tacit knowledge and having positive role modelswithin the business (Alderson, 2011).SuccessSuccessfully balancing the differing interests of family members and/or the interests of one ormore family members on the one hand and the interests of the business on the other hand requirethe people involved to have the competencies, character and commitment to do this work.Family-owned companies present special challenges to those who run them. The reason? Theycan be quirky, developing unique cultures and procedures as they grow and mature. Thats fine,as long as they continue to be managed by people who are steeped in the traditions, or at leastable to adapt to them.Often family members can benefit from involving more than one professional advisor, eachhaving the particular skill set needed by the family. Some of the skill sets that might be neededinclude communication, conflict resolution, family systems, finance, legal, accounting,insurance, investing, leadership development, management development, and strategicplanning.Ownership in a family business will also show maturity of the business. If all the shares rest withone individual, a family business is still in its infant stage, even if the revenue is strong.[
The changing face of family business in IndiaArticle | 1 February, 2002 05:21 PM | By Sumant BatraThe centre of the Indian social identity is the family. In many cases, the family not only tells youwho you are but also what you do. Thus, family businesses are not merely economic structures;for most business community individuals, the business is the source of their social identity.Furthermore, the family and the business are not treated separately. The boundaries of essentiallytwo different systems, family and business – with distinctive rules governing their respectivebehaviours – overlap within the business house. While the exclusive dynamics of family cultureand relationships have been imposed on the internal logic of managing a business enterprise,business relations have been allowed to play a role in governing relationships within the family.The result has not always been a happy one. As professionally managed companies enter themarketplace, bringing with them a high degree of competitiveness, the Indian family managedbusiness (FMB) finds itself under threat. A series of vital choices over its future role confront theIndian FMB if it is to thrive, perhaps even survive. Given that in India, more than 70% ofbusinesses are family-owned, the problem is alarming. Therefore, while Indias business housescope with the inevitable need to bring about rapid strategic, operational and financialtransformation in their business, they need to add one more item to the agenda: rewriting the roleof the family in business in the given present economic scenario.The next generationThe new generation of entrepreneurs is playing a significant role in changing the face of FMBsin India. Scions in their 20s and 30s equipped with skills obtained from foreign businessuniversities and professional institutions have joined the family business, impatient to implementchanges to their businesses on a par with international standards and to compete with the best. Inmany cases, their approaches conflict with the way the family has managed its business untilnow. A further complication is the heiress factor: daughters and sometimes their husbandsstaking their claim for a share of management, a paradign relatively new to the male-centricfamily business.Familial splitsThese factors are translating into a threat for the Indian FMBs, resulting in fracturing of thegroup, sapped synergies, abandoned economies of scale and crises of leadership. With 62% ofthe countrys 50 largest business houses already having entered the second or third generation,splits are perhaps becoming inevitable. This trend started with a prominent split in the Dalmiafamily in 1952 and became noticeable in the 1980s when the Oswal, Kothari, Sri Ram, Singhaniaand Bharat Ram families split. In the 1990s, it became a regular phenomenon with splits in thefamilies that controlled some of the biggest corporations in the country: Ranbaxy, Chhabaria,Apollo, Mittal, Walchand, Bhartia, Thapar, Bangur and Bakeman.FMBs in India are realising that the ostrich principle does not work – ignoring a problem wontmake it go away. Forcibly preventing conflicts that may lead to splits will not serve either thefamily or the business well. What is required instead is succession planning within the ranks soas to prevent internecine wars or morale-sapping struggles for power. For instance, the Rs800
crore* (€185 million) Dabur India group appointed management consultants a few years ago tochart out a strategy for its inheritors.In India, splits have goaded growth. The trend indicates that groups that have split outperformedthose that have not. When the three Goenka brothers split in 1979, the sales of each truncatedgroup were Rs70 crore. From this modest beginning, RP Goenka constructed a Rs6000 croregroup and GP Goenka assembled the Rs2500 crore Duncan Group. The third brother did not doas well comparatively, but the sum of the parts is definitely more than it would have been had thebrothers stayed together.Management of the fall-out of the splits has not been an Indian business familys stronghold. Norhas a contingency plan been kept in mind for carving out the family empire in such aneventuality. When the split is primarily a result of conflict within the family, it is not possible tocreate alternative avenues of growth for different members without endangering the core group.Thus, the protector becomes the destroyer. A striking example of this is the division in the ModiGroup of companies, one of the countrys largest industrial houses. A settlement drawn up in thelate 1980s to divide the various group companies between two groups of the Modi family hasstill not been successfully implemented – litigation continues to date. The two groups, whichhave since split further into sub groups, are backing out of the settlement, claiming bigger slicesof the pie in the profit making companies belonging to the group – and no one is willing to ownthe companies facing rough weather.Money mismanagementAnother problem that has plagued Indian FMBs is money mismanagment. Indian FMBs havealways focused too much on money. In India, money is not power, but money can buy power.Most businessmen are extremely sensitive to the social and political environment and take carenot to be seen as being powerful. Politicians, administrators and businessmen in Indian societycongregate in mutually exclusive social circles. Power, thus, has little attraction.Though money is a great attraction in Indian family business, there has never been focus onmoney management. In smaller businesses, short term gains and profits influence businessstrategy. There is no planning for the future, no recirculation of money and no investment for thefuture.In larger businesses, the problem is even more serious. The bigger projects require borrowingfrom public financial institutions and banks. Traditionally, the project promoters are required tocontribute about 20% towards the cost of the project. The balance comes via public financialinstitutions and banks, and from the public at large in lieu of equity offered to them. Though thestake is only 20%, the control on money is virtually 100%. The approach is to run the entirebusiness at the risk of the 80% that comes from the outside. Very often, the promoters take awaytheir 20% as soon as the disbursements are made by the financial institutions. This 20% and themajor chunk of the remaining 80% is siphoned away or sometimes, even legally, poured intoother privately-held family businesses. In some extreme cases, the money meant for workingcapital is even used to provide luxuries to the promoters and to finance their and their familysoverseas holidays. Needless to say, there is no contingency plan. Thus, the businesses are very
vulnerable. In such a scenario, even a non-event such as a modest shift in tax policy or variationin demand for a product can cause a major setback to the business.Possession and emotionIt is quite natural for families in business to be possessive and emotional about their business andassets. Over the years, a strong bond is woven between the family and business. Apart from thefact that the familys social standing becomes linked with its business, family members also see itas a symbol of the older generations that struggled to build the business.Unfortunately, this emotional tie can only end up working to their disadvantage. For instance, ifa business, despite possessing the potential to do well, is not faring well for various reasons (suchas lack of adequate funds, loss of creditors confidence in promoters, mismanagement), thepromoters are not prepared to walk out to make way for new management or even induct anotherpartner who is willing to bring in money. The reason for this behaviour is that they can notcomprehend a situation of sharing business with an outsider.When companies with an eroded net worth approach the Board for Industrial and FinancialReconstruction (BIFR – a body of experts set up under the Sick Industrial Companies [SpecialProvisions] Act, 1985), seeking measures for their revival, often every effort of the BIFR toexplore revival by change in management is resisted.However, the professionally-managed companies are realising the need to be more realistic. MrParvinder Singh, the CEO of Rs1261 crore Ranbaxy Laboratories has been quoted to say,"Tomorrow, if I am not capable of handling the company, I had better pull out. Being the highestshareholder I will be the biggest loser if the company suffers because of me".Mudslinging and criticismTraditionally, creditors have always looked upon family businesses with suspicion. Yet, theycannot help but finance them as they form a major chunk of Indias economy. Unfortunately,they have taken the failures of FMBs as a matter of course. They have adopted a very passiveapproach and remained mute spectators to family disputes. This policy of washing their hands ofthe problem -– terming it as an internal family issue – has faced criticism. No initiative has beentaken by them to deal with the problems related to this phenomenon of family business. Onereason for this has been to avoid accusations of taking sides within the family. Since most of theleading financial institutions are publicly held and the banks are nationalised (with thegovernment seen as their controlling body), maintaining a safe distance from internal disputes isseen as a compulsion.There have been instances of mudslinging against the financial institutions that have comeforward to help. One such case is the Modi family dispute. There, the chairman of IndustrialFinancial Corporation of India (IFCI) was appointed as a mediator to implement the settlementreached between the two Modi family groups wherein various group companies were dividedbetween them. Since about Rs2000 crore of public funds were at stake, the chairman of IFCIagreed to act as a mediator. When he gave his decision, one group challenged it in court, makingserious allegations of bias against the chairman of IFCI. This eventually dragged him to courtand forced him to file affidavits.
