A family business is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business

A family business is a business in which one or more members of one or more families have a
significant ownership interest and significant commitments toward the business’ overall well-
being.

In some countries, many of the largest publicly listed firms are family-owned. A firm is said to
be family-owned if a person is the controlling shareholder; that is, a person (rather than a state,
corporation, management trust, or mutual fund) can garner enough shares to assure at least 20%
of the voting rights and the highest percentage of voting rights in comparison to other
shareholders.[1]
Some of the world's largest family-run-businesses are Walmart (United States), Samsung Group
(Korea), Tata Group (India) and Foxconn (Taiwan).

Contents
1 Definition
2 Problems
3 Structuring
4 Scenarios
5 Succession
6 Success
7 Examples of family businesses
8 See also
9 References
10 External links

Definition
In a family business, two or more members within the management team are drawn from the
owning family. Family businesses can have owners who are not family members. Family
businesses may also be managed by individuals who are not members of the family. However,
family members are often involved in the operations of their family business in some capacity
and, in smaller companies, usually one or more family members are the senior officers and
managers. Many businesses that are now public companies were family businesses in India.

Family participation as managers and/or owners of a business can strengthen the company
because family members are often loyal and dedicated to the family enterprise. However, family
participation as managers and/or owners of a business can present unique problems because the
dynamics of the family system and the dynamics of the business systems are often not in
balance.

Problems
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.

Or, 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.

Finally, the interest of one family member may not be aligned with another family member. For
example, a family member who is an owner may want to sell the business to maximize their
return, but a family member who is an owner and also a manager may want to keep the company
because it represents their career and they want their children to have the opportunity to work in
the company.

Structuring
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).

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 (Alderson, K., 2011).

Scenarios
Balancing competing interests often become difficult in three situations. The first situation is
when the founder wants to change the nature of their involvement in the business. Usually the
founder begins this transition by involving others to manage the business. Involving someone
else to manage the company requires the founder to be more conscious and formal in balancing
personal interests with the interests of the business because they can no longer do this alignment
automatically—someone else is involved.

The second situation is when more than one person owns the business and no single person has
the power and support of the other owners to determine collective interests. For example, if a
founder intends to transfer ownership in the family business to their four children, two of whom
work in the business, how do they balance these unequal differences? The four siblings need a
system to do this themselves when the founder is no longer involved.

The third situation is when there are multiple owners and some or all of the owners are not in
management. Given the situation above, there is a higher chance that the interests of the two sons

not employed in the family business may be different than the interests of the two sons who are
employed in the business. Their potential for differences does not mean that the interests cannot
be aligned, it just means that there is a greater need for the four owners to have a system in place
that differences can be identified and balanced.

These three scenarios can be mitigated by following the guidelines of TMP, or "The Maria
Principle"

Succession
There appear to be two main factors affecting the development of family business and succession
process: the size of the family, in relative terms the volume of business, and suitability to lead
the organization, in terms of managerial ability, technical and commitment (Arieu, 2010). Arieu
proposed a model in order to classify family firms into four scenarios: political, openness,
foreign management and natural succession (See Succession planning).

One of the largest trends in family business is the amount of women who are taking over their
family firms. In the past, succession was reserved for the first born son, then it moved on to any
male heir. Now, women account for approx. 11-12% of all family firm leaders, an increase of
close to 40% since 1996. Daughters are now considered to be one of the most underutilized
resources in family businesses. To encourage the next generation of women to be valuable
members of the business, potential female successors should be nurtured by assimilation into the
family firm, mentoring, sharing of important tacit knowledge and having positive role models
within the business (Alderson, 2011).

Success
Successfully balancing the differing interests of family members and/or the interests of one or
more family members on the one hand and the interests of the business on the other hand require
the people involved to have the competencies, character and commitment to do this work.

Family-owned companies present special challenges to those who run them. The reason? They
can be quirky, developing unique cultures and procedures as they grow and mature. That's fine,
as long as they continue to be managed by people who are steeped in the traditions, or at least
able to adapt to them.[2]

Often family members can benefit from involving more than one professional advisor, each
having the particular skill set needed by the family. Some of the skill sets that might be needed
include communication, conflict resolution, family systems, finance, legal, accounting,
insurance, investing, leadership development, management development, and strategic
planning.[3]

Ownership in a family business will also show maturity of the business. If all the shares rest with
one individual, a family business is still in its infant stage, even if the revenue is strong.[

The changing face of family business in India
Article | 1 February, 2002 05:21 PM | By Sumant Batra

The centre of the Indian social identity is the family. In many cases, the family not only tells you
who you are but also what you do. Thus, family businesses are not merely economic structures;
for most business community individuals, the business is the source of their social identity.
Furthermore, the family and the business are not treated separately. The boundaries of essentially
two different systems, family and business – with distinctive rules governing their respective
behaviours – overlap within the business house. While the exclusive dynamics of family culture
and relationships have been imposed on the internal logic of managing a business enterprise,
business relations have been allowed to play a role in governing relationships within the family.

The result has not always been a happy one. As professionally managed companies enter the
marketplace, bringing with them a high degree of competitiveness, the Indian family managed
business (FMB) finds itself under threat. A series of vital choices over its future role confront the
Indian FMB if it is to thrive, perhaps even survive. Given that in India, more than 70% of
businesses are family-owned, the problem is alarming. Therefore, while India's business houses
cope with the inevitable need to bring about rapid strategic, operational and financial
transformation in their business, they need to add one more item to the agenda: rewriting the role
of the family in business in the given present economic scenario.

The next generation
The new generation of entrepreneurs is playing a significant role in changing the face of FMBs
in India. Scions in their 20s and 30s equipped with skills obtained from foreign business
universities and professional institutions have joined the family business, impatient to implement
changes to their businesses on a par with international standards and to compete with the best. In
many cases, their approaches conflict with the way the family has managed its business until
now. A further complication is the 'heiress factor': daughters and sometimes their husbands
staking their claim for a share of management, a paradign relatively new to the male-centric
family business.

Familial splits
These factors are translating into a threat for the Indian FMB's, resulting in fracturing of the
group, sapped synergies, abandoned economies of scale and crises of leadership. With 62% of
the country's 50 largest business houses already having entered the second or third generation,
splits are perhaps becoming inevitable. This trend started with a prominent split in the Dalmia
family in 1952 and became noticeable in the 1980s when the Oswal, Kothari, Sri Ram, Singhania
and Bharat Ram families split. In the 1990s, it became a regular phenomenon with splits in the
families that controlled some of the biggest corporations in the country: Ranbaxy, Chhabaria,
Apollo, Mittal, Walchand, Bhartia, Thapar, Bangur and Bakeman.

FMBs in India are realising that the ostrich principle does not work – ignoring a problem won't
make it go away. Forcibly preventing conflicts that may lead to splits will not serve either the
family or the business well. What is required instead is succession planning within the ranks so
as to prevent internecine wars or morale-sapping struggles for power. For instance, the Rs800

crore* (€185 million) Dabur India group appointed management consultants a few years ago to
chart out a strategy for its inheritors.

