Family business

Family business is a dominant organization form worldwide. Over 75% of all registered companies in the industrialized world are family businesses (OECD).

Few key groups are: -

Fiat Group (Italy) revenues $54.7 B (Agnelli family)
Grupo Modelo (Mexico) revenues $3.5 B, (Diez Fernandez family)
IKEA (Sweden) revenues $10.4 B (Kamprad family)
L’Oreal (France) revenues $12.2 B (Bettencourt family)
McCain Foods (Canada) revenues $3.5 B, (McCain Family)
Samsung Group (South Korea) revenues $98.7 B (Lee family)
Tata Group (India) revenues $7.9 B (Tata family)
Reliance (India) – Ambani Family
The Gap (USA) revenues $13.8 B (Fisher Family)
Wal-Mart (USA) – revenues $217.8 Billion (Sam Walton family)

Fortune 500 companies now constitute only 10 percent of the US economy. Companies with 19 or fewer employees create 50 percent of US exports. Companies with 500 or more employees create only 7 percent of US exports. About 83 percent of Small and Medium Enterprises (SME’s) are family businesses: members of the same family occupy top management positions and own the majority of the shares.

What distinguishes a family business from any other?

Features

Key advantage of a family business is that a cohesive force usually exists providing a strong sense of mission and a shared vision ideally cemented by loyalty and commitment.

The benefit of low capital costs allows them to adopt longer-term business strategies or to exploit market niches, which are not sufficiently profitable for larger business.

Family business is also free from pressure for short-term profits. They own long term perspectives, saving and reinvesting capital and viewing the business as legacy of heirs.

Family business is inward looking. Decisions are based on emotions rather than commercial grounds.

Let’s compare systems in family and business systems.

Family System Business System

Traits Traits

Inward looking Outward looking
Emotion based Task based
Unconditional acceptance Unemotional
Sharing Reward performance
Lifetime membership Perform or Leave
Averse to change Embrace change

Tasks Tasks

To nurture To generate profits
To develop To develop skills
To grow adults

Family businesses have their own life cycle.

Birth and initial expansion

Worldwide statistics show that the mortality rate among small and middle-size businesses is about –
15 % at the end of the first year of existence and 23 % after the second year.

The newly created company is a fragile little flower, which demands a great deal of effort, time, and energy devotion, just like a newborn child does. Opening companies have a propensity to have high operational costs and low profits while the turnover is rather modest and still unpredictable.

Everything depends on the promoter’s personality. As the driving force of the company, he takes all the decisions and assumes all the economical responsibilities. As the young company grows, more employees are coming to work in its dynamic team. Trustworthiness and loyalty to the company are important values.

The great challenge for families in business is to separate the world of the family and the world of the business appropriately and to maintain this separation.

Growth and complexity: Development through Generations

A crucial period for a family business is during expansion. There will come a stage when the family or existing management do not have either the skills or sufficient time to manage the business effectively. It is time to introduce external management, if not done.

In this stage, the Promoter must delegate many tasks, allow others to take over vital functions in the company and he must be able to hand over the power of decision to others, be it family members, be it non-family employees.

The typical stages of development for a family business, as it passes on from generation to generation, is for the founder to pass the business on to his or her heirs.

The founder must be prepared to gradually let go of his direct influence in exchange for indirect influence through his leadership. The non-family members working in a family business need special attention. When the children grow up, some of them will probably work in the family business. The way they enter the family business is important.

Maturity – Sibling Rivalry

As the business "matures" and Promoter also grows older, the business is fully developed.

The second generation has taken over some of the leadership and they have important functions in the company. In the second generation there may be conflict between brothers and sisters due to sibling rivalry.
Non-family managers and executives are in high positions.

However primogeniture, the phenomenon of favoring the first born, is often evident in a family business, with elder brothers, is often evident in a family business. Conflict may arise from a parent’s wish to treat children equally.

The Founder has to consider transference of the property and the delegation of the management. The fair distribution of the property among all the children is such a way that the continuation of the company is not endangered, is a difficult and complex task.

The basic rule is: ‘what is good for the company is good for the family.

For every business stage the prerequisite managerial skills and abilities are different and many of the dilemmas faced in family business are related to the stage of development of one or more family members. Each of these issues has its own challenges and tasks, and the business can suffer if the family does not face such realities.

Principles in Managing Family Business

1. Family Business does not mean unprofessional business.
2. Accept emotions and personal relationships as unavoidable elements in the rational world of your company.
3. Accept the synchronicity of the family and business life cycle.
4. Keep family and business separated whilst knowing that they are both sides of one coin.
5. Accept help in order to avoid blindness for family and for business affairs.
6. Respect the loyalty of ‘non-family family’.
7. Give the company a chance.
8. Succession is a coin with two faces: hereditary succession and management succession.
9. Succession preferably implies a (mental) de-familiarization.
10. What is good for the company is good for the family.