The up-sideA stage has been reached where the family owned businesses have become the least preferredemployers. People perceive uncertainty in career development in family owned businesses, alevel of transparency that is below average and think the businesses compare poorly onleadership qualities. However, the fact remains that FMBs have been the vanguard of theeconomy for about a century. The family business dominates the private sector in terms ofnumber and performance. It has grown faster than the rest of the economy and forms themajority of Indias industry in terms of numbers, investments, profits and most of the otherquantifiable numbers. The private sector has rarely taken pride of place in the literature of Indianindustry and its achievements were barely mentioned in the planned economy regime thatdominated Indian industrial growth ever since India attained its independence.Government policy has kept the private sector out of most critical sectors of the economy and itscontribution to national industrial and service products has not been proportional to its numbers.The large infrastructure and core industries sectors remain largely the monopoly of thegovernment-funded public sector. These companies are much larger than the family managedbusinesses and perform very poorly compared to private sector businesses. The public sector hasbeen marred with controversies and surrounded by corruption. The public sector includes someof the largest and most prestigious sectors in oil, gas and other core industries. However, theyhave been termed unprofessional industries because they have not been able to exploit the largeresources at their disposal. Too much government control has added a bureaucratic touch to therunning of these companies.Morale booster Recently, there has been a serious rethinking regarding the potential of theprivate sector companies. There is a realisation that the countrys infrastructure can be managedbetter by some of the leading companies in the private sector. FMBs like the Ambanis, Lalbhais,Ruias, Premjis and Bajajs are considered to be Indias best managed business houses and havethe ability to handle the infrastructure and core industry much more professionally than if run bythe government.As a result, the Government of India has recently reviewed its industrial and investment policyand has decided to disinvest its equity and control of many public companies. Already, theGovernment has divested its share holding in its Rs1000 crore Bharat Aluminium Company Ltd,one of the largest aluminium producing companies, in favour of the Aggarwal-controlled Rs3000crore Sterlite Group. Air India, the state owned international carrier; SAIL, the largest steelmanufacturing company; Indian Oil Corporation; Oil and Natural Gas Company; and other coreand infrastructure industries owned by the Government of India, both profit and loss making, areat an advanced stage of disinvestment. The state governments are also selling off their stake instate-controlled electricity boards to the private sector. Undoubtedly, this is a big morale boosterfor the FMBs.StrengthsIndian cultural values give Indian companies a markedly different flavour. The differencereflects the hierarchy and values of the controlling family. Indian FMBs are very imageconscious. The image of the business directly reflects on the familys reputation and their socialstanding. Similarly, the familys social standing provides added respectability and advantages to
the familys business. Therefore, the two biggest strengths of Indian business families areunderstanding of the environment and image.Another strength is the ability to settle disputes without resorting to litigation. The communitylooks poorly on families that take disputes to court or outside the community. There is greatpressure from the community to settle disputes through negotiations and if necessary througharbitration by a community network of associates, friends and relatives. Take the followingclassic, true example. A dispute arose between two members of the National Stock Exchange ofIndia, both from the same family. In accordance with the Stock Exchange Rules, the dispute hadto be solved by way of arbitration. A retired Judge of the High Court was appointed as arbitrator.Both the parties however, approached the arbitrator with a request to appoint a panel of their fourcommon relatives to settle their dispute and requested that based on their decision, an awardbased on settlement may be passed. The four relatives gave a decision and the arbitrator passedan award based on settlement.Western research indicates that 70% of firms fail to reach the second generation. Some of theselosses are due to lack of successors. In India, however, things are very different. There are fourmajor stake holders in the family firm: (i) the family members who own the firm and see it as asource of identity, income and social bonding; (ii) the managers who see the firm as the source ofprofessional advancement and livelihood ; (iii) the workers who see it as a source of stability andlivelihood; and (iv) the rest of the society, which sees it as a social and economic institution. Thecontinuance of the firm is seldom in debate among those connected with it. Even if the familymembers want to shut it down and liquidate its assets to get their shares, other stake holders dontlet it happen.A need for changeThe evolutionary context of business is crying for the involvement of the Indian businessfamilies to change. A typical family business goes through four stages in its development:entrepreneurial; functional; process driven; and market driven. Still mired, for the most part, inthe first and second stages, the Indian family business house must, of necessity, progress to thenext two phases. And more importantly, it is the family that must initiate and implement thechanges. The family must appreciate the distinction between the environment of two separatesystems and withdraw to prevent conflict between the rules and expectations for behaviour ineach system. The owner is in the process of changing its role to goal setting and governancerather than being involved in day to day operations. For instance, in 1997 Vikram Lal set aprecedent at the Rs1000 crore Eicher Group by renouncing all his executive posts, despiteholding about 70% of its equity. Instead, he chose to head a supervisory board that was to guide,but not control, the group companies. The Goenkas of Rs6000 crore RPG Enterprises have alsoshifted their focus to governance and not to day to day running of the organisation. Anil andMukesh Ambani, the sons of Rs10, 000 crore Reliance Group CEO Dhirubhai Ambani, prefer touse their expertise not to overrule the ideas and efforts of their managers but to use it as a tool forcommunication between intellectual equals, to weigh the merits of managerial decisions.Forward-thinking patriarchsThis change in traditional business methods was influenced by a few forward-thinkingpartriarchs in the 1970s. At that time, they began sending their sons to business schools in the