In India, splits have goaded growth. The trend indicates that groups that have split outperformed
those that have not. When the three Goenka brothers split in 1979, the sales of each truncated
group were Rs70 crore. From this modest beginning, RP Goenka constructed a Rs6000 crore
group and GP Goenka assembled the Rs2500 crore Duncan Group. The third brother did not do
as well comparatively, but the sum of the parts is definitely more than it would have been had the
brothers stayed together.

Management of the fall-out of the splits has not been an Indian business family's stronghold. Nor
has a contingency plan been kept in mind for carving out the family empire in such an
eventuality. When the split is primarily a result of conflict within the family, it is not possible to
create alternative avenues of growth for different members without endangering the core group.
Thus, the protector becomes the destroyer. A striking example of this is the division in the Modi
Group of companies, one of the country's largest industrial houses. A settlement drawn up in the
late 1980s to divide the various group companies between two groups of the Modi family has
still not been successfully implemented – litigation continues to date. The two groups, which
have since split further into sub groups, are backing out of the settlement, claiming bigger slices
of the pie in the profit making companies belonging to the group – and no one is willing to own
the companies facing rough weather.

Money mismanagement
Another problem that has plagued Indian FMBs is money mismanagment. Indian FMBs have
always focused too much on money. In India, money is not power, but money can buy power.
Most businessmen are extremely sensitive to the social and political environment and take care
not to be seen as being powerful. Politicians, administrators and businessmen in Indian society
congregate in mutually exclusive social circles. Power, thus, has little attraction.

Though money is a great attraction in Indian family business, there has never been focus on
money management. In smaller businesses, short term gains and profits influence business
strategy. There is no planning for the future, no recirculation of money and no investment for the
future.

In larger businesses, the problem is even more serious. The bigger projects require borrowing
from public financial institutions and banks. Traditionally, the project promoters are required to
contribute about 20% towards the cost of the project. The balance comes via public financial
institutions and banks, and from the public at large in lieu of equity offered to them. Though the
stake is only 20%, the control on money is virtually 100%. The approach is to run the entire
business at the risk of the 80% that comes from the outside. Very often, the promoters take away
their 20% as soon as the disbursements are made by the financial institutions. This 20% and the
major chunk of the remaining 80% is siphoned away or sometimes, even legally, poured into
other privately-held family businesses. In some extreme cases, the money meant for working
capital is even used to provide luxuries to the promoters and to finance their and their family's
overseas holidays. Needless to say, there is no contingency plan. Thus, the businesses are very

vulnerable. In such a scenario, even a non-event such as a modest shift in tax policy or variation
in demand for a product can cause a major setback to the business.

Possession and emotion
It is quite natural for families in business to be possessive and emotional about their business and
assets. Over the years, a strong bond is woven between the family and business. Apart from the
fact that the family's social standing becomes linked with its business, family members also see it
as a symbol of the older generations that struggled to build the business.

Unfortunately, this emotional tie can only end up working to their disadvantage. For instance, if
a business, despite possessing the potential to do well, is not faring well for various reasons (such
as lack of adequate funds, loss of creditors' confidence in promoters, mismanagement), the
promoters are not prepared to walk out to make way for new management or even induct another
partner who is willing to bring in money. The reason for this behaviour is that they can not
comprehend a situation of sharing business with an outsider.

When companies with an eroded net worth approach the Board for Industrial and Financial
Reconstruction (BIFR – a body of experts set up under the Sick Industrial Companies [Special
Provisions] Act, 1985), seeking measures for their revival, often every effort of the BIFR to
explore revival by change in management is resisted.

However, the professionally-managed companies are realising the need to be more realistic. Mr
Parvinder Singh, the CEO of Rs1261 crore Ranbaxy Laboratories has been quoted to say,
"Tomorrow, if I am not capable of handling the company, I had better pull out. Being the highest
shareholder I will be the biggest loser if the company suffers because of me".

Mudslinging and criticism
Traditionally, creditors have always looked upon family businesses with suspicion. Yet, they
cannot help but finance them as they form a major chunk of India's economy. Unfortunately,
they have taken the failures of FMBs as a matter of course. They have adopted a very passive
approach and remained mute spectators to family disputes. This policy of washing their hands of
the problem -– terming it as an internal family issue – has faced criticism. No initiative has been
taken by them to deal with the problems related to this phenomenon of family business. One
reason for this has been to avoid accusations of taking sides within the family. Since most of the
leading financial institutions are publicly held and the banks are nationalised (with the
government seen as their controlling body), maintaining a safe distance from internal disputes is
seen as a compulsion.

There have been instances of mudslinging against the financial institutions that have come
forward to help. One such case is the Modi family dispute. There, the chairman of Industrial
Financial Corporation of India (IFCI) was appointed as a mediator to implement the settlement
reached between the two Modi family groups wherein various group companies were divided
between them. Since about Rs2000 crore of public funds were at stake, the chairman of IFCI
agreed to act as a mediator. When he gave his decision, one group challenged it in court, making
serious allegations of bias against the chairman of IFCI. This eventually dragged him to court
and forced him to file affidavits.

The up-side
A stage has been reached where the family owned businesses have become the least preferred
employers. People perceive uncertainty in career development in family owned businesses, a
level of transparency that is below average and think the businesses compare poorly on
leadership qualities. However, the fact remains that FMBs have been the vanguard of the
economy for about a century. The family business dominates the private sector in terms of
number and performance. It has grown faster than the rest of the economy and forms the
majority of India's industry in terms of numbers, investments, profits and most of the other
quantifiable numbers. The private sector has rarely taken pride of place in the literature of Indian
industry and its achievements were barely mentioned in the planned economy regime that
dominated Indian industrial growth ever since India attained its independence.

Government policy has kept the private sector out of most critical sectors of the economy and its
contribution to national industrial and service products has not been proportional to its numbers.
The large infrastructure and core industries sectors remain largely the monopoly of the
government-funded public sector. These companies are much larger than the family managed
businesses and perform very poorly compared to private sector businesses. The public sector has
been marred with controversies and surrounded by corruption. The public sector includes some
of the largest and most prestigious sectors in oil, gas and other core industries. However, they
have been termed 'unprofessional industries' because they have not been able to exploit the large
resources at their disposal. Too much government control has added a bureaucratic touch to the
running of these companies.

Morale booster Recently, there has been a serious rethinking regarding the potential of the
private sector companies. There is a realisation that the country's infrastructure can be managed
better by some of the leading companies in the private sector. FMBs like the Ambani's, Lalbhais,
Ruias, Premjis and Bajajs are considered to be India's best managed business houses and have
the ability to handle the infrastructure and core industry much more professionally than if run by
the government.

