Family Business at a Glance

Family Business at a Glance

Probably, you are familiar with such business names as Ford, Bombardier Inc, Mittal Steel, Avantha Group, WWE and others. You might have patronised any of these businesses before. They are typical examples of family business. But why are they called families business? What differentiates them from other businesses? Read on to know why a business is categorized as a family business and another is not.

What is a family business?

As implicit from the name, family business refers to any commercial enterprise which has existed for several generations and generations of a family have serious influence on decision-making throughout its years of existence. It is a business whose leadership and ownership has been provided by a family (either related by blood or by marriage) through its years of existence. A business becomes a family business when its management and leadership are transferred from one generation of a family to another. The management of the business took over from a family member and will also hand over to a family member or family members after retirement.

Businesses that have not existed for several generations or whose leadership have not been wielded by several generation of a family cannot be considered to be family businesses. In the light of the above start-ups and owner-manager entrepreneurial firms cannot be regarded as family businesses in making. They are not yet family businesses at this stage but will become family business when it has existed for years and its leadership and management passed from generation to another of the owner.

Family business could be regarded as the commonest and oldest economic organisation’s models. A good number of businesses today even some that are listed in the stock market are family businesses. This type of business plays a very important role in the economic growth of a country. Unfortunately, its role is overlooked to a greater extent because of a number of reasons. One of the reasons why the economic importance of family business is not always recognised is because of lack of information about the operation of these businesses.

The public knows little or nothing about these businesses. Because some of these businesses are managed by a family or are privately managed, they are not bound by the requirements of financial reporting. In some cases, trusts and holding companies manage these businesses for the family members. This explains why some family business owners have little or no information about the operations of their businesses or the ownership structure of their business. The above problems make it difficult for studies to be carried on family businesses as well as on their operation. But one fact that cannot be denied is that they played a very important role in the economic development of a company.

There are a number of family owned businesses today that are publicly listed. When a business is listed publicly, it is classified as a private or a family-owned business if the largest amount of shares in the company belongs to a family. In this case, the family that has the largest share becomes very influential during decision making. Such a family should have enough shares that will give him or her 20 percent of the voting rights when compared with the other shareholders.

There are some family businesses that have grown and achieved international reputation. Their names speak volume in the world of business. Some of these privately owned businesses or family businesses that have achieved international reputation are Samsung Group whose owners are from Korea, Foxconn which is a Taiwan based family business, Walmart which is a US based family business, Tata Group based in India and others. It is said that 30 percent of companies whose sales are more than one billion US dollar are family owned businesses.

One or two members of the families that own these businesses are involved in the management of these businesses. However, there are cases where family businesses are managed by other people who are not members of the family that owned the businesses but these managers are always accountable to the owners. This means that they are hired to manage the business for the family. But the business tends to be more progressive and successful when they are managed by the members of the family that owned the business or when one or two members of the family are involved in the management of the business. This is because these members of the family will always work hard to ensure that the business is progressing.

Common problems encountered by family businesses

There are some problems militating against the progress of a family business. In fact, some family businesses or privately owned businesses have collapsed because of these problems. Here are some of the problems that may cause the collapse of a family business if it is not properly handled.

  • Incompetency of family members to manage the business

Family businesses have been liquidated or bought over by another company because of poor management of the business by the family. Sometimes, family members of a family assume positions which are not capable of handling. When this happens, the business will suffer and if nothing is done to remedy the situation, the business will start to dwindle and will eventually collapse. It is in order to avoid this problem that most people hire experts to take prominent managerial positions in their business but render account to them.

  • Different of interests

Another problem that may militate against the growth of a family business is the difference of interest between the family members and the business. The family may have interest in charity while the business will require fund for growth. If such difference of interest is not harmonised, the business will suffer.

Difference of interest may also occur among the members of the family that own the business. This sometimes can result to fight or even legal battle that may result to the disintegration of the business. For example, a family member may want the business to be sold so that he gets money to enter into some other business or even to engage in frivolities while other members of the family will want to keep the business because it means much to them. They will still want the business to continue and be handed over to their future generation.

Laissez-affair attitude of a family member may constitute a problem between the members of the family. If a family member is extravagant and he or she is wasting the business money, such a lifestyle can affect the progress of the business.

The above are some of the problems facing family businesses. They have caused the fall of a business. However, these problems may not occur and when they occur, they can be handled in such a manner that the business is not affected.

Points to consider in order to avoid these problems

If you own a family business or you are starting a business and you will like it to be a family business, there are some points that you should put into consideration that will help your business to avoid having some of the problems mentioned above. Here are some of these points.

  • Allocation of profits accruing from the business to family members

Sharing of a family resource can cause serious problems among the members of the family if it is not properly determined earlier. It is important that members of a family that own a business to determine on time how financial resources are to be shared to the members of the family. It is recommended that any agreement reached should be written down and signed by an attorney. A review clause should be included in case the future generation wants to review it.

  • Power of control

Control of the business is another crucial matter. The family members should decide on how responsibility or management of the company should be wielded. If they are not agreed on who will handle key functions, it is advisable that they hire other people to manage the business for them. But family members who are competent to manage the business should be allowed to take prominent positions.

  • Conflict resolution

Another point that should be taken into consideration by family members of a privately or family owned business is how to resolve conflicts arising among them. Sometimes, conflict of interest among the family members can cause serious problems in the business. The family should anticipate that and decide on time how to handle such problem. Premium should be put on the good and progress of the business when resolving any conflict. Given the above mentioned possible problem a family business may encounter, the family members should work out a solution for each of them before they occur. These should be written and included in the policy and contract of the business.

  • Transfer of the business to younger generation

It should be decided on time who and who should have right over the ownership of the business. For example, the family members have to decide on time whether in-laws should have any right over the ownership of the company and if they should, their right should also be determined.

  • Decision making

Decision making is very crucial in every business. As it has been said above, it can constitute a very serious issue in a family owned business. If the business is managed by one person, then it is the responsibility of the owner to make decision unless he or she hires another person to manage the business for him or her. When it is owned by multiple individuals, decision making can become more challenging and difficult. Before decision is made, it is recommended that owners cast vote if no agreement is arrived. They can also hire consultants in that regard.