US. This move not only earned respect from their executives, but it also began a process of muchneeded professionalism. Today, the strategy is being extended to another level. The executivesrespect can not be earned by owning money and being the boss. Rather, the families are expectedto know a lot about their industry. For example, it is a point of honour for a family member ofMafatlal, one of largest family managed textile industrial houses, to walk around the weavingshed discussing counts with the master. Rajiv, Rahul Bajajs son, worked on the shopfloor of acompetitor for a year, gathering work experience before joining the family-controlled BajajAuto. It can go even further: Rahul Bajaj went to the extent of living in the factory complex. Noone expects the executive to out-do or out-know his employees, but it certainly helps himunderstand his business and the view point of his employees.Motivation for changeGiven these new priorities, a crucial question for the business family will, of course, be that ofmotivation. What priorities need to change? The traditional business house has always pursuedgrowth, finding finance for the growth, enhancing the worth of its portfolio, maximising its ownreturns and establishing firm ownership control. Threatened by survival, however, theseobjectives can no longer be primary. Instead, pride of place must go to the construction of anentrepreneurial culture, the management of human resources and the orchestration of competitiveadvantages. The new roles will flow automatically from the pursuit of these changed objectives.Thus, the focus needs to shift from what to do to how to do it.Even though the past few years have been among the most difficult ones in recent history, moreentrepreneurs than ever before are feeling confident enough to embark upon new ventures. Alarge and growing number of new family groups have appeared on the corporate landscape in the1990s. Many of these are jostling with the old guard for a leadership position. Fresh blood suchas the Nambiars (BLP), Guptas (Lloyd Steels), Jindals (Jindal Strips), Singhs (Ranbaxy), Mehtas(Torrent), Motwanis (Ratnagiri), Dhoots (Videocon) and Premji (Wipro) have elbowed out theformer stalwarts such as the Dalmias and Walchands. The robustness of the new groups,combined with the unmistakable vitality in at least a dozen of the older ones, is proof enough thatfamily business in India is not just alive, but kicking.20 challenges faced by a family owned business17 08 2006Every business organization has a unique set of challenges and problems. The family business isno different. Many of these problems exist in corporate business environments, but can beexaggerated in a family business.Family business go through various stages of growth and development over time. Many of thesechallenges will be found once the second and subsequent generations enter the business.A famous saying about family owned business in Mexico is ―Father, founder of the company,son rich, and grandson poor‖ (Padre noble, hijo rico, nieto pobre). The founder works and buildsa business, the son takes it over and is poorly prepared to manage and make it grow but enjoysthe wealth, and the grandson inherits a dead business and and empty bank account.
Prepare now and help your grandson avoid the poorhouse.20 challenges for the family business 1. Emotions. Family problems will affect the business. Divorce, separations, health or financial problems also create difficult political situations for the family members. 2. Informality. Absence of clear policies and business norms for family members 3. Tunnel vision. Lack of outside opinions and diversity on how to operate the business. 4. Lack of written strategy. No documented plan or long term planning. 5. Compensation problems for family members. Dividends, salaries, benefits and compensation for non-participating family members are not clearly defined and justified. 6. Role confusion. Roles and responsibilities must be clearly defined. 7. Lack of talent. Hiring family members who are not qualified or lack the skills and abilities for the organization. Inability to fire them when it is clear they are not working out. 8. High turnover of non-family members. When employees feel that the family ―mafia‖ will always advance over outsiders and when employees realize that management is incompetent. 9. Succession Planning. Most family organizations do not have a plan for handing the power to the next generation, leading to great political conflicts and divisions. 10. Retirement and estate planning. Long term planning to cover the necessities and realities of older members when they leave the company. 11. Training. There should be a specific training program when you integrate family members into the company. This should provide specific information that related to the goals, expectations and obligations of the position. 12. Paternalistic. Control is centralized and influenced by tradition instead of good management practices. 13. Overly Conservative. Older family members try to preserve the status quo and resist change. Especially resistance to ideas and change proposed by the younger generation. 14. Communication problems. Provoked by role confusion, emotions (envy, fear, anger), political divisions or other relationship problems. 15. Systematic thinking. Decisions are made day-to-day in response to problems. No long- term planning or strategic planning. 16. Exit strategy. No clear plan on how to sell, close or walk away from the business. 17. Business valuation. No knowledge of the worth of the business, and the factors that make it valuable or decrease its value. 18. Growth. Problems due to lack of capital and new investment or resistance to re- investment in the business. 19. Vision. Each family member has a different vision of the business and different goals. 20. Control of operations. Difficult to control other members of the family. Lack of participation in the day-to-day work and supervision required 21. TACKLING CRISIS OF FAMILY OWNED BUSINESSES 22. Most family owned businesses face a sobering reality the odds are stacked against their long term success. Around 90% of family-run businesses do not survive as a single entity beyond the third generation worldwide. A similar trend has been seen in India as well, as
ambition, greed and aspiration of the newer generation leads to family feuds, resulting in disintegration.23. Things are hunky-dory in the family and business prospers while the patriarch is alive, and is calling the shots. Since he is the head of the family, the business is run professionally enough, with few bickering by the other members.24. The risk to the business comes from within the family, usually when it migrates to the second or third generation. Things begin to change with new elements coming in, and outside influences. It may be something to do with the education or ambition of the new generation, experts say.25. If the head of the family views each member of the family (sons) equally and delegates equal responsibility after a consensus is reached, then matters stay is control.26. To hold the family together and be involved in business at the same time, many family businesses have devised a unique model of floating a holding company. Like in the case of Swedenâ€™s Wallenberg empire, which is governed by the familyâ€™s holding company which holds controlling or large equity stakes in leading Swedish multinational companies such as ABB, Scania and Ericsson. In India, a similar example is Tata Sons where Ratan Tata is the chairman of the holding company, while all other businesses are run by professional managers.27. But if the scion of the family decides to carve out a bigger role for himself he may decide to be at the helm or become involved in the business. In this case, the company should put in place an independent assessment process to evaluate whether the family member (be it the son of the patriarch) can fulfill the role, as desired by the organization. Otherwise, it should get a professional.28. But what happens in cases where there is no professional management structure, or a clear succession plan has not been laid down.29. A good example is Thermax where Anu Aga handled the succession issue successfully when her husband died suddenly.30. Sometimes, complications arise because of the women in the family. The environment in the family may get vitiated if the ladies of the house stay together, and the seed of discontent is sown if one of them feels that she has been ignored. A way out in this case is that the family sets up a governance council to understand the needs and aspirations of each family member, and how these can be fulfilled in a fair manner.31. The Murugappa family in the south has stayed together for several years because of its chairman, MV Subbiah which handled both family issues and governance very well. He created a Murugappa Corporate Board, quit as CEO and became a mentor-director, placing an ombudsman-like role ensure that the family does veer from the mantra of corporate governance.32. It then becomes difficult for the family business to remain as a single entity. The Modis, Nandas and recently the Singhsâ€™ (Analjit versus Malvinder) and the Ambani spat are all cases in point.33. A few of them such as the Delhi-based Munjals and and Jindals have, however, defied the odds and continued to thrive, with or without a split.34. more at http://www.citeman.com/859-tackling-crisis-of-family-owned- businesses.html#ixzz1uGLXAdAE
