Saint Mary’s University

Bayombong, Nueva Vizcaya

SCHOOL OF ACCOUNTANCY AND BUSINESS

Family Business

“Family business is a firm which has been closely identified with at least two generations of a
family and when this link has had a mutual influence on company policy and on the interests and
objectives of the family.” — R. G. Donnelley

“Family businesses are those where policy and decision are subject to significant influence by one
or more family units. This influence is exercised through ownership and sometime through the
participation of family members in management. It is the interaction between two sets of
organizations, family and business, that establishes the basic character of the family business and
defines its uniqueness.” — P. Davis

In sum and substance, a family business can simply be defined as a business one that includes two
or more members of a family with financial control of the company. In other words, a family
business is one actively owned and/or managed by more than one member of the same family.

Characteristics:

a. A group of people belonging to one or more families run one business enterprise.
b. Position in family business is influenced by the relationship the family members enjoy
among themselves.

c. Family exercises control over business in the form of ownership or in the form of
management of the firm where family members are employed on key positions.

d. Family exercises the influence on the firm’s policy direction in the mutual interest of
family and business.

e. The succession of family business goes to the next generation.

5 unique resources every family business possesses:

1. Human capital. The first resource is the family's human capital, or "inner circle." When the skill
sets of different family members are coordinated as a complementary cache of knowledge, with a
clear division of labor, the likelihood of success improves significantly.

2. Social capital. The family members bring valuable social capital to the business in the form of
networking and other external relationships that complement the insiders' skill sets.

3. Patient financial capital. The family firm typically has patient financial capital in the form of both
equity and debt financing from family members. The family relationship between the investors and
the managers reduces the threat of liquidation.

4. Survivability capital. The family company must manage its survivability capital-family members'
willingness to provide free labor or emergency loans so the venture doesn't fail.

5. Lower costs of governance. The family business must manage its ability to hold down the costs
of governance. In nonfamily firms, these include costs for things such as special accounting
systems, security systems, policy manuals, legal documents and other mechanisms to reduce theft
and monitor employees' work habits. The family firm can minimize or eliminate these costs
because employees and managers are related and trust each other.

12 Essentials for striking the right balance in a family business

1. Set some boundaries. It’s easy for family members involved in a business to talk shop
24/7. But mixing business, personal and home life will eventually produce a volatile
brew. Limit business discussions outside of the office. That’s not always possible, but
at least save them for an appropriate time — not at a family wedding or funeral, for
example.
2. Establish clear and regular methods of communication. Problems and differences of
opinion are inevitable. Maybe you see them already. Consider weekly meetings to
assess progress, air any differences and resolve disputes.
3. Divide roles and responsibilities. While various family members may be qualified for
similar tasks, duties should be divvied up to avoid conflicts. Big decisions can be
made together, but a debate over each little move will bog the family business
down.
4. Treat it like a business. A common pitfall in a family business is placing too much
emphasis on “family” and not enough on “business.” The characteristics of a healthy
business may not always be compatible with family harmony, so be ready to face
those situations when they arise.
5. Recognize the advantages of family ownership. Family-owned businesses offer
unique benefits. One is access to human capital in the form of other family members.
This can be a key to survival, as family members can provide low-cost or no-cost
 labor, or emergency loans. Firms run by trusted family members can also avoid
special accounting systems, policy manuals and legal documents.
6. Treat family members fairly. While some experts advise against hiring family
members at all, that sacrifices one of the great benefits of a family business.
Countless small companies would never have survived without the hard work and
energy of dedicated family members. Qualified family members can be a great asset
to your business. But avoid favoritism. Pay scales, promotions, work schedules,
criticism and praise should be evenhanded between family and non-family
employees. Don’t set standards higher or lower for family members than for others.
7. Put business relationships in writing. It’s easy for family members to be drawn into a
business startup without a plan for what they will get out of the business
relationship. To avoid hard feelings or miscommunication, put something in writing
that defines compensation, ownership shares, duties and other matters.
8. Don’t provide “sympathy” jobs for family members. Avoid becoming the employer
of last resort for your kids, cousins or other family members. Employment should be
based on what skills or knowledge they can bring to the business.
9. Draw clear management lines. Family members who often have a present or
presumed future ownership stake in the business have a tendency to reprimand
employees who don’t report to them. This leads to resentment by employees.
10. Seek outside advice. The decision-making process for growing a family business can
sometimes be too closed. Fresh ideas and creative thinking can get lost in the
tangled web of family relationships. Seeking guidance from outside advisors who are
not affiliated with any family members can be a good way to give the business a
reality check.
11. Develop a succession plan. A family business without a formal succession plan is
asking for trouble. The plan should spell out the details of how and when the torch
will be passed to a younger generation. It needs to be a financially sound plan for the
business, as well as retiring family members. Outside professional advice to draw up
a plan is essential.
12. Require outside experience first. If your children will be joining the business, make
sure they get at least three to five years business experience elsewhere first.
Preferably in an unrelated industry. This will give them valuable perspective on how
the business world works outside of a family setting.