As a result, the Government of India has recently reviewed its industrial and investment policy
and has decided to disinvest its equity and control of many public companies. Already, the
Government has divested its share holding in its Rs1000 crore Bharat Aluminium Company Ltd,
one of the largest aluminium producing companies, in favour of the Aggarwal-controlled Rs3000
crore Sterlite Group. Air India, the state owned international carrier; SAIL, the largest steel
manufacturing company; Indian Oil Corporation; Oil and Natural Gas Company; and other core
and infrastructure industries owned by the Government of India, both profit and loss making, are
at an advanced stage of disinvestment. The state governments are also selling off their stake in
state-controlled electricity boards to the private sector. Undoubtedly, this is a big morale booster
for the FMBs.

Strengths
Indian cultural values give Indian companies a markedly different flavour. The difference
reflects the hierarchy and values of the controlling family. Indian FMBs are very image
conscious. The image of the business directly reflects on the family's reputation and their social
standing. Similarly, the family's social standing provides added respectability and advantages to

the family's business. Therefore, the two biggest strengths of Indian business families are
understanding of the environment and image.

Another strength is the ability to settle disputes without resorting to litigation. The community
looks poorly on families that take disputes to court or outside the community. There is great
pressure from the community to settle disputes through negotiations and if necessary through
arbitration by a community network of associates, friends and relatives. Take the following
classic, true example. A dispute arose between two members of the National Stock Exchange of
India, both from the same family. In accordance with the Stock Exchange Rules, the dispute had
to be solved by way of arbitration. A retired Judge of the High Court was appointed as arbitrator.
Both the parties however, approached the arbitrator with a request to appoint a panel of their four
common relatives to settle their dispute and requested that based on their decision, an award
based on settlement may be passed. The four relatives gave a decision and the arbitrator passed
an award based on settlement.

Western research indicates that 70% of firms fail to reach the second generation. Some of these
losses are due to lack of successors. In India, however, things are very different. There are four
major stake holders in the family firm: (i) the family members who own the firm and see it as a
source of identity, income and social bonding; (ii) the managers who see the firm as the source of
professional advancement and livelihood ; (iii) the workers who see it as a source of stability and
livelihood; and (iv) the rest of the society, which sees it as a social and economic institution. The
continuance of the firm is seldom in debate among those connected with it. Even if the family
members want to shut it down and liquidate its assets to get their shares, other stake holders don't
let it happen.

A need for change
The evolutionary context of business is crying for the involvement of the Indian business
families to change. A typical family business goes through four stages in its development:
entrepreneurial; functional; process driven; and market driven. Still mired, for the most part, in
the first and second stages, the Indian family business house must, of necessity, progress to the
next two phases. And more importantly, it is the family that must initiate and implement the
changes. The family must appreciate the distinction between the environment of two separate
systems and withdraw to prevent conflict between the rules and expectations for behaviour in
each system. The owner is in the process of changing its role to goal setting and governance
rather than being involved in day to day operations. For instance, in 1997 Vikram Lal set a
precedent at the Rs1000 crore Eicher Group by renouncing all his executive posts, despite
holding about 70% of its equity. Instead, he chose to head a supervisory board that was to guide,
but not control, the group companies. The Goenkas of Rs6000 crore RPG Enterprises have also
shifted their focus to governance and not to day to day running of the organisation. Anil and
Mukesh Ambani, the sons of Rs10, 000 crore Reliance Group CEO Dhirubhai Ambani, prefer to
use their expertise not to overrule the ideas and efforts of their managers but to use it as a tool for
communication between intellectual equals, to weigh the merits of managerial decisions.

Forward-thinking patriarchs
This change in traditional business methods was influenced by a few forward-thinking
partriarchs in the 1970s. At that time, they began sending their sons to business schools in the

US. This move not only earned respect from their executives, but it also began a process of much
needed professionalism. Today, the strategy is being extended to another level. The executive's
respect can not be earned by owning money and being the boss. Rather, the families are expected
to know a lot about their industry. For example, it is a point of honour for a family member of
Mafatlal, one of largest family managed textile industrial houses, to walk around the weaving
shed discussing counts with the master. Rajiv, Rahul Bajaj's son, worked on the shopfloor of a
competitor for a year, gathering work experience before joining the family-controlled Bajaj
Auto. It can go even further: Rahul Bajaj went to the extent of living in the factory complex. No
one expects the executive to out-do or out-know his employees, but it certainly helps him
understand his business and the view point of his employees.

Motivation for change
Given these new priorities, a crucial question for the business family will, of course, be that of
motivation. What priorities need to change? The traditional business house has always pursued
growth, finding finance for the growth, enhancing the worth of its portfolio, maximising its own
returns and establishing firm ownership control. Threatened by survival, however, these
objectives can no longer be primary. Instead, pride of place must go to the construction of an
entrepreneurial culture, the management of human resources and the orchestration of competitive
advantages. The new roles will flow automatically from the pursuit of these changed objectives.
Thus, the focus needs to shift from 'what to do' to 'how to do it'.

Even though the past few years have been among the most difficult ones in recent history, more
entrepreneurs than ever before are feeling confident enough to embark upon new ventures. A
large and growing number of new family groups have appeared on the corporate landscape in the
1990s. Many of these are jostling with the old guard for a leadership position. Fresh blood such
as the Nambiars (BLP), Guptas (Lloyd Steels), Jindals (Jindal Strips), Singhs (Ranbaxy), Mehtas
(Torrent), Motwanis (Ratnagiri), Dhoots (Videocon) and Premji (Wipro) have elbowed out the
former stalwarts such as the Dalmias and Walchands. The robustness of the new groups,
combined with the unmistakable vitality in at least a dozen of the older ones, is proof enough that
family business in India is not just alive, but kicking.

20 challenges faced by a family owned business
17 08 2006

Every business organization has a unique set of challenges and problems. The family business is
no different. Many of these problems exist in corporate business environments, but can be
exaggerated in a family business.

Family business go through various stages of growth and development over time. Many of these
challenges will be found once the second and subsequent generations enter the business.

A famous saying about family owned business in Mexico is ―Father, founder of the company,
son rich, and grandson poor‖ (Padre noble, hijo rico, nieto pobre). The founder works and builds
a business, the son takes it over and is poorly prepared to manage and make it grow but enjoys
the wealth, and the grandson inherits a dead business and and empty bank account.

Prepare now and help your grandson avoid the poorhouse.