Meeting the Unique Challenges of Family-owned BusinessesBy Harrison B. MillerJuly 01, 2010Family-owned businesses make up a large share of the world’s current economy. No matter theirsize, these companies confront many of the same challenges as non-family-owned businesses—managing growth, hiring the right people and competing for market share. Given their ownershipstructure, however, family-owned businesses face distinct issues that can affect both familyrelationships and business strategy in complex ways. In this article, we examine how outsideinvestors can help these dynamic companies successfully navigate those unique and interrelatedchallenges.Liquidity and controlAlmost by definition, a family-owned business is a highly illiquid asset. Although owners offamily businesses may be worth millions of dollars on paper, they still worry about the mortgage,tuition for children and grandchildren, or personal guarantees made to banks on behalf of thebusiness. While these owners would like to reap the fruits of their labor and achieve enoughliquidity to secure their personal future, they do not want to starve the business of needed cash orsell it too soon. What are their options for achieving liquidity without giving up control of thecompany?Those were some of the complex issues facing Sybari Software, a New York-based securitysoftware company managed by Cofounder, CEO and President Bob Wallace and his two sons-in-law. Bob had always resisted outside investment, preferring to reinvest cash flows to supportsteady growth. As he grew older, however, Bob began to think of ways to provide financialsecurity for his family. In 2001, Summit Partners made a minority investment in Sybari,providing Bob and his sons-in-law with immediate partial liquidity. While leaving Bob firmly incharge of operations, Summit helped Sybari expand its board and management team. Over thenext four years, Sybari grew 30% annually and became attractive to both public market investorsand acquirers. As Sybari prepared for an IPO in 2005, Microsoft offered to buy the firm. Theacquisition positioned Sybari for further growth and assured the financial security of Bob and hissons-in-law.Expanding the teamFamily business owners tend to rely on people close to them—spouses, children, long-timefriends and employees, and trusted advisors. When the company is growing rapidly, however,entrepreneurs may require the expertise and perspective of outsiders. An experienced CFO, for
example, can help a company navigate more complex accounting requirements, while anexecutive with international experience can work to establish a global presence. Even so,recruiting outside executives and integrating them into the family-owned business structure canbe daunting. Business owners must assure new hires that their career paths are secure within afamily-owned company, and they must help long-standing employees and family membersunderstand the role of the new manager.By bringing in additional expertise, an outside board can help the family-owned business makethe transition toward a larger, more professionally managed company. This board should includerepresentatives of the family as well as outside directors with experience relevant to thecompany. In 2007, the American Family Business Survey found that more than one-third of thebusinesses it served maintained an active board of directors and that more than half of thosefirms rated the board’s contribution as excellent.On its path toward growth, AlphaSmart, a manufacturer of computing device keyboards forschools, expanded both its management team and board. Brothers Ketan and Manish Kothari andtheir partner Joe Barrus founded the California-based company and built a successful product forthe educational market—a computer that was simple, affordable and durable enough forelementary and high school students. Yet, as their company grew, the founders knew that theywould require more expertise. After investing $20 million in AlphaSmart, Summit Partnershelped the founders hire seasoned veterans for the positions of CFO and director of operations.Summit also assisted AlphaSmart in building an independent board with the requisite experienceand perspective to guide the company to success. Over the next five years, the firm grew from asingle-product company into a provider of diverse technology solutions to the educationalmarket. AlphaSmart went public in 2004; one year later, Renaissance Learning (NASDAQ:RLRN) acquired the company.Succession planning and exit strategiesAll founders must eventually choose a successor, but the decision is particularly fraught withemotional issues in family-owned firms. Should the future CEO be a family member, or shouldthe family find the most qualified outside candidate? If the latter, how can the founders be surethat the new leader will run the business in a way that aligns with the family’s goals and values?In many cases, succession means transferring ownership or management of the firm outside thefamily. Business owners who do not want to pass on their business—or who do not have anobvious successor in the family—might consider selling their business through either an IPO or astrategic acquisition.Marc, Oliver and Alexander Samwer founded Jamba! in 2000. The three brothers knew that theywould eventually want to sell their digital multimedia content company, just as they had soldtheir Internet auction company a few years earlier. Based in Germany, the company had a limitedprofile among U.S.-based financial firms and investors. By taking on Summit Partners as anoutside investor, the Samwer brothers hoped to increase their visibility in the U.S. market, whileexpanding their business from Germany to the rest of Europe. In 2003, Summit invested inJamba!, and by the next year was already working with investment banks and strategic buyers to
prepare for an IPO or acquisition. Due to this dual-track process, in 2004 VeriSign (NASDAQ:VRSN) acquired Jamba! for $273 million—one of the largest technology transactions in Europethat year.The role of an investorBuilt on the sweat equity of their founders, family-owned businesses often grow for many yearswithout outside capital. As these companies reach a certain size and their founders begin toconsider retirement and succession, family-owned businesses can often benefit from apartnership with an outside investor.Great care should be taken in selecting the right investor, however. Families that seek tomaintain control should ensure that the chosen firm has a long-standing history of minorityinvestments and a proven ability to add value without micromanaging day-to-day managementdecisions. Families that intend to cede control should look for investors that have been successfulin bringing companies like theirs to the next level, while respecting and amplifying the valuesand priorities that first made the business a success.Ideally, outside investors can provide capital and guidance on the critical issues that facecompanies as they grow to the next level—strategy, management and board recruiting, financing,acquisitions and networking with potential buyers. They can also offer an impartial perspectiveon the difficult emotional issues that family ownership can entail. Moreover, as minorityinvestors, they can provide all this support while leaving day-to-day control in the hands of thefamily.BEST PRACTICES:Family Businesses Doing It Rightby Mike CohnFar from being the weaklings of the commercial world, family businesses are the invisible giantsof industry. Family companies are the worlds dominant form of enterprise.Two- thirds of all U.S. companies are family owned and managed. Nearly half of the 1000largest industrial companies in the U.S. are family companies. So are 40% of the Fortune 500.Sixty percent of all U.S public companies are family owned, and family firms are even moreprevalent abroad.ABOUT DR. DAVISDr. John Davis, Senior Lecturer at Harvard Business School and President of the OwnerManaged Business Institute based in Santa Barbara, Calif., has been working with familybusinesses for 20 years.
