Family Business and Entrepreneurship
A family business is a business actively owned and/or managed by more than one member of the same family.
Family business is a relatively new arena, but business research in this field has gained increased attention recently. As there is not a single or sole, comprehensive understandable definition of a family business associating various research results is, however, challenging. This may be owing to the slight consensus as this is a comparatively new and young research field, but also as of different elements, which affect the changing definitions.
Table of Content
- 1 Family Business and Entrepreneurship
- 2 Differences between Family and Non-Family Firms
- 3 Characteristics of Family Business
- 4 Types of Family Businesses
- 5 Advantages and Disadvantages of Family Business
- 6 Succession Planning
- 7 Pitfalls in Succession Planning
Furthermore, the resemblance and similarity of these firms/businesses can be cross-questioned, as every family business has its history, culture, and characteristic that is diverse in various ways.
However, a firm needs to meet the following conditions to be considered as a family business, irrespective of the legal form, sector, or age, firstly, a family (i.e. an extended family formed e.g. by grandparents, siblings, and cousins, or at most a small number of families) has possession and controls the ownership. Secondly, individuals belonging to the family, or the extended family, are on the company’s board or participate otherwise in the activities of the company.
Distinctive of all family businesses is the addition of a firm, ownership, and business. Endurance of the business is also the one chief element, i.e. there is a conscious intent to hand over the firms (leadership and control) to the following owner generation. For instance, where the voting control is in the hands of a given family, in a proprietorship, partnership, company, corporation, or any other form of business association it is considered a family business.
According to the PWC 2014 Family Business Survey, which is their seventh study of family businesses globally, a ‘family business’ is a business where: most of the votes, one can say, the majority are held by the person who has found/ established or acquired/ purchased the firm (or their family including their parents, spouses, child, or direct hairs of the child’s); minimum one family representative shall be involved in administration or management of the firm.
In a listed company, the person (or their families) who has acquired or found/ established the firm/business must have 25% of the right to vote through their share capital and a minimum of one family member should be on the board of the company.
As an entrepreneur, you may perhaps fear even more than the ordinary entrepreneur about ensuring that your company not only survives but also flourishes to nurture the next generation if you own a family business. Quite a few years ago, researchers David Sirmon and Michael Hitt examined the strategies behind the successful family business. They found that success is knotted directly to how well a company manages the five unique resources every business possesses.
A family business is a profitable and commercial association in which decision-making is prejudiced by multiple generations of a family related by blood or marriage- which is closely recognized by the firm through its ownership or leadership. The owner-manager entrepreneurial firm is not considered to be a family business as there is the nonexistence of the multigenerational dimensional element and family influence that form the exceptional dynamics and relationships of family businesses.
The family business is the oldest and the most common model of economic institute. The massive majority of businesses across the globe from corner shops to international publicly listed establishments with thousands of employees can be considered family businesses. Established to the research of the Forbes 400 richest Americans, 44% of the Forbes 400 member’s fortunes were derived by being a member of or in association with a family business. Over 30% of companies with sales over $1 billion are family-owned businesses.
In a family business, at least two or more members within the managing and administrative team are drawn from the owning family. Family businesses can also have owners who are not extended family members. However, family members are often involved in the process and operations of their family business in some or the other capacity/position and, in smaller companies, usually at least one or more family members are having the positions of senior officers and managers.
Family participation usually supports the business because family members are usually very faithful, honest, loyal, innovative, responsible, and dedicated to the family firm. Such faithfulness generally decreases struggling for power in the business firm, providesupswing to cooperation and trust, great communication and creates a good level of understanding.
The soul of an enterprise and efficient actions are also considered and belong to the strengths of the family business. Decision-making is generally more centralized, effective, and efficient because of simultaneous roles in the family firm. Though, synchronized roles can also have negative consequences and concerns such as mixing up of family ownership and business possibilities, grief from poor profit discipline, and lack of objectivity in the marketplace.
The family business may also have difficulties in special organization structures, internationalization and growth, succession planning procedure, and emotional charge (fights that are based on the ownership and the exercise of power).