20 challenges for the family business

1. Emotions. Family problems will affect the business. Divorce, separations, health or
financial problems also create difficult political situations for the family members.
2. Informality. Absence of clear policies and business norms for family members
3. Tunnel vision. Lack of outside opinions and diversity on how to operate the business.
4. Lack of written strategy. No documented plan or long term planning.
5. Compensation problems for family members. Dividends, salaries, benefits and
compensation for non-participating family members are not clearly defined and justified.
6. Role confusion. Roles and responsibilities must be clearly defined.
7. Lack of talent. Hiring family members who are not qualified or lack the skills and
abilities for the organization. Inability to fire them when it is clear they are not working
out.
8. High turnover of non-family members. When employees feel that the family ―mafia‖ will
always advance over outsiders and when employees realize that management is
incompetent.
9. Succession Planning. Most family organizations do not have a plan for handing the power
to the next generation, leading to great political conflicts and divisions.
10. Retirement and estate planning. Long term planning to cover the necessities and realities
of older members when they leave the company.
11. Training. There should be a specific training program when you integrate family
members into the company. This should provide specific information that related to the
goals, expectations and obligations of the position.
12. Paternalistic. Control is centralized and influenced by tradition instead of good
management practices.
13. Overly Conservative. Older family members try to preserve the status quo and resist
change. Especially resistance to ideas and change proposed by the younger generation.
14. Communication problems. Provoked by role confusion, emotions (envy, fear, anger),
political divisions or other relationship problems.
15. Systematic thinking. Decisions are made day-to-day in response to problems. No long-
term planning or strategic planning.
16. Exit strategy. No clear plan on how to sell, close or walk away from the business.
17. Business valuation. No knowledge of the worth of the business, and the factors that make
it valuable or decrease its value.
18. Growth. Problems due to lack of capital and new investment or resistance to re-
investment in the business.
19. Vision. Each family member has a different vision of the business and different goals.
20. Control of operations. Difficult to control other members of the family. Lack of
participation in the day-to-day work and supervision required
21. TACKLING CRISIS OF FAMILY OWNED BUSINESSES
22. Most family owned businesses face a sobering reality the odds are stacked against their
long term success. Around 90% of family-run businesses do not survive as a single entity
beyond the third generation worldwide. A similar trend has been seen in India as well, as

ambition, greed and aspiration of the newer generation leads to family feuds, resulting in
disintegration.
23. Things are hunky-dory in the family and business prospers while the patriarch is alive,
and is calling the shots. Since he is the head of the family, the business is run
professionally enough, with few bickering by the other members.
24. The risk to the business comes from within the family, usually when it migrates to the
second or third generation. Things begin to change with new elements coming in, and
outside influences. It may be something to do with the education or ambition of the new
generation, experts say.
25. If the head of the family views each member of the family (sons) equally and delegates
equal responsibility after a consensus is reached, then matters stay is control.
26. To hold the family together and be involved in business at the same time, many family
businesses have devised a unique model of floating a holding company. Like in the case
of Swedenâ€™s Wallenberg empire, which is governed by the familyâ€™s holding
company which holds controlling or large equity stakes in leading Swedish multinational
companies such as ABB, Scania and Ericsson. In India, a similar example is Tata Sons
where Ratan Tata is the chairman of the holding company, while all other businesses are
run by professional managers.
27. But if the scion of the family decides to carve out a bigger role for himself he may decide
to be at the helm or become involved in the business. In this case, the company should
put in place an independent assessment process to evaluate whether the family member
(be it the son of the patriarch) can fulfill the role, as desired by the organization.
Otherwise, it should get a professional.
28. But what happens in cases where there is no professional management structure, or a
clear succession plan has not been laid down.
29. A good example is Thermax where Anu Aga handled the succession issue successfully
when her husband died suddenly.
30. Sometimes, complications arise because of the women in the family. The environment in
the family may get vitiated if the ladies of the house stay together, and the seed of
discontent is sown if one of them feels that she has been ignored. A way out in this case
is that the family sets up a governance council to understand the needs and aspirations of
each family member, and how these can be fulfilled in a fair manner.
31. The Murugappa family in the south has stayed together for several years because of its
chairman, MV Subbiah which handled both family issues and governance very well. He
created a Murugappa Corporate Board, quit as CEO and became a mentor-director,
placing an ombudsman-like role ensure that the family does veer from the mantra of
corporate governance.
32. It then becomes difficult for the family business to remain as a single entity. The Modis,
Nandas and recently the Singhsâ€™ (Analjit versus Malvinder) and the Ambani spat are
all cases in point.
33. A few of them such as the Delhi-based Munjals and and Jindals have, however, defied
the odds and continued to thrive, with or without a split.
34.
more at http://www.citeman.com/859-tackling-crisis-of-family-owned-
businesses.html#ixzz1uGLXAdAE

Meeting the Unique Challenges of Family-owned Businesses
By Harrison B. Miller

July 01, 2010

Family-owned businesses make up a large share of the world’s current economy. No matter their
size, these companies confront many of the same challenges as non-family-owned businesses—
managing growth, hiring the right people and competing for market share. Given their ownership
structure, however, family-owned businesses face distinct issues that can affect both family
relationships and business strategy in complex ways. In this article, we examine how outside
investors can help these dynamic companies successfully navigate those unique and interrelated
challenges.

Liquidity and control

Almost by definition, a family-owned business is a highly illiquid asset. Although owners of
family businesses may be worth millions of dollars on paper, they still worry about the mortgage,
tuition for children and grandchildren, or personal guarantees made to banks on behalf of the
business. While these owners would like to reap the fruits of their labor and achieve enough
liquidity to secure their personal future, they do not want to starve the business of needed cash or
sell it too soon. What are their options for achieving liquidity without giving up control of the
company?

Those were some of the complex issues facing Sybari Software, a New York-based security
software company managed by Cofounder, CEO and President Bob Wallace and his two sons-in-
law. Bob had always resisted outside investment, preferring to reinvest cash flows to support
steady growth. As he grew older, however, Bob began to think of ways to provide financial
security for his family. In 2001, Summit Partners made a minority investment in Sybari,
providing Bob and his sons-in-law with immediate partial liquidity. While leaving Bob firmly in
charge of operations, Summit helped Sybari expand its board and management team. Over the
next four years, Sybari grew 30% annually and became attractive to both public market investors
and acquirers. As Sybari prepared for an IPO in 2005, Microsoft offered to buy the firm. The
acquisition positioned Sybari for further growth and assured the financial security of Bob and his
sons-in-law.

Expanding the team

Family business owners tend to rely on people close to them—spouses, children, long-time
friends and employees, and trusted advisors. When the company is growing rapidly, however,
entrepreneurs may require the expertise and perspective of outsiders. An experienced CFO, for

example, can help a company navigate more complex accounting requirements, while an
executive with international experience can work to establish a global presence. Even so,
recruiting outside executives and integrating them into the family-owned business structure can
be daunting. Business owners must assure new hires that their career paths are secure within a
family-owned company, and they must help long-standing employees and family members
understand the role of the new manager.

By bringing in additional expertise, an outside board can help the family-owned business make
the transition toward a larger, more professionally managed company. This board should include
representatives of the family as well as outside directors with experience relevant to the
company. In 2007, the American Family Business Survey found that more than one-third of the
businesses it served maintained an active board of directors and that more than half of those
firms rated the board’s contribution as excellent.