Families that have managed to nurture both family and business over two or more generationscan teach us a great deal. Research by Dr. John Davis, president of the Owner Managed BusinessInstitute in Santa Barbara, Calif., shows that those family businesses that have been mostsuccessful and enduring have demonstrated many important practices: Family and company management treat family as family and business as business. The family nurtures a family culture of loyal differences. The family cultivates a garden of virtues for family members. The company maintains a compelling, long-term business vision. The family, management, and shareholders practice patience. The family and management emphasize competence and openness in the company. Business leaders respectfully manage shareholder loyalty. Family and company make tough decisions in a timely way. Family and business leaders plan beyond their own lifetimes. Family and company support their servant leaders.Magical SynergyProperly woven together, family and business elements create a magical synergy of forces. Abusiness can enhance a familys sense of purpose and build mutual loyalty as well as wealth.Family leadership and ownership of a company can sustain a long-term innovative culture ofsurprising passion and loyalty. For family and business to function well, they must beintegrated—yet relaxed enough to keep family and business separate and distinct from oneanother.I succeed when my family succeeds is an ancient Chinese saying that truly applies to successfulbusiness families.Given the central role of the company in the life of a business family (especially in the first twogenerations of the family), it is difficult to separate what is business from what is family. It isvery tempting to hire relatives who do not deserve jobs in the company, pay them more than theydeserve and pay higher dividends to family shareholders—all in the name of family love andharmony.Successful business families recognize that a business must have a clear set of rules andboundaries that everyone follows. But along with treating a business like a business, leaders ofsuccessful family companies must respect the needs of the family and be compassionate to therelatives.Successful business families recognize their responsibility to provide emotional support andguidance to their members and to raise responsible adults. They nurture individual identities andencourage respectful relationships and healthy interdependence.To help maintain healthy boundaries between business and family, successful family andbusiness leaders set explicit rules, rights, and responsibilities (the 3Rs) for members of thefamily, employees of the business, and for shareholders. Where there are agreed-upon
boundaries, business leaders are more likely to demonstrate respect and enthusiasm for theirfamilies, and communication in each of these areas will typically be more clear and effective.Nurturing Loyal DifferencesSuccessful families recognize thateach individual within thefamily is distinctive and for a familyto thrive, differences must be respected. Without a basic respect for individuality, individualswither, and with them goes their creativity and ambition. The instinctual need for unity withinthe family challenges this individuality. Business families, which have a lot at stake financiallyand otherwise, sense an even greater need for unity.When unity is forged by respecting and harnessing the diverse strengthsof relatives, the familybecomes oneof relatives, the family becomes oneof the most powerful teams known tosocialscientists."I succeed when my family succeeds" is an ancient Chinese saying that truly applies tosuccessful business families. Family members do not rely on each other for every need orbecome overly dependent on the family for support, but they learn to use the strengths and skillsof the family and its members to support their individual and family goals.Cultivating VirtuesFor a business to continue thriving for generations under family leadership, each successivegeneration must be developed to effectively carry on its values and traditions. Key virtues mustbe instilled in at least some of the children to perpetuate both the company and the family.The best family business dynasties forgo short-term personal benefits in favor of long-rangeprosperity.Successful business families cultivate many virtues in their children, including individualresponsibility, teamwork, problem solving, honesty, fairness, loyalty, respect, strong work ethic,discipline, love of family, modesty, humility, bravery, confidence, and giving back to the world.It is not enough just to espouse virtues such as these; they must be taught and nurtured byexample.Compelling, Long-term VisionHigh performing family businesses excel at fundamental business practices and at creatingcompelling, long-term business visions. This vision unites everyone in the organization andfocuses them on a target. It makes them reach and extend beyond themselves.Family companies are more likely to create visions that go beyond just making profits intocreating visions that compel generations of people to contribute to the organization, itscustomers, and society as a whole. The best family business dynasties forgo short-term personalbenefits in favor of long-range prosperity.
Practicing PatiencePatience is a virtue that invariably pays off. Aggressive reinvestment in the business, and modestdividend payouts to shareholders, have always been hallmarks of high performers, but thesepractices are extremely important today.It takes that much more reinvestment for most companies to keep pace with competition andremain viable. The best family companies aggressively reinvest earnings for the long-term,refraining from short-term gain. The leadership of a family business must build a sense of long-term value created by hiring and developing competent managers and investing in innovationand growth.Family companies come to this strategy more naturally than other companies because familyshareholders usually share a mutual interest in perpetuating the business, and in watching itsequity, and thereby their own wealth, grow for the benefit of the next generation.Competence and OpennessThe highly successful family business maintains an innovative, open culture that is highlyresponsive to its environment, including customers, employees, competitors, technology, andexternal ideas.They are on a quest to do business better by seeking advice and constructive feedback fromfamily members, employees, customers, and external experts. These businesses maintainadequate external privacy while openly sharing information with employees and familymembers. Internal openness about the business improves employee motivation, family loyalty,and company profitability. These businesses hold all employees accountable for results, and theygive them the tools necessary to produce results.Leading family businesses insist on competence within company ranks, regardless of whetherthis hurts career prospects of family members. Outside experience is encouraged and "safeguardstructures" (like family employment review committees) are developed to assure fairness in allsituations. Rules are most effective when they are developed before a family employmentsituation arises. Employment rules are discussed by the family, endorsed by the board ofdirectors, and implemented by management.Management Shareholder LoyaltyAttentive shareholder relationship management is key to success in family businesses. Activeshareholders proactively manage information and communication with passive shareholders.They avoid shareholders being the "last to know" by ensuring appropriate shareholderinvolvement in discussions and decision-making Boards of directors, family councils auditcommittees, and family customer focus groups are created to provide vehicles for informationsharing and gathering. Although it may seem ridiculous to establish such explicit rules forshareholders at the early stages of the family business, it is imperative for long-term success.