Tips for starting a successful family business

Develop a family business plan

 Define roles: In the excitement of starting a family business, some family members may
have different ideas of how to run it. Determine who will assume each role, and what that
role entails. Detail who reports to each manager so there’s no confusion.
 Compensation: Determine how compensation is awarded, whether it’s a salary, hourly
wage, percentage of profits, or something else. Make sure each employee, family or
 otherwise, understands how compensation works, and make sure everyone understands
relevant state wage laws.
 Ownership stakes: Define the ownership stakes before opening. Are family employees
working for a salary? Do they get a percentage of the business upon its sale or at a certain
time? What are the family members’ voting rights on the company direction?
 Exit plan: What’s the exit plan for each family member? For those starting out — whether
or not they get a salary or ownership percentage — determine what happens if someone
leaves the business. Without understanding this up front, a family member may think he or
she contributed greatly to the business's success and is owed something. If that person
does have an official stake in the business, you’ll need a way to decide what that stake is
worth and how that person will be compensated if he or she wants to leave.
 Create a succession plan: The business founders may want to retire or pass along the
business and start something else. Before opening the business, consider who will be taking
over, how the business will be valued (if necessary) and under what circumstances a
founder or stakeholder may step down. You may need to make changes to this plan after
the business is founded, but at this stage this creates a precedent that you can refine later.
Having a plan in place can lessen hurt feelings or eliminate future disagreements.

 Set ground rules for your family corporation

 Keep your work and personal lives separate. When mixing business and family, it’s
easy for business to become the sole topic of discussion at home or at family BBQs.
Non-family employees who consider themselves important to your business will be
left out. They'll likely want their opinions considered, too, but may not know when or
where to share them. Make it a family rule to talk business at work and have
personal discussions at home.
 Kids must have outside experience. While teens get great experience working at a
family business, they should also get some outside experience before joining the
company full time. Consider mandating that, after high school or college, any
children wanting to join your business for the long term must get experience
elsewhere. That will give them real-world experience and an understanding of how
other companies run. Acquiring additional skills will help them when they join the
family business.
 Get outside advice. Family members aren’t experts in everything. You’ll want a
lawyer to draw up business structure documents such as papers for a family limited
liability (FLC) or family corporation. A lawyer or business consultant can also advise
you on the family business plan, set up human resource programs — such
as employee benefits, employee documents, retirement plans, health insurance,
employment tax forms — and provide expertise your family members may not have.
 Hire outsiders. It’s great to have family members involved, but don’t sacrifice the
company’s best interests by keeping out non-family members who can bring value to
the company and help it grow. An outside perspective may be just what you need.
 Treat everyone equally. It can be hard to treat a nephew or child the same as an
outside employee, but it’s important for morale to do so. Employees, whether
 they’re family members or not, appreciate when everyone is treated the same. It’s
hard to feel motivated if you see that your actions are watched closely but someone
else’s are not.
 Start strong. In the run-up to your launch and early days of your enterprise, you’ll
need to address such operational issues as hiring and succession, product
development, logistics and technology platforms. In addition, you may also have to
mitigate potential tensions that are unique to families.

