What is meant by a family-owned business?
There is a varied level of definitions provided by different authors on what does and what does not mean a family-owned business; however, commonly, business ownership and control generally drive what constitutes a family-owned business. A single-family business effectively controls the ownership of more than 50 per cent and decisions making powers through voting rights or otherwise is termed a family-owned business.
The unique ownership structure and centralised decision-making authority give the family-owned business a long-term orientation than a traditional public or private company.
Evolution of family-owned business
Family-owned businesses are the oldest form of business that started initially with farms raised by a single family. This business structure grew further into the urban society, where the family carries ownership of the business from one generation to another. According to the Boston Consulting Group’s analysis, these businesses include sprawling corporations such as Walmart, Samsung, Tata Group, and Porsche. They also account for over 30% of all companies with over $1 billion in sales.
Three-dimensional model of a family-owned business
The family-owned business’s uniqueness is beautifully explained by the three-dimensional model of a family-owned business. The type of family-owned business and the challenges it will face are determined by its position along three axis, which, over time, the transition from stage to stage. These stages include:
- Ownership dimension
- Family dimension
- Business dimension
Within the Ownership dimension of the three-dimensional model, three stages may occur based on the number of owners and the complexity of ownership. As the organisation moves along these stages, ownership increasingly dilutes among a broader array of families. The organisation may move to any of these stages as it transitions in request, becoming more complex or straightforward. However, the Ownership dimension typically develops in the following order:
In its infancy, a single Controlling Owner, who lives at the organisation’s centre, operates the organisation based on a wealth of knowledge and experience. As a result, the business cannot survive without high input levels from the owner. The company relies on the owner to make most decisions and on employees to complete the required tasks. While this centralised power upholds during this stage, shared control becomes a critical issue when a Sibling Partnership takes over the organisation. Each sibling typically finds their role and stands up as a spokesperson for their business division and family branch. This shared power may spark growth and spread the delegation of authority to more employees in the organisation. The common thread that tied these siblings together often fails to connect the Cousin Consortium. With a blend of many cousins and relatives owning the business, each with their own culture, a shared vision may fail to develop.
A family can build a close identity founded on interpersonal trust and loyalty. However, we have all experienced the deep emotional conflicts that can tie into this relationship. These relationships change and develop over time as the family grows and continues to cycle through generations. As each generation ages into adulthood, their life structure is reinvented – they gain power in the family and business while redeveloping goals, values, and objectives. Critical moments affect the lives of each member as well as the family. The Family dimension can be broken down into the following stages.
The young family business is the first generation of children who start the business. These can be adults or married couples who start together. As age progresses, children see their parents working and entering the family business themselves. The next stage of working together begins when the young generation comes of age to work in the industry. While each generation has its own identity, clear communication can unite them to develop innovative business changes. As the parental unit ages, succession becomes critical for the business’s continuity during the Passing the Baton stage. At this stage, the transferring owner may feel a loss of identity and attempt to make one last heroic leadership stand, which will likely hinder the organisation.
Most small businesses, families and nonfamily fail to sustain enough cash flows to stay alive for only a significant period. More specifically, only one-third of family-owned businesses survive to the second generation, 12 per cent make it to the third, and a dismal 3 per cent survive to the fourth generation (Schooley, 2007). The business dimension of the family-owned business can be categorised into three stages based on the growth and complexity of the company:
The above phases are the standard business time series that every business goes through, i.e., the company opens up as a start-up and then expands; this expansion depends upon several factors, including leadership, management, product demand, and investment. However, the sun doesn’t shine forever, so all the businesses see their margins decline at maturity and then either die down or reinvent themselves.
Best practices in a family-owned business
Like all other businesses, the family-owned business also flourishes, and many have made their names the most successful companies worldwide. Among the public company best practices, the following rules are unique and critical for family-owned businesses:
- Identify the ultimate decision-maker
- Identify the relevant skill sets and invest in them
- Create a transition plan for next generation
- Formalise a structure and create a board of directors that includes both family members and independent directors
- Keep up open communication to enhance trust in the family.
Pitfalls of a family-owned business
The family-owned business has its pitfall, which could hamper its success of the family-owned businesses. Some of the common pitfalls are as follows:
- The transition from one generation to another becomes troublesome if not planned appropriately
- The next generation may not possess the relevant skills to continue the already successful business
- The family tensions may spill over to the business
- Who controls the decision-making becomes complex when the company passes on from generation to generation?
As said earlier, family-owned businesses are one of the oldest forms of operations. History has shown that if appropriately run, these do have success stories to prove their effectiveness.