Small Business Management Chapter 5 PowerPoint

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CHAPTER
5
The Family Business

LEARNING OBJECTIVES
By studying this chapter, you should be able to…
5-1 Define the terms family and family business.
5-2 Explain the forces that can keep a family business
moving forward.
5-3 Describe the complex roles and relationships
involved in a family business.
5-4 Identify management practices that enable a family
business to function effectively.
5-5 Describe the process of managerial succession in a
family business.

5-1 WHAT IS A FAMILY
BUSINESS? (slide 1 of 2)
• Family – A group of people bound by a shared
history and a commitment to share a future
together, while supporting the development
and well-being of individual members.

5-1 WHAT IS A FAMILY
BUSINESS? (slide 2 of 2)
• Family business – An organization in which either the
individuals who established or acquired the firm or their
descendants significantly influence the strategic
decisions and life course of the firm.
• A family business can be described as an owner-managed
business, a sibling partnership, or a cousin consortium.
• Owner-managed business – A venture operated by a founding
entrepreneur.
• Sibling partnership – A business in which children of the
founder become owners and managers.
• Cousin consortium – A business in third and subsequent
generations, when children of the siblings take ownership and
management positions.

5-1a Family and Business Overlap
• Families and businesses exist for fundamentally different reasons.
• The family’s primary function is the care and nurturing of family
members, while the business is concerned with the production and
distribution of goods and/or services.
• The family’s focus is on creating value for family members and
emphasizing cooperation, unity, and stability, while the business’s
goal is to create value for customers and emphasize competition,
diversity, and flexibility.
• Individuals involved in a family business have interests and
perspectives that differ according to their particular situations.
• Competing interests can complicate the management process,
creating tension and sometimes leading to conflict.
• Relationships among family members in a business are more
sensitive than relationships among unrelated employees.

5.1 The Three-Circle Model of Family Firms

5-1b Advantages and Disadvantages
of a Family Business
• There are a number of advantages of working in a
family business.
• Businesses that are family owned may promote their family
values to set themselves apart from competitors.
• Family businesses can convey a sense of tradition and
achievement to relatives who are considering joining the firm
and to nonfamily employees who have become part of the
story.
• There are also disadvantages as well.
• Conflict may arise among family members.
• Employees and executives may show favoritism toward their
relatives, regardless of competence or performance.
• Nepotism – The practice of employing relatives.

5.2 Positives and Negatives of Family Businesses

5-2 DYNAMIC FAMILY BUSINESS
• On average, family businesses survive longer than
nonfamily firms.
• Recent research findings suggest that companies that
are successful in transferring ownership and
management from one generation to the next are
characterized by entrepreneurial behavior.
• For family businesses, a key issue in the transfer of ownership
and management is the retention or modification of the
organizational culture.
• Organizational culture – A pattern of behaviors and beliefs that
characterize a particular firm.

5-2a The Imprint of Founders on
the Family Business Culture
• The founder often leaves a deep imprint on the
culture of a family firm.
• The distinctive values that motivate and guide an
entrepreneur in the founding of a company may
help create a competitive advantage for the new
business.
• However, an overly controlling founder who won’t
listen to others, share information, or allow others to
make decisions fails to prepare others for
leadership.

5-2b The Commitment of
Family Members (slide 1 of 4)
• The long-term survival of the business is dependent on
the commitment of family members.
• They may be committed to the family business for different
reasons, and these reasons will likely determine the nature
and strength of that commitment.
• Founders have to balance their obvious interest in the
business, their personal aspirations, and the needs of
their family and employees.
• Next-generation family members who choose to pursue a
career in the business must also deal with these challenges,
and their commitment to the company will likely determine the
value of their contributions, the financial benefits they create
for the family, and their personal satisfaction in work-related
roles.

SOCIOEMOTIONAL WEALTH
• Socioemotional wealth – Nonfinancial factors in a
family firm that affect the commitment of family
members to the business.
• The socioemotional commitment of family members to
the firm occurs along five dimensions (FIBER):
1. Family control.
2. Identification with the firm.
3. Binding social ties.
4. Emotional attachment.
5. Renewal of family bonds through dynastic succession.