Once the family company is passed to the siblings, decision making often becomes more difficultbecause of the rivalry that often exists among them. Decision-making problems generally growat the cousin consortium stage.Timely DecisionsNothing brings a business down faster today than indecision. If a family business stalls outbecause it cant set direction at the top, it soon will be overpowered by companies that can and domake timely decisions. Families, too, can be disabled by the fear of deciding. Decision-makingin family business is fraught with conflicting goals and powerful emotions.Decades-old patterns of behavior are preserved and perpetuated in the family, and decisionsabout matters such as management and ownership succession can be delayed, often too long.Successful family businesses ensure and that decisions can be made in a timely fashion. They usetheir boards of directors, family councils, and management teams to assist them in importantdecision-making processes. And they empower employees at all levels to make decisionsregarding their own positions and tasks.Because family relationships are more emotional and have more history behind them, successfulbusiness families need to manage their emotions and anxiety and build trust in each othersabilities to make decisions.Planning Beyond LifetimesSuccessful family companies anticipate the challenges they will face in the future and prepare forthem. They adopt a generational outlook and a commitment to maintaining their businesses overthe long haul. To plan really long-term, however, family leaders must plan beyond their ownlifetimes.Family leaders of successful family firms consider succession early on and champion the process ofchange. They make sure the family or others are prepared to assume leadership in the future...Families and boards must periodically review their plans and policies to ensure that the familyfeels psychological ownership of the rules that bind it to the company and that the rules aresensible. The planning process should allow for healthy discussions and consideration ofbusiness concerns (performance, products, services, customers, employees), family concerns(finances, leadership, involvement, employment), and ownership concerns (shareholderinvolvement, returns on investment, leadership succession) so that all issues can be voiced andmanaged effectively.One of the most important plans that the family must make regards succession in the business.Family leaders of successful family firms consider succession early on and champion the processof change. They make sure the family or others are prepared to assume leadership in the futureand that family members and employees alike support the transition process.
Supporting Servant LeadersLeadership of these complex systems must be strong-willed, clear, and decisive. It must providethe strategic direction and moral compass for business and family. Servant leaders bring theirown visions to their roles, but more importantly they see themselves as serving the needs of theircompany and family.Those effective in this role see their position as resulting not from entitlement, but from theirability to advance the cause of the system. Good family leaders are caring and seek their powerfor the good of all those involved. It is not unusual for business families to have more than oneleader, and leaders of the business and the family may not always be the same.Fairness bravery, empathy and trustworthiness are fundamental characteristics of successfulservant leaders. These leaders are ultimately focused on the values that have made theircompanies and families strong. In the final analysis, enduring business families and theircompanies are about values. It should come as no surprise that their leaders are the chiefprotectors of these guiding values.Family-Owned Businesses Print PDF Cite THE PROS AND CONS OF FAMILY BUSINESS ROLES IN THE FAMILY BUSINESS FAMILY BUSINESSES AS A TRAINING GROUND EXTENDED FAMILY THE PLANNING PROCESS SYSTEMS FOR PLANNING IN THE FAMILY-OWNED BUSINESS THE FUTURE OF FAMILY BUSINESSES RESOURCES FURTHER READING:Family-owned businesses are recognized today as an important and distinct organization in theworld economy. Family-owned businesses now operate in every country and may be the oldestform of business organization, but only within the last decade have their unique benefits beenidentified and studied. Family businesses have been described as unusual business entities. Thedescription is due to their concern for the long-term over generations, their strong commitment toquality and its relation to their own family name, and their humanity in the workplace where thecare and concern for employees is often likened to that of an extended family.More than 90 percent of the companies in North America and a majority of businesses locatedaround the world are family-owned. Some of the more recognizable businesses still managed by
family members include Benneton, Beretta, Estee Lauder Inc., Tootsie Roll, Playboy, Gucci,Carnival Cruise Lines, Harley-Davidson, Inc., U-Haul, Ford Models, Forbes Inc., and FordMotor Co. They vary widely in regard to the overlap of family and business issues, and muchcan be learned from studying their experiences.Family businesses provide the only setting for an unusual social phenomenon, the overlap offamily issues and business issues. The family business offers two separate but connected systemsof family and business with uncertain boundaries, different rules, and differing roles. Familybusinesses may include numerous combinations, including husbands and wives, parents andchildren, extended families, and multiple generations in roles of stockholders, board members,working partners, advisors, and employees.The two systems in a family business, described as the interaction of two separate but connectedsystems, are often shown as two overlapping circles depicting the unclear boundaries of familyand business.THE PROS AND CONS OF FAMILY BUSINESSFamily businesses provide a number of advantages to family members, the most common beingfreedom, independence, and control. In addition, they also offer many lifestyle benefits such asflexibility, prestige, community pride, and creativity. Family businesses normally provide forcloser contact with management, are less bureaucratic, have a built-in trust factor withestablished relationships, and provide for hands-on training and early exposure of the nextgeneration to the business.On the other hand, family businesses also bring a unique set of challenges. Family businesses areoften recognized in the popular press as a source of difficulty when it comes to succession issues,identity development, and sibling relationships. Succession is one of the largest challenges facingfamily businesses, and in most cases the process is resisted. Succession becomes an issue whenthe senior generation does not allow the junior generation the necessary room to grow,effectively develop, and eventually assume the leadership of the business. Often businessrelationships among siblings or between parent and child deteriorate due to an underlyingdifficulty in communication within the family. This behavior erupts into criticism, judgments,conservatism, lack of support, and lack of trustll elements that affect the business.Family-owned businesses typically have a set of shared traditions and values that are rooted inthe history of the firm. Depending on how they are viewed, deeply rooted traditions and valuescan be a positive or a negative influence. In a changing world, family businesses can honor theirtraditions if they realize they can be guides to selecting the best course of action when there is arecognized need for change. It makes sense to honor traditions and trust them; they havesurvived because they have helped the family business prosper. It doesnt make sense to lettraditions stand in the way of progress and change. Traditions themselves have evolved andchanged over time. In fact, the best time to reaffirm the family businesss tradition is when it isthreatened or appears to conflict with the future prosperity of the business.