Three types of family business ROI

• Financial return. Family members need a financial return as an acknowledgment from the
company that their assets are invested in an enterprise with a long time horizon.

• Emotional return. Family members need to feel connected to the company -- its history, its
products, its relationship to the community, its loyalty to employees or its philanthropic activities.

• Relationship return. Family members need to feel good about being business partners together.
Getting together must be a fun, rewarding and fulfilling experience; every family interaction should
not engender a feeling of dread or fear of conflict.

6 Traits of Strong Family Businesses (Business Harvard Review)

1. Families must have a values system, which unites members and provides a common
framework for building relationships with the business and the community. This
gives the organization a moral center that helps sustain it in the face of challenges
and difficult decisions and provides a powerful way to differentiate itself in the
marketplace.
2. The vision for the future is a clearly defined and communicated vision that guides the
family’s actions. Such shared vision is particularly important in the current business
environment, when ambiguity and complexity can be high and incremental
improvements are rarely enough. It allows a business-owning family to set goals and
determine priorities.
3. Families must have clarity on the level of its own involvement and how much
information-sharing will be necessary to ensure that everyone can carry out his or
her responsibilities and be a positive force for the business.
4. They must also demonstrate cohesion and interaction: mutual understanding,
respect and support, and a healthy exchange of ideas and discussion of key and
delicate issues. This determines how resilient the family will be and how it will
respond to change.
5. Good family governance means ensuring that decisions are made and authority
exercised in accordance with established and accepted best practices so as to avoid
conflict, commit to professionalism and attract and retain superior talent.
6. Finally, leadership principles and roles are clearly defined for all executives of a
certain level, whether operating within our outside the company.
***Mastery of all six family gravity dimensions. They have values and vision, the right involvement,
cohesion and interaction, family governance, and clarity on their leadership principles and roles.