However, existing studies have found some submissions that small firms, usually family-owned firms, have performed on average better than large ones measured by profitability and growth. In addition to growth, because of the age structure of the entrepreneurs, succession has lately been an especially important issue in the arena of family business.
- Family businesses constitute about 80%–98% of all businesses in the world’s free economies.
- Family businesses produce 49% of the gross domestic product (GDP) in the United States.
- Family businesses produce more than 75% of the GDP in most other countries.
- Family businesses hire 80% of the U.S. workforce.
- Family businesses hire more than 75% of the working population around the world.
- Family businesses generate 86% of all new jobs in the United States.
- A total of 37% of Fortune 500 companies are family-controlled.
- A total of 60% of all publicly held U.S. companies are family-controlled.
- Number of family-owned businesses in the United States: 17 million.
- Number of U.S. family-owned businesses with annual revenues greater than$25 a million:35,000
- Family business outperformance of nonfamily businesses in the United States:6.65% annually in return on assets(ROA)10% in market value.
- Family business outperformance of nonfamily business in Europe:8%–16% annually in return on equity(ROE), depending on the study.
- Family business outperformance of nonfamily business in Latin America (Chile):8% annually in return on assets and return on equity.
According to the PWC 2014 Family Business Survey; Indian family businesses are focused on growth and most of them are expecting bullish growth (nearly 50%). For achieving significant growth, they are adopting the latest technologies and are keen on professionalizing. Two-thirds of Indian family businesses have grown in the last financial year (2012- 13) in line with the global average.
Differences between Family and Non-Family Firms
Firm-value maximization is not the only goal of the family companies. There exist several other, family-centered goals, such as wealth creation, maintaining socio-emotional wealth and family harmony, as well as providing employment to family members.
While a large number of past studies found the larger financial performance of family businesses compared to nonfamily ones, other authors, such as O’Boyle found no significant main effects. According to a recent study, there exists an economically weak, although statistically significant, superior performance compared to non-family firms. Besides different goals, performance differences are often explained by agency cost reduction.
Since the interests of owners and hired managers are different, managers may act to maximize their utilities instead of those of the shareholders. This vagueness can be mitigated in the case of family firms. However, other authors suggest that with family unselfishness and conflict between majority and minority shareholders, principal conflict can exist, offsetting advantages.
Characteristics of Family Business
Family firms have been an important configuration of the business landscape for ages and have played an important role in employment, income generation, and wealth creation. They represent a major engine of economic growth and wealth creation. They need to plan a confident image and reserve a good status with investors owing to a heightened need to protect the family status and legacy.
Scholars believe family firms contain limited characteristics derived from the pattern of proprietorship, development, and supremacy. These characteristics influence the strategic process thereby disturbing the performance of those firms. The following are the characteristics of the family business:
- In the business high participation of family members: This means by family members the strategy and decision-making, strategic planning, and day-to-day activities in the company are operated.
- High learning and sharing environment within the organization: It means that even in family get-togethers sharing about the business occurs many times. As they frequently get to hear about the business, all family members generally understand the business’s progress.
- High dependability and trust in each other: For instance, it is easier to trust one of the family members to handle the business if the owner or the person who is in charge of the business gets ill or occasionally cannot involve in the business.
- Family-hood management style: The business will manage in the sense of family-hood as the emotional binding within the business is very high. A maximum of the family members respect the founder, as the founder is the parent or grandparent.
- High sense of belongingness from family members to the business: As the business belongs to them or their parent or grandparent the family member has a high sense of belonging to the business.
- Less formal management and twin leadership: The management of family business tends to be less formal and typically twin leadership exists. When the owner delegates the business to the outsider professional or the other family member the twin leadership comes into existence. Though, the owner will still interfere in the decision-making process and will have strong control over the business. It is usual since the owner has a high emotional connection towards the business and high expectations towards the prosperity and success of the business.