5.3 Dimensions in Socioemotional Commitment
Family control and influence. Specifically, family members exert control over
strategic decisions.
Identification of family members with the firm. The firm may be seen as an
extension of the family itself.
Binding social ties. Family members feel closeness and solidarity.
Emotional attachment of family members. The history and knowledge of past
events influence and shape current activities.
Renewal of family bonds to the firm through dynastic succession. There is an
intention to hand the business down to future generations.
Source: Based on Pascual Berrone, Cristina Cruz, and Luis Gomez-Mejia,
“Socioemotional Wealth in Family Firms: Theoretical Dimensions, Assessment
Approaches, and Agenda for Future Research,” Family Business Review, Vol.
25, No. 3 (2012): pp. 258–279.

THE FEAR OF COMMITMENT
• Members of the succeeding generation in family firms
may have emotional resistance to joining the firm.
• Typical fears include the following:
• Fear of failure.
• Fear of success.
• Fear of commitment.
• Fear of disappointing your parents.
• Fear of disappointing others.

COMMITMENT TO CONTINUITY
• Studies have shown that only a little over half of
current owners of family businesses are optimistic
about their companies remaining in the hands of family
members.
• The biggest concern expressed about retaining family
management was the fear there would be a lack of innovation
on the part of successors.

5-3 FAMILY ROLES AND
RELATIONSHIPS
• There are many possible family roles and
relationships that can contribute to managerial
complexity in a family business.

5-3a Co-Preneurs
• Co-preneurs – Couples who own and manage
businesses.
• Advantage:
• There is the opportunity to work with someone you really trust
and to share more of your lives together.
• Disadvantages:
• Differences of opinion about business matters can carry over
into family life.
• The energy of both parties may be so spent by working long
hours in a struggling company that little zest remains for a
strong family life.
• There can be too much togetherness.

5-3b Mom or Dad, the Founder
• Entrepreneurs with children think naturally in terms of handing the
business on to the next generation.
• Some of the approaches taken to prepare prospective successors
for ownership and leadership include the following:
• Demonstrating the founders’ commitment to both the business and
the family through both actions and words.
• Permitting and supporting entrepreneurial behavior by the children;
letting them take calculated risks, and encouraging them to learn
from failure.
• Supporting educational efforts that contribute to skills for leading the
business while helping the children to develop their own special talents.
• Helping the children recognize that rules and responsibilities have
their place in both business and life.
• Of all the relationships in a family business, the parent–child
relationship has been recognized for generations as the most
troublesome.

5-3c Sons and Daughters
• Experts recommend introducing children to the family firm at an
early age.
• In the entrepreneurial family, the natural tendency is to think in
terms of a family business career and to push a child, either
openly or subtly, in that direction with little thought given to the
child’s talent, aptitude, and temperament.
• However, our society values the right of the individual to choose his
or her own career and way of life, and if this value is embraced by
the child, then he or she must be granted the freedom to select a
career of his or her own choosing.
• A son or daughter may feel a need to work outside the family
business, for a time at least, to prove that he or she can make it
without the help from the family.
• Grown children who find they can succeed on their own are likely to
have more self-confidence in their abilities if they choose to join the
family firm at a later date.

5-3d Sibling Cooperation,
Sibling Rivalry
• At best, siblings work as a smoothly functioning team,
each contributing according to his or her respective
abilities.
• However, business issues tend to generate
competition, and conflicts between siblings often occur.
• One sibling dilemma has been labeled the predator/parasite
conflict.
• Family members working in the firm are sometimes seen by
relatives who work outside the company as predators—extracting
money from the business that the outsiders believe is rightfully
theirs.
• From the inside, family members external to the firm are seen, in
turn, to be parasites—that is, they have ownership rights, receive
dividends, or make other claims on the business without
contributing to its success.

