Family Business shares many of the products that any business would, there are some unique aspects that are brought into sharp focus by the complexity of personal family relationship. While family relationships provide unwavering trust and strength to any business, they also pose significant challenges.
In this article, we’ll delve deeper into the definition of a true family business, its key traits, and the challenges it must overcome to survive for generations.
Definitions of Family Business
A family firm could be defined as any organization in which more than one member of a family is involved, or any organization that defines itself as a family business.
Westhead and Strovey 1997 argue that a family firm should meet at least three of the following four criteria:-
- Has undergone an intergenerational transition.
- Has more than 50 per cent of the shares held by the family.
- Has more than 50 per cent of family members involved in day-to-day management.
- Speaks of itself as family firm.
Barclays Bank say in their report “Family businesses say that for a firm to be defined as a true family business, the family should hold a majority of the company’s shares.
In case of a public company, an individual family group must hold at least 25 per cent of the voting shares.
BDO stoy Hayward similarly highlight ownership, management participation and longevity in their definition.
- A single family holds more than 50 per cent of the voting shares.
- Supplies a significant proportion of the company’s senior management, and is effectively controlling the business.
- More than one generation is involved in the business and most importantly.
Core Traits and Friction Points of Family Business
There are many benefits and losses of family Business which are given below:-
1. Incidence
According to the BDO stoy Hayward Center for family businesses up to 76 per cent of UK businesses are family owned.
Only 30 per cent of family businesses survive to the second generation. And 15 per cent to the third generation.
Which highlights succession planning as one of the key issues for family businesses.
2. Insularity
Family business can become quite insular in their approach, and bringing outsiders into a firm is useful in that it offers an opportunity to introduce some fresh ideas and challenges some taken-for-guranted assumptions.
3. Conflicting Priorities
Personal relationships within families can impact upon the effectiveness of the business.
Issues like this are commonplace, they are not isolated occurrences. The ongoing psychological stress might also affect the ability of the owner to manage effectively.
4. Communication
Communication is often informal in families, but, as with any businesses, relying on informal communication can leave some people feeling that they are excluded or that they do not have an equal opportunity to express their views.
Another common problem is the ‘Sunday lunch decision-making’ syndrome, where the family decides on what should be done outside the office.
5. Early Experience of enterprise
The small Business Sector 2003 Household survey states that having an entrepreneur as a parent significantly increases the likelihood of an individual setting up their own businesses.
They are not significantly more likely to have siblings or friends who have been or are entrepreneurs.
This might partly be genetic, but early exposure to small business seems to socialize children to be enterprising.
Role models are very important as influences and, in addition, the offspring of business owners often have sample opportunity to practice their skills by working in the family firm in the evening at weekends.
Perhaps, having some business management at first hand, children are also able to absorb learning informally.
6. Succession
We would like to think that families are harmonious entities but this is not always true.
There can be intergenerational differences in values, aspirations, and opinions as to how the business should be managed.
BDO stoy hayward highlight a range of practical options for the founder, each of which bring their own advantages and disadvantages.
They suggest that the founder can choose to :
- Appoint a family member,
- Appoint a caretaker manager
- Appoint a professional manager,
- Liquidate the business.
- Sell, in whole or in part;
- Do nothing.
They point out the this decisions will be influenced by:
- The availability of suitable family or non-family successors.
- The family’s requirements from the business .
- The personal and corporate tax implications of the various options.
- The health and size of the business.
- The business environment at the time of succession.
7. Support Needs
Barclays in 2002 found that when family businesses were asked what additional help they would like from the government, tax relief on succession was mentioned most frequently – one in four family business owners want support in this area.
Provision of loans, grants and subsidies, better advice and reduced business rates were also highlighted.
Final Thoughts
At last words, Family businesses are the backbone of any economy, but their greatest strength, the family bond can also become their greatest weakness. If you want to avoid the 30% failure trap, you must institutionalize your business.
This means that household matters should be handled at home, and office decisions should be formalized within the office. Only by prioritizing professional competence over blood ties can a family business survive for centuries.
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