Family Business

Introduction

A family business is a commercial organization in which decision-making is influenced by multiple generations of a family — related by blood or marriage or adoption — who has both the ability to influence the vision of the business and the willingness to use this ability to pursue distinctive goals. They are closely identified with the firm through leadership or ownership. Owner-manager entrepreneurial firms are not considered to be family businesses because they lack the multi-generational dimension and family influence that create the unique dynamics and relationships of family businesses.

Family business is the oldest and most common model of economic organization. The vast majority of businesses throughout the world—from corner shops to multinational publicly listed organizations with hundreds of thousands of employees—can be considered family businesses. Based on research of the Forbes 400 richest Americans, 44% of the Forbes 400 member fortunes were derived by being a member of or in association with a family business.

Some of the world's largest family-run businesses are Walmart (United States), Samsung Group (Korea) and Tata Group & Reliance Industries (India).

One Man Wonder in Family Business

When the family business is basically owned and operated by one person, that person usually does the necessary balancing automatically. For example, the founder may decide the business needs to build a new plant and take less money out of the business for a period so the business can accumulate cash needed to expand. In making this decision, the founder is balancing his personal interests (taking cash out) with the needs of the business (expansion).

Ex. Reliance & Bajaj broken down into pieces, when new generation came.

Conflicts Rising in Family Business

The interests of a family member may not be aligned with the interest of the business. For example, 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 in conflict.

The interests of the entire family may not be balanced with the interests of their business. For example, if a family needs its business to distribute funds for living expenses and retirement but the business requires those to stay competitive, the interests of the entire family and the business are not aligned.

Emotional Challenge

The challenge faced by family businesses and their stakeholders, is to recognize the issues that they face, understand how to develop strategies to address them and more importantly, to create narratives, or family stories that explain the emotional dimension of the issues to the family.

The most intractable family business issues are not the business problems the organization faces, but the emotional issues that compound them. Many years of achievement through generations can be destroyed by the next, if the family fails to address the psychological issues they face.

Most first generation owner/managers make the majority of the decisions. When the second generation (sibling partnership) is in control, the decision making becomes more consultative. When the larger third generation (cousin consortium) is in control, the decision making becomes more consensual, the family members often take a vote. In this manner, the decision making throughout generations becomes more rational.

Success of Family Business

We've spent a lot of time studying why some families stay financially successful over generations and others don't. (Actually, most don't.) There are three reasons why families succeed.

• First, successful families see important changes in their industry and adapt by diversifying into new activities that can grow. Simply put, successful families are entrepreneurial.
• Second, families succeed because they invest in productive activities (including the development of the next generation), emphasize growing assets, and consume relatively little of their wealth. These families maintain a culture that encourages family members to create things of lasting value. It's not surprising that these families encourage entrepreneurs.
• Third, successful families remain reasonably united, keeping supportive members loyal to one another and to the family's mission. Over generations, as families become more diverse, it is likely that only a few relatives per generation will directly work in the business. Outside-the-business members might still support family philanthropic efforts or social activities, and sometimes that level of involvement is enough to maintain family unity.

 Investing in family entrepreneurs has to be done objectively based on the feasibility of their business plans, and also fairly within the family. Even if some entrepreneurial projects don't succeed, these investments will help you spot talent to keep your business growing. And you are sending an important message: this family is committed to creating value.