On its path toward growth, AlphaSmart, a manufacturer of computing device keyboards for
schools, expanded both its management team and board. Brothers Ketan and Manish Kothari and
their partner Joe Barrus founded the California-based company and built a successful product for
the educational market—a computer that was simple, affordable and durable enough for
elementary and high school students. Yet, as their company grew, the founders knew that they
would require more expertise. After investing $20 million in AlphaSmart, Summit Partners
helped the founders hire seasoned veterans for the positions of CFO and director of operations.
Summit also assisted AlphaSmart in building an independent board with the requisite experience
and perspective to guide the company to success. Over the next five years, the firm grew from a
single-product company into a provider of diverse technology solutions to the educational
market. AlphaSmart went public in 2004; one year later, Renaissance Learning (NASDAQ:
RLRN) acquired the company.

Succession planning and exit strategies

All founders must eventually choose a successor, but the decision is particularly fraught with
emotional issues in family-owned firms. Should the future CEO be a family member, or should
the family find the most qualified outside candidate? If the latter, how can the founders be sure
that the new leader will run the business in a way that aligns with the family’s goals and values?

In many cases, succession means transferring ownership or management of the firm outside the
family. Business owners who do not want to pass on their business—or who do not have an
obvious successor in the family—might consider selling their business through either an IPO or a
strategic acquisition.

Marc, Oliver and Alexander Samwer founded Jamba! in 2000. The three brothers knew that they
would eventually want to sell their digital multimedia content company, just as they had sold
their Internet auction company a few years earlier. Based in Germany, the company had a limited
profile among U.S.-based financial firms and investors. By taking on Summit Partners as an
outside investor, the Samwer brothers hoped to increase their visibility in the U.S. market, while
expanding their business from Germany to the rest of Europe. In 2003, Summit invested in
Jamba!, and by the next year was already working with investment banks and strategic buyers to

prepare for an IPO or acquisition. Due to this dual-track process, in 2004 VeriSign (NASDAQ:
VRSN) acquired Jamba! for $273 million—one of the largest technology transactions in Europe
that year.

The role of an investor

Built on the sweat equity of their founders, family-owned businesses often grow for many years
without outside capital. As these companies reach a certain size and their founders begin to
consider retirement and succession, family-owned businesses can often benefit from a
partnership with an outside investor.

Great care should be taken in selecting the right investor, however. Families that seek to
maintain control should ensure that the chosen firm has a long-standing history of minority
investments and a proven ability to add value without micromanaging day-to-day management
decisions. Families that intend to cede control should look for investors that have been successful
in bringing companies like theirs to the next level, while respecting and amplifying the values
and priorities that first made the business a success.

Ideally, outside investors can provide capital and guidance on the critical issues that face
companies as they grow to the next level—strategy, management and board recruiting, financing,
acquisitions and networking with potential buyers. They can also offer an impartial perspective
on the difficult emotional issues that family ownership can entail. Moreover, as minority
investors, they can provide all this support while leaving day-to-day control in the hands of the
family.

BEST PRACTICES:

Family Businesses Doing It Right
by Mike Cohn
Far from being the weaklings of the commercial world, family businesses are the invisible giants
of industry. Family companies are the world's dominant form of enterprise.

Two- thirds of all U.S. companies are family owned and managed. Nearly half of the 1000
largest industrial companies in the U.S. are family companies. So are 40% of the Fortune 500.
Sixty percent of all U.S public companies are family owned, and family firms are even more
prevalent abroad.

ABOUT DR. DAVIS
Dr. John Davis, Senior Lecturer at Harvard Business School and President of the Owner
Managed Business Institute based in Santa Barbara, Calif., has been working with family
businesses for 20 years.

Families that have managed to nurture both family and business over two or more generations
can teach us a great deal. Research by Dr. John Davis, president of the Owner Managed Business
Institute in Santa Barbara, Calif., shows that those family businesses that have been most
successful and enduring have demonstrated many important practices:

Family and company management treat family as family and business as business.
The family nurtures a family culture of loyal differences.
The family cultivates a garden of virtues for family members.
The company maintains a compelling, long-term business vision.
The family, management, and shareholders practice patience.
The family and management emphasize competence and openness in the company.
Business leaders respectfully manage shareholder loyalty.
Family and company make tough decisions in a timely way.
Family and business leaders plan beyond their own lifetimes.
Family and company support their servant leaders.

Magical Synergy
Properly woven together, family and business elements create a magical synergy of forces. A
business can enhance a family's sense of purpose and build mutual loyalty as well as wealth.
Family leadership and ownership of a company can sustain a long-term innovative culture of
surprising passion and loyalty. For family and business to function well, they must be
integrated—yet relaxed enough to keep family and business separate and distinct from one
another.

'I succeed when my family succeeds' is an ancient Chinese saying that truly applies to successful
business families.

Given the central role of the company in the life of a business family (especially in the first two
generations of the family), it is difficult to separate what is business from what is family. It is
very tempting to hire relatives who do not deserve jobs in the company, pay them more than they
deserve and pay higher dividends to family shareholders—all in the name of family love and
harmony.

Successful business families recognize that a business must have a clear set of rules and
boundaries that everyone follows. But along with treating a business like a business, leaders of
successful family companies must respect the needs of the family and be compassionate to the
relatives.

Successful business families recognize their responsibility to provide emotional support and
guidance to their members and to raise responsible adults. They nurture individual identities and
encourage respectful relationships and healthy interdependence.

To help maintain healthy boundaries between business and family, successful family and
business leaders set explicit rules, rights, and responsibilities (the 3Rs) for members of the
family, employees of the business, and for shareholders. Where there are agreed-upon

boundaries, business leaders are more likely to demonstrate respect and enthusiasm for their
families, and communication in each of these areas will typically be more clear and effective.

Nurturing Loyal Differences
Successful families recognize thateach individual within thefamily is distinctive and for a family
to thrive, differences must be respected. Without a basic respect for individuality, individuals
wither, and with them goes their creativity and ambition. The instinctual need for unity within
the family challenges this individuality. Business families, which have a lot at stake financially
and otherwise, sense an even greater need for unity.

When unity is forged by respecting and harnessing the diverse strengthsof relatives, the family
becomes oneof relatives, the family becomes oneof the most powerful teams known tosocial
scientists.

"I succeed when my family succeeds" is an ancient Chinese saying that truly applies to
successful business families. Family members do not rely on each other for every need or
become overly dependent on the family for support, but they learn to use the strengths and skills
of the family and its members to support their individual and family goals.

Cultivating Virtues
For a business to continue thriving for generations under family leadership, each successive
generation must be developed to effectively carry on its values and traditions. Key virtues must
be instilled in at least some of the children to perpetuate both the company and the family.

The best family business dynasties forgo short-term personal benefits in favor of long-range
prosperity.