Family communication, conflict with relatives, and sibling relationships typically rank amongthe top ten concerns among family-owned businesses. When these issues conflict withshareholder value, it often becomes necessary to bring in an outside consultant to deal with them.The main issue in solving such family-related problems is to deal with them openly and begincommunications within the family toward solving the problems. Other keys to a successfulfamily business include mutual respect, the presence of good role models within the family, theability to not take business issues personally, and the patience and ability to listen to others.A history of the family business can be a useful tool to improve communication andunderstanding among family members. By telling the story of how the business was founded andits early struggles, the history helps members of succeeding generations better understand thevalues and attitudes of the family toward the business. In addition to transmitting family values,the family business history can be used to perpetuate a unique business culture and createcohesiveness among employees. It can also be used as a marketing tool to project a positiveimage of the company and the family behind it.ROLES IN THE FAMILY BUSINESSThe most successful families in business have clearly defined roles and responsibilities forindividuals involved in the enterprise. Most often these roles have fallen along gender lines. Themost common form of family business is one in which a husband and wife are both involved.Often, such a business has typically been referred to as "his," while the wifes role is of helpmate.Women are often in the office, on the computer, or doing the bookkeeping and have even beendescribed as "invisible." These same capable women, however, often become "instantentrepreneurs" when their husbands are ill or die, or when an economic crisis forces them toassume the husbands role. Such gender stereotypes are slowly changing.The role of a father who is also the boss of his children is more often a difficult one to balance.One father shared the story of his son who was always late for work and provided a bad examplefor other employees. He called him aside one day and said, "Son, as your boss, I have to tell youyoure fired, and as your father, I am sorry to learn you have just been fired."Research indicates adult children describe their fathers as bosses in many different ways. Onesons statement relates the patterns that repeat in families and therefore carry over to the business,"Im stubborn just like him, and it is like looking in a mirror." In the ideal case, the father servesas a role model and trainer for the next generation. He treats both his sons and daughters equallyand exposes them to various aspects of the business. He listens to their ideas and lets them maketheir own mistakes. He views the business as a team project rather than an individual effort andturns over the leadership reins before the children reach the age of 35.Mothers are influential whether they work in the business or not, and their roles need to berecognized. Traditionally, mothers have worked behind the scenes supporting their husbands andmaintaining the home. The changing roles of women have brought them challenges when tryingto balance home and business. One woman said she wished she was more like Mrs. Cleaver,which seemed to reflect her confusion about not being a mother like her own, yet also not beingcomfortable in a leadership role in a business. Often women do not get equal credit in the role
they choose. Just like the case of the fathers, these roles also carry over into the next generationand influence both daughters and sons.Brothers and sisters usually disagree in their views of their mother, but agree in their views oftheir father. This might be explained by the fact that fathers are seen primarily as the leaders inthe business, while the mothers play a variety of roles, and sons and daughters describe the rolethey are most comfortable with. For example, one son describes his mother as always being athome for him, while the daughter described her active role in the business.FAMILY BUSINESSES AS A TRAINING GROUNDPerhaps the best job training programs throughout history have been family businesses. Researchindicates that over two-thirds of all people starting businesses today grew up in a family businessenvironment. Many share stories from early childhood when they stayed at the family store, rodeon the delivery trucks, or went to visit customers with their parents. This early exposure enablesthem to hear, see, observe, and absorb the business environment. This experience can teachchildren about the value of money, customer relations, dealing with employees, and how anorganization operates.A number of factors have been found that predispose children to be interested in the familybusiness. The first is time spent with their father in the business. Most family businessescurrently operating in the United States were started after World War II and most were foundedby men. As more women start businesses, children will also benefit in this way from spendingtime with their mother in the family business setting.Exposure to various aspects of the business positively affects children. As they grow theyassume new and varied roles, developing skills in the business as they take on each new role.With encouragement and a positive attitude from the parents about the business, their interest isheightened. Along the way, as children work in the family business, their individual contributionto the team needs to be recognized on a regular basis.Lastly, an opportunity to join the company needs to be presented to the children as a careeroption. Not all children will join the family business, but they should know how to fully takeadvantage of the opportunity if they so choose. Throughout this training process children andparents who see each other as peers have an optimal relationship.Daughters have special needs when it comes to developing as leaders in family businesses. Theynormally spend less time in the business, develop fewer skills, and face a major obstacle rightfrom the start because fathers typically consider sons over daughters as potential successors. Theprocess of preparing daughters to join the business is often overlooked. A report from the familybusiness workshops held at the Wharton School of Business over a three-year period showed thatamong female Wharton business students, only 27 percent planned to enter the family businessand only 22 percent studied business in college.Research shows a number of surprising factors which influence the leadership interest of women.Women tend to show an interest in leading the family business when their brothers are not strong
leaders, when they do not have a spouse or children of their own, and when they are asked by thefather to join the company. Women are found to be held back from leading the company whenthey lack skills and knowledge, experience constraints within their own family, or have littleencouragement from their father or husband. Women who are not at all interested in the familybusiness have not developed an identity in the business, have found better opportunitieselsewhere, or are dependent on their spouse to satisfy their financial needs.When it comes to sons, researchers found that the quality of the work relationship betweenfathers and sons varies as a function of their respective life stages. When sons are between theages of 17 and 22, and they are in the process of establishing identity and separating from thefamily, poor communication is common. At this time, the father is typically in his forties and isalso re-examining his identity and appraising his life. Here fathers want to give their life meaningand exert power and control, needs that are in conflict with the needs of their sons at this time.As the father reaches his fifties, and the son matures from 23 to 33, the father has become lesscompetitive and with his experience he may have the inclination to teach. Sons during this timefeel an urgency to focus their lives and settle in, re-appraising the past and considering the future.They strive for competence, and desire recognition and advancement. By 40 the goals ofcompetence, recognition, advancement, and security become pressing, and the son struggles withauthority if the father is still involved in the business. The father, perhaps in his sixties, isreminded about retirement and often death, which leads to a problematic relationship should hetry to hang on to the business. There are numerous cases of sons in their fifties with fathers intheir seventies and eighties who still are in control of the family business. This becomesproblematic for the individuals involved as well as for the business itself.Sibling relationships in the family business are important since these are the vehicles by whichsocial skills are learned, and siblings often go on to work together. These relationships play asignificant part in identity development, yet research is sparse in this general area. Siblingaccommodation in the family business occurs when they agree on their relative positions ofresponsibility and power.EXTENDED FAMILYExtended family members can play a wide range of roles in the family business. Familybusinesses become more complicated in multiple generations when all of the family membersstay involved in some manner. For example, a husband and wife start a business and involvetheir three children. These three children have six children each for a total of 18. These 18 have atotal of 29 children between them. Within 50 years over 50 direct descendents could now haveinvolvement, and that does not include in-laws.In-laws are controversial in family businesses. Some businesses have a rule not to involve in-laws in either ownership or management, while others involve them to varying degrees. In eithercase it is best to have clearly defined rules when it comes to the role and responsibility of in-laws, and clear expectations of the consequences in the event of a death, divorce, or involvementof children. In one case, the son-in-law was asked to stay on in a management capacity in thebusiness after the daughter divorced him, which caused friction between the father and hisdaughter for the next 20 years.