14Reasons why family businesses fail

Generic causes of decline and failure for family businesses

1. Big projects gone wrong
You should always carefully consider who you are doing work for (esp. if you are in the
mining industry), the risks associated with that party and to take care that the size of the
transaction does not present undue balance sheet risk.
2. Changes in market demand
New business pipelines can literally halve ‘overnight’ as upstream clients focus on cutting
costs and unnecessary spending.
3. Increased competition
As the environment has become increasingly tough, industry competitors are seeking to
compete more aggressively which is manifesting itself lower and lower prices for
customers, to the point where some work completed is no longer profitable, it simply keeps
the cash flow cogs greased. The potential effect of this is industry structural change which
can impact on otherwise healthy participants.
4. Poor marketing
As a starting point, commence this process with a ‘relationship marketing’ initiative. This in
simple terms is a marketing strategy focused on your existing customer base, those with
whom you have done most of the hard work already and hopefully established a
relationship of trust and understanding.
5. High-cost structures
Through the ‘fat years’ of the mining boom many business owners achieved considerable
growth and prosperity in spite of themselves. Now that the ‘lean post-mining boom years
are starting to bite, business owners have to step up decisively and make every effort to
make their businesses more efficient, productive and capable of running on far lower cost
structures. This statement is way easier said than done as this discipline almost always
involves a reduction in headcount, an extremely confronting task for most clients we deal
with. If you know that you’re going to have difficulty in identifying excess costs within your
business’ cost structures, are not going to be able to make the hard decisions, you should
take action now and seek out someone independent who can help you through this
process, to keep you focused on the desired outcomes. If you are not making enough
revenue and your cost structures stay too high it would seem only a matter of time before
failure comes knocking at your door.
6. Poor financial policy and management
So often businesses are running blind with no budgets, profit and loss statements, balance
sheets, cash flow statements and management accounts in place. Good business strategy
and well run successful business’ dictate that a business’ financial performance must be
accurately measured according to pre-determined financial ‘Key Performance Indicators
(KPIs)’ and monitored and reported on in detail at the leadership level. Of course one
cannot make financial geniuses of all business owners and managers overnight, and this is
most certainly not the object. The objective must firstly be to bring structure, focus and
policy, and then over time to transfer valuable knowledge through knowing and
understanding key data.
7. A lack of leadership
Make no mistake, management is not leadership and leadership is not management.
Notably, my experience would suggest that you will seldom find outstanding leadership and
management attributes in the same person, this is a rare beast. Furthermore, seldom are
there business individuals in leadership positions who have the experience, skills, maturity
and wisdom that affords them the ability to seamlessly transcend one leadership style to
the next as required by the circumstances. The required leadership style in prosperous times
is very different to that in very difficult times. A toxic culture in need of repair demands a
very different leadership style to a healthy culture in a state of flow, and the nature of staff
member and the nature of work will in-turn again demand a very different type of
leadership style. An assessment of business culture and team dynamics in the context of the
environment and circumstances the business finds itself in is required, then reconciling this
to the leadership style in evidence. You need to carefully consider your leadership style in
the context of the issues your business is currently dealing with and in the context of your
team objectives – is this the appropriate style for the circumstances and are you leading and
inspiring your team towards the ‘desired outcomes’?
8. An inability to cope with change
It simply cannot be any clearer, the business environment in Western Australia has changed
significantly and is continuing to change quite rapidly. One must have an ability to see reality
for what it is and deal with it quickly and decisively. You only have a few levers you can pull
on to achieve better financial performance – Sell more, increase price, lower cost of sale,
lower indirect operating costs, change capital structure. Of course within these simple words
is a huge amount, not least of all an enormous debate about business model innovation and
optimization. The point is you must quickly come to terms with what is happening and what
is likely to happen in your business environment and have an ability to identify the correct
lever to pull and know how to pull it. Importantly, change which is a constant, to quote a
trite cliché, requires that action is always taken to cope. Strategy is constantly about moving
from point A to point B; you cannot stand still.
9. Poor cash flow management
This simple fact comes as a surprise to so many business owners and managers – Profit after
tax is not ‘free cash flow’. Because your business is showing a monthly profit please don’t
think that automatically equates to cash in the bank you can spend, as there may be
provisions and commitments against that cash. In challenging times, more than ever, we
advise our clients to focus on cash management, monitoring and control. In good times cash
seems to pour in, in tough times it seems not to come fast enough. In times like these,
business owners should put in place a 4 to 8 weeks rolling cash flow forecast, or longer if
that level of visibility is possible. In addition, monitor you expected cash receipts and
commitments and reconcile this back to the profile and loss.