Types of Family Businesses
All family businesses are diverse. That is the reason it would be erroneous to collide them all together in less than one caption. While most family businesses are perhaps and probably started for like reasons, their progress is all different, depending much on the ownership style of every family. The various types of family businesses are as follows:
As the name advocates, this is a one-man-army kind of business, where the proprietor or owner wears many hats within the business. This is how maximum family-run businesses start, with one entrepreneur, or twosome as the originator and owner of the new business, and then it develops from there. In most cases, the development and expansion of family businesses from this sole practitioner stage happens progressively and gradually, as the founder family develops and more members take active attention and participation in the company.
This can be considered as an uncertain and problematic phase to change and bring modification in management, as the founder has a strong emotional connection with the company, and might find it hard to submit or surrender or part control of the business with another family member. The sole practitioner is so familiar with running every different feature of the business single handily and often feels extraordinary.
The union of the different entrepreneurs could be in various and numerous different forms; this is not primarily a formal partnership in the legal form of the term such as a Limited Liability Company (LLC), a corporation, or other enterprise. By at least two or more entrepreneurs coming together jointly, this type of family business is created, in the case of family businesses, usually siblings or cousins, then take up ownership and management of different dimensions and facets of the business.
Family-controlled Versus Family-influenced Businesses
This is also a significant area in which family businesses can diverge greatly. When business activity is referred or mentioned to as a family business it means family-controlled businesses. This is a situation where a family member is not the individual owner of the business, but is actively participating in the management and running of the business on a routine basis.
Conversely, in family-influenced businesses, family members do not actively participate in the management and running of the business. It is a situation where the running of the business is possibly delegated to key employees who could be better suited for definite roles than any other family members. Family members may have variable degrees of control in this kind of business model, extending from seats on the board to the greater part of the company shares.
Effect of Internationalisation on Family Businesses
It takes up more interrogations than other business models have to retort when a family business decides to expand internationally. More frequently than not, mounting internationally means that the family-controlled business will necessarily have to welcome outside parties into the supremacy or power of the company in one shape or another.
Family-controlled businesses would require to decide how to take in outside parties in their controlled business with the options available like to give complete control of international subdivisions, have them in more of a decision-maker role, or to a certain degree in-between., As the family is already used to controlling and authorizing external parties, have more control over the actual running and operation of the business. Family-influenced businesses would find this change easier to take on as compared with others.
Seldom, for a family business to positively expand by crossing its borders, the family has to admit the fact that their control over the business may have to be curtailed. This can be tougher for some, but in the long run, each family business must decide what possessing and holding their business means in reality, and how much extent of control over it they need.
Advantages and Disadvantages of Family Business
Following are some advantages and disadvantages of the family business:
Advantages of Family Business
Family firms are long-term concerned with care and growth about the future. This is supported by research done earlier that even in the bad times, this is related to possible greater dependability. Family bonds keep their firms running, which can be seen as a support that non-family firms lack. Predominantly in terms of profits and revenue stability loyalty of family firms is a more universal lookout, has been reported by multiple researchers. Nevertheless, loyalty, devotion, and variation are sometimes considered to be a trade-off relationship. Dislike to change can limit growth opportunities, which has been described by some researchers.
Another aspect of faithfulness is a lower variation of employees, lower rotation of employees, encouraging employment environment, and reluctance to fire employees during times of crisis.
Terms such as faith and relationship have been frequently and commonly mentioned. While they contribute to a better working environment, they are also related to another benefit of family firms; one of the realities is that family ties and bonds minimize misbehavior and criminality.
Another benefit of family firms mentioned by the offenders is the fact and the reality that family owners are keener to share information and know-how with their employees. Within family firms this can be seen as a better distribution of knowledge – both formal and tacit knowledge.
Family businesses also enjoy a positive status in terms of dominance, superiority, and tradition, which may positively affect the demand for their products and services.
Disadvantages of Family Business
Conflicts and clashes seem to be one of the major disadvantages of family businesses. Although all businesses ought to deal with communicating dynamics, family participation brings together a supplementary source of complexity. Conflicts can arise amongst spouses-husband and wife, as well as between parents and children, between siblings, or between family and non-family employees.