Successful business families cultivate many virtues in their children, including individual
responsibility, teamwork, problem solving, honesty, fairness, loyalty, respect, strong work ethic,
discipline, love of family, modesty, humility, bravery, confidence, and giving back to the world.
It is not enough just to espouse virtues such as these; they must be taught and nurtured by
example.

Compelling, Long-term Vision
High performing family businesses excel at fundamental business practices and at creating
compelling, long-term business visions. This vision unites everyone in the organization and
focuses them on a target. It makes them reach and extend beyond themselves.

Family companies are more likely to create visions that go beyond just making profits into
creating visions that compel generations of people to contribute to the organization, its
customers, and society as a whole. The best family business dynasties forgo short-term personal
benefits in favor of long-range prosperity.

Practicing Patience
Patience is a virtue that invariably pays off. Aggressive reinvestment in the business, and modest
dividend payouts to shareholders, have always been hallmarks of high performers, but these
practices are extremely important today.

It takes that much more reinvestment for most companies to keep pace with competition and
remain viable. The best family companies aggressively reinvest earnings for the long-term,
refraining from short-term gain. The leadership of a family business must build a sense of long-
term value created by hiring and developing competent managers and investing in innovation
and growth.

Family companies come to this strategy more naturally than other companies because family
shareholders usually share a mutual interest in perpetuating the business, and in watching its
equity, and thereby their own wealth, grow for the benefit of the next generation.

Competence and Openness
The highly successful family business maintains an innovative, open culture that is highly
responsive to its environment, including customers, employees, competitors, technology, and
external ideas.

They are on a quest to do business better by seeking advice and constructive feedback from
family members, employees, customers, and external experts. These businesses maintain
adequate external privacy while openly sharing information with employees and family
members. Internal openness about the business improves employee motivation, family loyalty,
and company profitability. These businesses hold all employees accountable for results, and they
give them the tools necessary to produce results.

Leading family businesses insist on competence within company ranks, regardless of whether
this hurts career prospects of family members. Outside experience is encouraged and "safeguard
structures" (like family employment review committees) are developed to assure fairness in all
situations. Rules are most effective when they are developed before a family employment
situation arises. Employment rules are discussed by the family, endorsed by the board of
directors, and implemented by management.

Management Shareholder Loyalty
Attentive shareholder relationship management is key to success in family businesses. Active
shareholders proactively manage information and communication with passive shareholders.
They avoid shareholders being the "last to know" by ensuring appropriate shareholder
involvement in discussions and decision-making Boards of directors, family councils audit
committees, and family customer focus groups are created to provide vehicles for information
sharing and gathering. Although it may seem ridiculous to establish such explicit rules for
shareholders at the early stages of the family business, it is imperative for long-term success.

Once the family company is passed to the siblings, decision making often becomes more difficult
because of the rivalry that often exists among them. Decision-making problems generally grow
at the cousin consortium stage.

Timely Decisions
Nothing brings a business down faster today than indecision. If a family business stalls out
because it can't set direction at the top, it soon will be overpowered by companies that can and do
make timely decisions. Families, too, can be disabled by the fear of deciding. Decision-making
in family business is fraught with conflicting goals and powerful emotions.

Decades-old patterns of behavior are preserved and perpetuated in the family, and decisions
about matters such as management and ownership succession can be delayed, often too long.

Successful family businesses ensure and that decisions can be made in a timely fashion. They use
their boards of directors, family councils, and management teams to assist them in important
decision-making processes. And they empower employees at all levels to make decisions
regarding their own positions and tasks.

Because family relationships are more emotional and have more history behind them, successful
business families need to manage their emotions and anxiety and build trust in each other's
abilities to make decisions.

Planning Beyond Lifetimes
Successful family companies anticipate the challenges they will face in the future and prepare for
them. They adopt a generational outlook and a commitment to maintaining their businesses over
the long haul. To plan really long-term, however, family leaders must plan beyond their own
lifetimes.

Family leaders of successful family firms consider succession early on and champion the process of
change. They make sure the family or others are prepared to assume leadership in the future...

Families and boards must periodically review their plans and policies to ensure that the family
feels psychological ownership of the rules that bind it to the company and that the rules are
sensible. The planning process should allow for healthy discussions and consideration of
business concerns (performance, products, services, customers, employees), family concerns
(finances, leadership, involvement, employment), and ownership concerns (shareholder
involvement, returns on investment, leadership succession) so that all issues can be voiced and
managed effectively.

One of the most important plans that the family must make regards succession in the business.
Family leaders of successful family firms consider succession early on and champion the process
of change. They make sure the family or others are prepared to assume leadership in the future
and that family members and employees alike support the transition process.

Supporting Servant Leaders
Leadership of these complex systems must be strong-willed, clear, and decisive. It must provide
the strategic direction and moral compass for business and family. Servant leaders bring their
own visions to their roles, but more importantly they see themselves as serving the needs of their
company and family.

Those effective in this role see their position as resulting not from entitlement, but from their
ability to advance the cause of the system. Good family leaders are caring and seek their power
for the good of all those involved. It is not unusual for business families to have more than one
leader, and leaders of the business and the family may not always be the same.

Fairness bravery, empathy and trustworthiness are fundamental characteristics of successful
servant leaders. These leaders are ultimately focused on the values that have made their
companies and families strong. In the final analysis, enduring business families and their
companies are about values. It should come as no surprise that their leaders are the chief
protectors of these guiding values.

Family-Owned Businesses
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THE PROS AND CONS OF FAMILY BUSINESS
ROLES IN THE FAMILY BUSINESS
FAMILY BUSINESSES AS A TRAINING GROUND
EXTENDED FAMILY
THE PLANNING PROCESS
SYSTEMS FOR PLANNING IN THE FAMILY-OWNED BUSINESS
THE FUTURE OF FAMILY BUSINESSES
RESOURCES
FURTHER READING:

Family-owned businesses are recognized today as an important and distinct organization in the
world economy. Family-owned businesses now operate in every country and may be the oldest
form of business organization, but only within the last decade have their unique benefits been
identified and studied. Family businesses have been described as unusual business entities. The
description is due to their concern for the long-term over generations, their strong commitment to
quality and its relation to their own family name, and their humanity in the workplace where the
care and concern for employees is often likened to that of an extended family.

More than 90 percent of the companies in North America and a majority of businesses located
around the world are family-owned. Some of the more recognizable businesses still managed by

family members include Benneton, Beretta, Estee Lauder Inc., Tootsie Roll, Playboy, Gucci,
Carnival Cruise Lines, Harley-Davidson, Inc., U-Haul, Ford Models, Forbes Inc., and Ford
Motor Co. They vary widely in regard to the overlap of family and business issues, and much
can be learned from studying their experiences.