Family businesses specific causes of decline and failure

10. Death of the business founder
The death of the business founder/owner is reportedly the catalyst for 78% of family
business failures. Business founder who live to retirement age, becomes increasingly
reluctant to face their own mortality and enter into a structured process of handing over
the reigns, leaving the family in a crisis at death.
11. Failed family relationships and conflict
There can be no separating the family business from the affairs of the family, with this
situation becoming more complex over time. Family business owners and leaders occupy
the unenviable position of being ‘mega-structure leaders’, which encompasses the family
business, family and the leader or manager. These three separate but intertwined systems
come together to form a cocktail of very complex dynamics. What often manifests
is incompetent family member employees, spoilt kids in the business, entrepreneurial inter-
generational aggressions, altruism, marital conflict and a tendency towards autocratic rule. It
is only through considerable experience can one hope to navigate and advise clients
through this very complex quagmire.
12. The intermingling of finances
Reportedly two-thirds of family business intermingle family and business finances, and at
times it is very difficult to distinguish between the two. The significance of this is that firstly,
this makes it extremely difficult to measure and monitor the financial performance of the
business accurately, and secondly, this in fact can be catastrophic for the family and the
business. Always consider your business entity ownership structure, and make sure to
structure this in a manner that takes into account potential risks and how to best mitigate
them. Quite obviously, family businesses and family finances should be separated to the
fullest extent possible and furthermore, family assets should be removed from the business
risk to the maximum extent possible. This is a complex subject best engaged as early in the
process as possible, as over time it becomes increasingly challenging and costly to
 implement. In this environment, and particularly if your business is experiencing difficulty in
this environment, you need to pause and consider your family business/family ownership
structure and potentially take advice to see what might be done to ring-fence, mitigate and
remove or distance risk.
13. Scarce financial resources
Most, but particularly early stage family businesses have access to limited financial
resources and lines of credit. The vast majority of family businesses are self-funded, and in
many cases continue to do so out of family assets and the family home mortgage. In a
declining business environment, a significant strain may be put on these limited financial
resources, and it is important to bear in mind that banks will go only so far and no further. It
is therefore essential to understand the limitations to these scarce resources and to clearly
identify at what point in the future that limit might be arrived at. So many family businesses
tend to leave this until it’s far too late and there’s very little, or nothing, that can be done for
them. The statistics suggest that 70% of businesses that attempt to turn their performance
around fail, for this, and other reasons. For those family business owners and managers that
are slow to take action and embrace necessary change what tends to jolt them into action is
when they can clearly see what is at stake (often through a business advisor and strategist),
things like that family home, investment properties etc., should the business fail. Business
owners need to see beyond personal financing and bank debt when considering funding
options for their businesses, and furthermore should explore shareholder equity as a
potential funding option, casting beyond ordinary voting shares as the only instrument at
their disposal. This is a very involved topic which must be dealt with by a very suitably
qualified and licensed advisor.
14. A reticence to call in outside help
A business in crisis or decline can be a very stressful situation to deal with and even more so
when facing it alone. It’s always a good idea to engage an expert and independent advisor
that can help with impartial advice and provide helping hand when implementing robust
strategies and process to build a better and stronger business.

Advantages of Running a Business with Your Family

Owning or operating a family-run business can give you more of an incentive to work harder,
especially knowing that what is at stake affects the people you care about the most. Most likely,
you will have some shared values, and working towards a common goal as a team can come more
naturally. Other benefits include:

 More incentive to work harder

 Initial familiarity among coworkers
  Saves money and time
 More relaxed environment
 Flexible work schedule
 Shared values

Disadvantages of Starting a Small Family-Owned Business

Sometimes, working closely together can create tension, strain already tough familial relationships
and create family business problems.

Not everyone can see eye to eye. Family members are no exception, and they can have completely
different views, which can strain work relations as well. What started as one of the best family
business ideas can quickly turn sour.

Disadvantages of starting a small family-owned business include...

 Too relaxed of an environment

 Lack of qualifying skills
 General family issues
 Informal training and structure
 Possibility of power struggles
 Harder to separate business and pleasure
 Numerous family business conflicts can happen when people who are related work so
closely together, and it is easy to let even the smallest problems turn a business into a soap
opera.

Types of Family-Run Businesses

What kind of company do you want to start? A family can run just about any business together!

Here are some of the best family businesses to start:

 Family restaurant
 Handyman service
 Auto repair shop
 Online retail business
 Cleaning service
 Landscaping company
 Brick and mortar store
 Dog walking or pet sitting
 Child care
 Errand or delivery service
Examples of Successful family businesses

1. Cebu Landmasters Inc

2. United Laboratories (Unilab)
3. Jollibee Foods Corporation
4. GT Cosmetics Manufacturing Inc.
5. SM Group of Companies
6. Aboitiz Group of Companies
7. Goldilocks Bakeshop