5-3e In-Laws In and Out
of the Business
• In-laws play a crucial role in the family
business, either as direct participants or as
sideline observers.

5-3f The Entrepreneur’s Spouse
• The role of the founder’s spouse is especially
important, as he or she often serves as a
mediator in family disputes and helps prepare
the children for possible careers in the family
business.

5-4 GOOD GOVERNANCE
IN THE FAMILY FIRM
• Good management practices are as important
as good family relationships in the successful
functioning of a family business.

5-4a Nonfamily Employees
in a Family Firm (slide 1 of 2)
• Nonfamily members often discover that they have limited
opportunities in family firms.
• Few parents will promote an outsider over a competent daughter or
son who is being groomed for future leadership.
• Those outside the family are sometimes caught in the crossfire
between family members who are competing with each other.
• It is difficult for outsiders to maintain strict neutrality in family feuds.
• The extent of limitations on nonfamily employees depends on:
• The number of family members active in the business.
• The number of managerial or professional positions in the business
to which nonfamily employees might aspire.
• The extent to which the owner demands competence in
management.
• The extent to which the owner maintains an atmosphere of fairness
in supervision.

5-4a Nonfamily Employees
in a Family Firm (slide 2 of 2)
• The leader of a family-owned enterprise might
decide to bring in a nonfamily member as an
executive with the firm for the following
reasons:
• To bridge the gap between generations.
• To set a new direction for the firm.
• To deal with change.
• To provide new skills and expertise.

5-4b Family Retreats (slide 1 of 2)
• Family retreat – An informal gathering of family
members, usually at a remote location, to discuss
family business matters.
• Family retreats provide a formal framework for the
family’s ongoing discussion of family and business
issues.
• Because honest and candid discussion can be difficult,
it is standard for family leaders to invite an outside
expert or facilitator to coordinate early sessions.
• The facilitator can help develop an agenda, set ground rules
for discussion, and establish a positive, nonthreatening tone
that emphasizes family achievements and encourages
rational consideration of sensitive issues.

5-4b Family Retreats (slide 2 of 2)
• To ensure the success of a family business retreat,
David Lansky, CEO of a family business consulting
firm, suggests that these guidelines be followed:
1. Be clear about the purpose of the retreat.
2. Set small, attainable goals.
• Don’t look at the retreat as having to accomplish all possible
goals.
3. Use an agenda, and stick to it.
4. Give everyone a chance to participate.
5. Know the difference between consensus and agreement.
• Participants don’t have to see things the same way (agreement)
in order to concur on a course of action (consensus).

5-4c Family Councils (slide 1 of 2)
• Family council – An organized group of family members who
gather periodically to discuss family-related business issues.
• A family council is the organizational and strategic planning arm of
a family.
• It provides a forum for listening to ideas of all members and
discovering what they believe in and want from the business.
• A family council formalizes participation of the family in the
business to a greater extent than a family retreat does.
• It can also be a focal point for planning the future of the individual
family members, the family as a whole, and the business, as well
as how each relates to the others.

5-4c Family Councils (slide 2 of 2)
• A family council should be a formal organization that
provides governance for family members in their
relationship with the business.
• Council members are normally elected by the
extended adult family members.
• The representatives hold regular meetings, keep
minutes, and make suggestions to the firm’s board of
directors.
• During the first several meetings, an acceptable
mission statement is usually generated, as well as a
family constitution.

5-4d Family Business
Constitutions
• Family business constitution – A statement of principles
intended to guide a family firm through times of crisis and change.
• A family business constitution is not usually a legally binding
document, but it helps preserve the intentions of the founder and
ensures that the business survives periods of change largely intact.
• A family business constitution, sometimes called a family creed,
provides the framework for a family’s system of governance of the
firm and may include the following topics:
• The core values that all family members should follow.
• A process for decision making.
• The benefits that family members may receive from the business.
• A mechanism for introducing younger members to the family
business and its governance structures.
• A dispute resolution procedure.
• The philanthropic ambitions of the family.