Family businesses provide the only setting for an unusual social phenomenon, the overlap of
family issues and business issues. The family business offers two separate but connected systems
of family and business with uncertain boundaries, different rules, and differing roles. Family
businesses may include numerous combinations, including husbands and wives, parents and
children, extended families, and multiple generations in roles of stockholders, board members,
working partners, advisors, and employees.

The two systems in a family business, described as the interaction of two separate but connected
systems, are often shown as two overlapping circles depicting the unclear boundaries of family
and business.

THE PROS AND CONS OF FAMILY BUSINESS
Family businesses provide a number of advantages to family members, the most common being
freedom, independence, and control. In addition, they also offer many lifestyle benefits such as
flexibility, prestige, community pride, and creativity. Family businesses normally provide for
closer contact with management, are less bureaucratic, have a built-in trust factor with
established relationships, and provide for hands-on training and early exposure of the next
generation to the business.

On the other hand, family businesses also bring a unique set of challenges. Family businesses are
often recognized in the popular press as a source of difficulty when it comes to succession issues,
identity development, and sibling relationships. Succession is one of the largest challenges facing
family businesses, and in most cases the process is resisted. Succession becomes an issue when
the senior generation does not allow the junior generation the necessary room to grow,
effectively develop, and eventually assume the leadership of the business. Often business
relationships among siblings or between parent and child deteriorate due to an underlying
difficulty in communication within the family. This behavior erupts into criticism, judgments,
conservatism, lack of support, and lack of trustll elements that affect the business.

Family-owned businesses typically have a set of shared traditions and values that are rooted in
the history of the firm. Depending on how they are viewed, deeply rooted traditions and values
can be a positive or a negative influence. In a changing world, family businesses can honor their
traditions if they realize they can be guides to selecting the best course of action when there is a
recognized need for change. It makes sense to honor traditions and trust them; they have
survived because they have helped the family business prosper. It doesn't make sense to let
traditions stand in the way of progress and change. Traditions themselves have evolved and
changed over time. In fact, the best time to reaffirm the family business's tradition is when it is
threatened or appears to conflict with the future prosperity of the business.

Family communication, conflict with relatives, and sibling relationships typically rank among
the top ten concerns among family-owned businesses. When these issues conflict with
shareholder value, it often becomes necessary to bring in an outside consultant to deal with them.
The main issue in solving such family-related problems is to deal with them openly and begin
communications within the family toward solving the problems. Other keys to a successful
family business include mutual respect, the presence of good role models within the family, the
ability to not take business issues personally, and the patience and ability to listen to others.

A history of the family business can be a useful tool to improve communication and
understanding among family members. By telling the story of how the business was founded and
its early struggles, the history helps members of succeeding generations better understand the
values and attitudes of the family toward the business. In addition to transmitting family values,
the family business history can be used to perpetuate a unique business culture and create
cohesiveness among employees. It can also be used as a marketing tool to project a positive
image of the company and the family behind it.

ROLES IN THE FAMILY BUSINESS
The most successful families in business have clearly defined roles and responsibilities for
individuals involved in the enterprise. Most often these roles have fallen along gender lines. The
most common form of family business is one in which a husband and wife are both involved.
Often, such a business has typically been referred to as "his," while the wife's role is of helpmate.
Women are often in the office, on the computer, or doing the bookkeeping and have even been
described as "invisible." These same capable women, however, often become "instant
entrepreneurs" when their husbands are ill or die, or when an economic crisis forces them to
assume the husband's role. Such gender stereotypes are slowly changing.

The role of a father who is also the boss of his children is more often a difficult one to balance.
One father shared the story of his son who was always late for work and provided a bad example
for other employees. He called him aside one day and said, "Son, as your boss, I have to tell you
you're fired, and as your father, I am sorry to learn you have just been fired."

Research indicates adult children describe their fathers as bosses in many different ways. One
son's statement relates the patterns that repeat in families and therefore carry over to the business,
"I'm stubborn just like him, and it is like looking in a mirror." In the ideal case, the father serves
as a role model and trainer for the next generation. He treats both his sons and daughters equally
and exposes them to various aspects of the business. He listens to their ideas and lets them make
their own mistakes. He views the business as a team project rather than an individual effort and
turns over the leadership reins before the children reach the age of 35.

Mothers are influential whether they work in the business or not, and their roles need to be
recognized. Traditionally, mothers have worked behind the scenes supporting their husbands and
maintaining the home. The changing roles of women have brought them challenges when trying
to balance home and business. One woman said she wished she was more like Mrs. Cleaver,
which seemed to reflect her confusion about not being a mother like her own, yet also not being
comfortable in a leadership role in a business. Often women do not get equal credit in the role

they choose. Just like the case of the fathers, these roles also carry over into the next generation
and influence both daughters and sons.

Brothers and sisters usually disagree in their views of their mother, but agree in their views of
their father. This might be explained by the fact that fathers are seen primarily as the leaders in
the business, while the mothers play a variety of roles, and sons and daughters describe the role
they are most comfortable with. For example, one son describes his mother as always being at
home for him, while the daughter described her active role in the business.

FAMILY BUSINESSES AS A TRAINING GROUND
Perhaps the best job training programs throughout history have been family businesses. Research
indicates that over two-thirds of all people starting businesses today grew up in a family business
environment. Many share stories from early childhood when they stayed at the family store, rode
on the delivery trucks, or went to visit customers with their parents. This early exposure enables
them to hear, see, observe, and absorb the business environment. This experience can teach
children about the value of money, customer relations, dealing with employees, and how an
organization operates.

A number of factors have been found that predispose children to be interested in the family
business. The first is time spent with their father in the business. Most family businesses
currently operating in the United States were started after World War II and most were founded
by men. As more women start businesses, children will also benefit in this way from spending
time with their mother in the family business setting.

Exposure to various aspects of the business positively affects children. As they grow they
assume new and varied roles, developing skills in the business as they take on each new role.
With encouragement and a positive attitude from the parents about the business, their interest is
heightened. Along the way, as children work in the family business, their individual contribution
to the team needs to be recognized on a regular basis.

Lastly, an opportunity to join the company needs to be presented to the children as a career
option. Not all children will join the family business, but they should know how to fully take
advantage of the opportunity if they so choose. Throughout this training process children and
parents who see each other as peers have an optimal relationship.

Daughters have special needs when it comes to developing as leaders in family businesses. They
normally spend less time in the business, develop fewer skills, and face a major obstacle right
from the start because fathers typically consider sons over daughters as potential successors. The
process of preparing daughters to join the business is often overlooked. A report from the family
business workshops held at the Wharton School of Business over a three-year period showed that
among female Wharton business students, only 27 percent planned to enter the family business
and only 22 percent studied business in college.

Research shows a number of surprising factors which influence the leadership interest of women.
Women tend to show an interest in leading the family business when their brothers are not strong

leaders, when they do not have a spouse or children of their own, and when they are asked by the
father to join the company. Women are found to be held back from leading the company when
they lack skills and knowledge, experience constraints within their own family, or have little
encouragement from their father or husband. Women who are not at all interested in the family
business have not developed an identity in the business, have found better opportunities
elsewhere, or are dependent on their spouse to satisfy their financial needs.