THE PLANNING PROCESSPlanning is more crucial to the family business than to other types of enterprise because mostfamilies have a majority of their assets tied up in their business. Estate planning becomesessential and is intertwined with succession planning, business planning, and family planning.Estate planning involves the financial and tax aspects of the company. Families plan to minimizetaxes at the time of the owners death so the resources can stay within the company. Current taxlaws provide disincentives for families wishing to continue the business.Business planning often guides the entire planning process and sets the agenda for the futureoperations of the business. This process may be overseen by a board of directors, an advisoryboard, or professional advisors. Owners must ask themselves where they want the company to bein 5, 10, or 20 years, including the level of family involvement. Owners often have a mentalpicture of this, but unless a business plan for financing purposes is necessary, it is usually notdown on paper.Succession planning is a long process that owners normally wait too long to address. Thegrooming, training, and development of talent in the next generation should start in thepreadolescent years.Most family businesses do not have a succession plan. This becomes crucial in the event of asudden death. Often the remaining family members do not know where to begin to pick up thepieces. This is the reason most family businesses do not succeed to the next generation. Theissues involved in succession are too numerous to leave to chance, and without planning, it islikely the family business will not successfully continue.The lack of planning, particularly in first to second generation businesses, is often the fault of thefounder himself. Usually the business is such an extension of his life that he has few outsideinterests and cannot imagine leaving the helm. As a result, his business dies with him. Otherswho recognize these issues too late in life may hastily turn over the business to an ill-preparedchild, only to have him fail.Family planning takes into account the needs and interests of all family members involved withthe business. The formation of a group called a family council often guides the communicationprocess between family members and management. They address issues such as rules for entry,conduct, and community relations.A 1999 survey of 500 family-owned businesses conducted by family business consultantsRegeneration Partners of Dallas, Texas, found that the number one concern among family-ownedbusinesses was planning for estates, taxes, and wealth. Ownership transfer or succession rankedsecond. In spite of the significance of these concerns, an estimated 25 to 50 percent of all senior-generation business owners have put off making business estate plans.
SYSTEMS FOR PLANNING IN THE FAMILY-OWNEDBUSINESSThere are numerous systems which can aid planning in the family-owned business. Estateplanning is normally handled by a team of professional advisors, including a lawyer, accountant,financial planner, insurance agent, and perhaps a family business consultant. Estate planningnormally begins with the success of the enterprise and is continually updated as the business andfamily change.A professional family business consultant can be a tremendous asset when confronting theseplanning issues. The consultant is a neutral party who can stabilize the emotional forces withinthe family and bring the expertise of working with numerous families across many industries.Most families believe theirs is the only company facing these difficult issues, and a familybusiness consultant brings a refreshing perspective. He or she can be involved at many levels,including working through the succession process. This may involve a variety of issues, such astraining the children, selecting a successor, involving non-family management, and facilitatingthe transition process. In addition, the family business consultant can establish a family counciland advisory board and serve as a facilitator to those two groups.Often the firms attorney and accountant may see planning problems coming, but they are notprepared to face them directly for many reasons. Some do not feel they have the specializedunderstanding of family dynamics, while others fear they could lose a client when dealing withsensitive issues. Instead, they may make the recommendation to bring in an outside familybusiness consultant for an interim period of time.A family council is a system that encourages family involvement and communications. It allowsfor a regular meeting where family members can voice their opinions and plan for the future in astructured way. Ultimately a more organized and strengthened family will emerge. Children gaina better understanding of the opportunities in the business, learn about managing resources, andinherit values and traditions. Conflicts can be discussed and settled.Topics brought to family councils can include: rules for joining the business, treatment of familymembers working and not working in the business, role of in-laws, evaluations and pay scales,stock ownership, ways to provide financial security for the senior generation, training anddevelopment of the junior generation, image in the community, philanthropy, opportunities fornew businesses, and diverse interests among family members.These family meetings evolve and change as the business evolves. A business in the firstgeneration usually only involves a nuclear family, whereas a business in the second generationwith a sibling team faces additional issues of family harmony, equal treatment, and theinvolvement of multiple children in the business. A family business in its third generation orbeyond may include cousins, in-laws, and family members not working in the business. Issues inthis case become much more complicated and may include commitment, traditions, communityimage, and resource allocation.
Family businesses typically evolve through three stages, and the type of leadership required ateach stage is different. In the entrepreneurial stage, the business is designed around the founderor leader. It is driven by personal and family goals and depends on the leaders intuitivedirection. Eventually the business evolves to the managerial stage, where it is more organized butstill like a family. The firm begins to require outside expertise and financial discipline. Structureand accountability are established. Tension can arise as family members begin to lose some oftheir freedom from structure, but they recognize that a lack of structure is causing frustration,too. Finally the firm enters the professional stage, where it is driven by what is best for thebusiness. More goal-setting and market-driven strategic planning takes place. In determiningwho will be the next leader of the family-owned business, it is necessary to recognize what stagethe business is in and select the leader with the most appropriate strengths and characteristics.Family members who participate in family councils find it a good forum to voice their opinions.They feel more like a team, and they see progress being made. Leadership of the family councilcan be on a rotating basis, and the family business consultant may leave the facilitating role oncethe forum is well established and emotions are under control. Stepping out too early, however,can lead to a collapse of the entire system.Advisory boards can be established to advise the president or board of directors. These boardsconsist of five to nine non-family members who meet regularly to provide advice and directionto the company. They too can take the emotions out of the planning process and provideobjective input. Advisory board members should have business experience and the capabilities ofassisting the business to get to the next level of growth. For example, a company with fivemillion dollars in annual sales should seek advisors who have experience with moderately moreprofitable companies. In most cases, the advisory board is compensated in some manner.As the family business grows, the family business consultant may suggest many different optionsfor the family. Often professional non-family managers or an outside CEO are recruited to play arole in the future growth of the business. Some families operate with few or no family membersin the business and simply retain ownership. The family can retain ownership by serving on theboard of directors or setting up a holding company, which may manage several companies andinvestments for the family.One second-generation family in the steel business recognized a declining market for its productand decided to sell off their divisions and liquidate the remaining assets. The dollars generatedfrom this process led to the sibling team staying together and forming an investment company.Today they are in the business of buying other family businesses and putting in professionalmanagers to operate them. They now manage eight such companies in a variety of industriesthroughout the United States.THE FUTURE OF FAMILY BUSINESSESFamily businesses will continue to play a greater and greater role in world economies into thenext century. They will become more recognized as business organizations, and be studied andwritten about in increasing depth. Schools and colleges will recognize the family business as a
career option of choice and provide direction and resources for students to pursue opportunitiesthere.Over fifty percent of the leaders of family businesses in the United States think their businesseswill be owned and managed by two or more of their children, so the future looks bright. Even inEastern Europe entrepreneurs are emerging and rekindling family businesses from years ago.They are starting family businesses for the next generation, and others are using family supportsystems to launch new enterprises. In Italy, family businesses are so common that the Chamberof Commerce tracks each family member and their position in the firm along with the traditionalbusiness information which is regularly collected. Asians have a legacy of passing on theirfamily traditions in business and of all working together with a central business focus. The nextcentury will bring more research on how ethnicity affects families in business.RESOURCESThere are a growing number of resources now available to families in business. The Family FirmInstitute is a group of more than 1000 professional advisors serving the field; it has more than100 university-based programs. The Family Business Network is headquartered in Switzerlandand holds an annual convention. The American Alliance of Family Businesses was formed in1995 to provide a full range of services to family-owned businesses, including lobbying,information, and professional development programs.