Between parents and their ancestors, the first kind of conflict or a clash can arise, and possibly even repeatedly between fathers and sons. In specific, parents and children can have different opinions about management and operational tasks (they are supposed to have different views and attitudes in general).
Children may deliberate their parents old-fashioned, whereas parents must be set to acknowledge that their children can perform better; have a better cognizance of contemporary trends in technology, fashion, society, etc. parents could have too high expectations: children will probably not be as good as their parents expect them to be. Certainly, control by successors has been habitually related to lower profitability, development, or growth in past works.
Principally due to unequal emotional and material handling conflicts may also arise between siblings, where a likely competition may occur between siblings, and between family and non-family members – in precise, non-family employees may see harmfully parents who give special treatment to their children, or favoritism granted to relatives (partiality).
Clashes and conflicts between spouses (husband and wife) but also amongst generations can be due to the absence of parting or bifurcation of work and family: a dearth of boundaries between work and family, bringing homework-related snags and working 24 hours a day. Anotherrecurrentlyrevealed source of conflicts is having no hiding place at home and no possibility of being alone, too much attachment.
Further, when dealing with their children or spouses family firm managers cannot afford to be too strict. Harsh things are not easy to tell when dealing with own family members. Gustaffson and Norgen stated that too strict policies or policies that entirely prevented family ties within the company could harm the company’s way to success in the long run. Such difficulties can emerge in the case of the autocratic leadership style of the family firm founder.
Moreover conflicts or clashes between family members and possible partiality, there are other disadvantages because of emotional ties; a distress of a family firm can have a negative causal impression on the whole family.
Family businesses are limited in the quantum to which succession planning undertakes a key and very strategic role in the firm’s life. Competitive success simultaneously within the firm family harmony, and ownership returns are all at stake, cautiously arranging the multiyear process signified by succession across generations of owner-managers is significant. There are hundreds of reasons why organizations fail, but in family-owned and family-controlled corporations, the prime reason relates to a failure in succession planning.
Whether the underlying reason is inexpert, inexperienced, or unclear succession plans, unprepared successors, or a tired strategy that is unable to comprehend competitors or family competitions and offers for power. For a family business to survive in the long run it has to efficiently and effectively craft its succession process.
Succession can be defined as the procedure through which leadership of a business is transferred from the outgoing generation to the successor generation, which can either be a family member or a non-family member. Family business owners need to conserve that they include the succession facets in their early business model of the family business.
Sustaining the family business over time early identification of succession is a significant and vital element. Interrelated to this is the serious timing of the decision. When should the next generation be introduced into the business, and when should the founder’s family members retire, these are thoughtful, serious, and key questions that need to be planned at the early stage in the life cycle of the family business. It is essential for succession to be considered a process and not an endpoint.
Perils and risks are high when it comes to succession planning for a business. Operational planning creates opportunities; it pronounces, describes, and discourses a company’s planned goals and challenges. It further identifies the qualifications and abilities needed to meet contemporary and forthcoming leadership needs and offers long-term business value.
Thoughtful planning can:
- Elude pressure and less doubt for business owners and families
- Strengthen investor confidence
- Progress employee morale
- Prevent essential business interruptions.
Assuring and guaranteeing a successful transition requires a focus on four dimensions of the business succession plan: leadership, ownership, legacy and values, and wealth transition. Succession planning is neither easy nor straightforward. Those four dimensions sit at the core of any successful succession plan and are key thoughts for all three primary shareholder groups – owners, families, and the business and investments.
From a succession and family perspective
- For all of the children to be entangled and involved in the management of the business is not always possible. The point that they are siblings does not automatically make them good future managers. Recognize the children who will contribute to the future business early, and confirm that they are correctly trained and receive proper skills development.
- In the occasion that appropriately qualified off-springs are not available in time, family businesses could develop and implement a seat-warmer succession strategy where the family appoints one of the family members in a definite position with the view to growing the issues in the future with that specific position.