5-5 THE PROCESS OF
LEADERSHIP SUCCESSION
• The task of preparing family members for
careers, leadership, and ownership within the
business is difficult and sometimes frustrating.

5-5a Available Family Talent (slide 1 of 2)
• The quality of leadership talent available in the
family determines the extent to which outside
managers are needed.
• A family firm should not accept the existing
level of family talent as unchangeable.
• Using development programs to teach younger
family members and improve their skills is
imperative.
• Some firms include mentoring as part of such programs.
• Mentoring is a process by which an experienced person
guides and supports the work, progress, and professional
relationships of a new or less-experienced employee.

5-5a Available Family Talent (slide 2 of 2)
• Perhaps the fairest and most practical approach to
leadership development is to recognize the right of
family members to prove themselves.
• A period of development and testing may occur either in
the family business or, preferably, in another organization.
• If children show themselves to be capable, they earn the
right to increased leadership responsibility.
• If potential successors are found to have inadequate
leadership abilities, preservation of the family business and
the welfare of family members demand that they be passed
over for promotion.

5-5b Preparing for Succession
(slide 1 of 6)
• Sons or daughters do not typically assume
leadership of a family firm at a particular
moment in time.
• Instead, a long, drawn-out process is involved.

(slide 2 of 6)
RESPONSIBILITIES OF THE CURRENT GENERATION
• Listed below are some topics that the current
generation should consider and some steps it should
take:
1. Communication.
• Parents need to listen and ask questions.
• Providing support and feedback are important, but not just in a
one-way direction.
2. Planning.
• Not only should the company’s vision be articulated, but also the
family’s values and even the plan for settling the estate of the
current generation.
• Planning should encompass family members, employees, and
owners.

(slide 3 of 6)
3. Accountability.
• The next generation should be held accountable for their actions,
especially those that relate to credibility and integrity.
4. Owner development.
• To prepare the next generation to participate in the governance of
the firm, the current generation should be specific about the job
structure of an active owner-manager or board member.
5. Long-term planning.
• When asking the next generation to develop long-term plans that
will prepare them for leadership, the current generation of leaders
must simultaneously prepare their own plans that take into
account future business development, boards of directors and
advisers, family councils, and other structures.

(slide 4 of 6)
RESPONSIBILITIES OF THE NEXT
GENERATION
• If prospective future leaders of the family
enterprise expect to advance to executive
positions, they must proactively engage in their
preparation by doing the following:
1. Be open to communication.
• The succeeding generation should understand the values
that led to the creation and growth of the family enterprise
and to its current mission.

(slide 5 of 6)
2. Develop a personal action plan.
• At this stage, prospective successors should seriously
assess whether they have addressed the following
questions:
• Who am I?
• What are my core values?
• What are the most important areas of my personal and
professional life that I should work on?
3. Implement the personal action plan.
• This involves pursuing relevant education, training, and
experience.

(slide 6 of 6)
4. Prepare for ownership.
• Future leaders need to develop basic management skills,
such as the ability to comprehend financial statements and
to effectively supervise employees.
• They must grasp the role of a board of directors in terms of
its relationship to the management team of the firm.
• They need to understand the relationship between the
business and the family.
5. Design life plans.
• Life plans are for both the individual and the business and
should address the following question:
• What should the résumé of the family company CEO look
like in 5 or 10 years?

5-5c Transfer of Ownership
• Transfer of ownership – Passing ownership
of a family business to the next generation.
• Transferring ownership includes:
• Changing the ownership structure.
• Addressing tax considerations.
• Considering government regulations that protect
minority shareholders.
• Arranging personal holdings to create wealth
outside the business as well as within it.
• Reflecting seriously on family talents and interests
as they relate to the future of the firm.

Key Terms
co-preneurs
cousin consortium
family
family business
family business constitution
family council
family retreat
nepotism
organizational culture
owner-managed business
sibling partnership
socioemotional wealth
transfer of ownership

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