- Siblings who wish to enter the business have a thorough understanding of the entire business environment facing the family business is required by them. Do not promote them to senior levels until such knowledge of the business is improved.
- To successfully deal with present global business issues investment is needed in the continuous expansion of the people and skills of the enterprise.
From a business perspective
- Family businesses need to create and establish a reliable and authentic market position initially and should build effective trading and supply channels right from the beginning of the business.
- By itself development creates control and management problems, geographical deviation varieties should be managed with extreme alertness.
- Develop an adaptive attitude and a plan to react to unanticipated and surprising events.
- With an outlook to grow the business look out against expanding too quickly. Bigger size does not necessarily mean more success for family businesses.
- Stick to the business model that functioned and worked early in the life of the business, but twist the model in the face of vital environmental changes.
- Map out the cause and effects of early decisions and learn how these will affect the future of the business.
Three patterns of ineffective succession were identified in one study as follows:
- Traditional: Though the parent has departed the business, the parental shadow remains, and the firm and its strategies are impenetrable in the past.
- Disobedient: In what is repeatedly an overreaction to the earlier generations’ control of the firm, the next generation launches a cleanslate approach to the organization. As a product, cultures, ethnicities, inheritances, and even the business model or its ‘secret to success’ are destroyed or rejected.
- Indecisive: The next generation is hooked and paralyzed by indecisiveness, not skillful to adapt the business to contemporary competitive conditions; it also fails to make its mark and adopt leadership effectively.
Pitfalls in Succession Planning
Succession in a family business can be troubled by challenges. Eluding these five pitfalls will upsurge the chances of successful family and business continuity.
- Unclear shareholder goals
- Overlooking the emotions
- Postponing the conversation
- Hiding from difficult conversations
- Underinvesting in the change
There are many shareholders in family business succession: current owners, future owners, staff, family members, and governing boards to name a few. When in the vision of succession, shorten the goals of each key shareholder, chiefly since they are often not related.
Goal transparency is vital for successful business continuity and survival as it consents to honest discussions and eventual agreement on a strategy. Succession decisions made in the void can result in hopeless and unintended consequences.
Overlooking the emotions
Wouldn’t it be amusing if all our decisions were balanced? Thriving, neuroscience is showing exactly the contradiction: our decisions are emotional, and we use reason to defend them. Since every shareholder views succession from a different lens and perspective this pitfall is closely aligned with the pitfall mentioned above with different needs and with different emotions.
Opening and initializing the dialogue about these needs can sense unsafe, and vulnerable, yet it’s perilous to successful transitions. Regarding speaking of emotions, owners who fail to focus on their ‘third act’ or ‘extra career often find themselves paralyzed, incapable to implement their continuity plans.
Postponing the conversation
Whether it’s planned or unplanned, succession will take place, and planned changes set up future owners for better accomplishments than unplanned ones. The longer business continuity discussions are deferred, the fewer the options to consider and shareholders risk getting supported into a corner.
Starting the discussion doesn’t mean implementing the plan. Much work can go into preparing for a successful business transition, from evolving future leaders to estate planning, before the leadership wand is officially passed on.
Hiding from difficult conversations
Leaders of family businesses have contradictory jobs. On one hand, they are responsible for short and long-term sustainability and viability of the business as leaders of a family business. On the other hand, they are often parents, accountable for raising new members of society.
Within a leader sometimes these roles create a fight. Succession planning decisions sometimes lead to disappointing people we love. Finding the courage to have these conversations means leadership.
Underinvesting in the change
Fortuitously, there are many knowledgeable professionals to help because business continuity decisions are often tough. Consider adding a transition advisor to coordinate your advisory team in addition to your attorney(s), auditors, and financial advisors. Think about a philanthropy advisor. Bring in a coach.
To help leaders clear out the dust, make simpler their goals and ease effective decision-making are done with the help of trained coaches. Cooperative advisory teams cost high, but the results they deliver are far more operative and should save you money and sorrow in the long run.