When it comes to sons, researchers found that the quality of the work relationship between
fathers and sons varies as a function of their respective life stages. When sons are between the
ages of 17 and 22, and they are in the process of establishing identity and separating from the
family, poor communication is common. At this time, the father is typically in his forties and is
also re-examining his identity and appraising his life. Here fathers want to give their life meaning
and exert power and control, needs that are in conflict with the needs of their sons at this time.
As the father reaches his fifties, and the son matures from 23 to 33, the father has become less
competitive and with his experience he may have the inclination to teach. Sons during this time
feel an urgency to focus their lives and settle in, re-appraising the past and considering the future.
They strive for competence, and desire recognition and advancement. By 40 the goals of
competence, recognition, advancement, and security become pressing, and the son struggles with
authority if the father is still involved in the business. The father, perhaps in his sixties, is
reminded about retirement and often death, which leads to a problematic relationship should he
try to hang on to the business. There are numerous cases of sons in their fifties with fathers in
their seventies and eighties who still are in control of the family business. This becomes
problematic for the individuals involved as well as for the business itself.

Sibling relationships in the family business are important since these are the vehicles by which
social skills are learned, and siblings often go on to work together. These relationships play a
significant part in identity development, yet research is sparse in this general area. Sibling
accommodation in the family business occurs when they agree on their relative positions of
responsibility and power.

EXTENDED FAMILY
Extended family members can play a wide range of roles in the family business. Family
businesses become more complicated in multiple generations when all of the family members
stay involved in some manner. For example, a husband and wife start a business and involve
their three children. These three children have six children each for a total of 18. These 18 have a
total of 29 children between them. Within 50 years over 50 direct descendents could now have
involvement, and that does not include in-laws.

In-laws are controversial in family businesses. Some businesses have a rule not to involve in-
laws in either ownership or management, while others involve them to varying degrees. In either
case it is best to have clearly defined rules when it comes to the role and responsibility of in-
laws, and clear expectations of the consequences in the event of a death, divorce, or involvement
of children. In one case, the son-in-law was asked to stay on in a management capacity in the
business after the daughter divorced him, which caused friction between the father and his
daughter for the next 20 years.

THE PLANNING PROCESS
Planning is more crucial to the family business than to other types of enterprise because most
families have a majority of their assets tied up in their business. Estate planning becomes
essential and is intertwined with succession planning, business planning, and family planning.

Estate planning involves the financial and tax aspects of the company. Families plan to minimize
taxes at the time of the owner's death so the resources can stay within the company. Current tax
laws provide disincentives for families wishing to continue the business.

Business planning often guides the entire planning process and sets the agenda for the future
operations of the business. This process may be overseen by a board of directors, an advisory
board, or professional advisors. Owners must ask themselves where they want the company to be
in 5, 10, or 20 years, including the level of family involvement. Owners often have a mental
picture of this, but unless a business plan for financing purposes is necessary, it is usually not
down on paper.

Succession planning is a long process that owners normally wait too long to address. The
grooming, training, and development of talent in the next generation should start in the
preadolescent years.

Most family businesses do not have a succession plan. This becomes crucial in the event of a
sudden death. Often the remaining family members do not know where to begin to pick up the
pieces. This is the reason most family businesses do not succeed to the next generation. The
issues involved in succession are too numerous to leave to chance, and without planning, it is
likely the family business will not successfully continue.

The lack of planning, particularly in first to second generation businesses, is often the fault of the
founder himself. Usually the business is such an extension of his life that he has few outside
interests and cannot imagine leaving the helm. As a result, his business dies with him. Others
who recognize these issues too late in life may hastily turn over the business to an ill-prepared
child, only to have him fail.

Family planning takes into account the needs and interests of all family members involved with
the business. The formation of a group called a family council often guides the communication
process between family members and management. They address issues such as rules for entry,
conduct, and community relations.

A 1999 survey of 500 family-owned businesses conducted by family business consultants
Regeneration Partners of Dallas, Texas, found that the number one concern among family-owned
businesses was planning for estates, taxes, and wealth. Ownership transfer or succession ranked
second. In spite of the significance of these concerns, an estimated 25 to 50 percent of all senior-
generation business owners have put off making business estate plans.

SYSTEMS FOR PLANNING IN THE FAMILY-OWNED
BUSINESS
There are numerous systems which can aid planning in the family-owned business. Estate
planning is normally handled by a team of professional advisors, including a lawyer, accountant,
financial planner, insurance agent, and perhaps a family business consultant. Estate planning
normally begins with the success of the enterprise and is continually updated as the business and
family change.

A professional family business consultant can be a tremendous asset when confronting these
planning issues. The consultant is a neutral party who can stabilize the emotional forces within
the family and bring the expertise of working with numerous families across many industries.
Most families believe theirs is the only company facing these difficult issues, and a family
business consultant brings a refreshing perspective. He or she can be involved at many levels,
including working through the succession process. This may involve a variety of issues, such as
training the children, selecting a successor, involving non-family management, and facilitating
the transition process. In addition, the family business consultant can establish a family council
and advisory board and serve as a facilitator to those two groups.

Often the firm's attorney and accountant may see planning problems coming, but they are not
prepared to face them directly for many reasons. Some do not feel they have the specialized
understanding of family dynamics, while others fear they could lose a client when dealing with
sensitive issues. Instead, they may make the recommendation to bring in an outside family
business consultant for an interim period of time.

A family council is a system that encourages family involvement and communications. It allows
for a regular meeting where family members can voice their opinions and plan for the future in a
structured way. Ultimately a more organized and strengthened family will emerge. Children gain
a better understanding of the opportunities in the business, learn about managing resources, and
inherit values and traditions. Conflicts can be discussed and settled.

Topics brought to family councils can include: rules for joining the business, treatment of family
members working and not working in the business, role of in-laws, evaluations and pay scales,
stock ownership, ways to provide financial security for the senior generation, training and
development of the junior generation, image in the community, philanthropy, opportunities for
new businesses, and diverse interests among family members.

These family meetings evolve and change as the business evolves. A business in the first
generation usually only involves a nuclear family, whereas a business in the second generation
with a sibling team faces additional issues of family harmony, equal treatment, and the
involvement of multiple children in the business. A family business in its third generation or
beyond may include cousins, in-laws, and family members not working in the business. Issues in
this case become much more complicated and may include commitment, traditions, community
image, and resource allocation.

Family businesses typically evolve through three stages, and the type of leadership required at
each stage is different. In the entrepreneurial stage, the business is designed around the founder
or leader. It is driven by personal and family goals and depends on the leader's intuitive
direction. Eventually the business evolves to the managerial stage, where it is more organized but
still like a family. The firm begins to require outside expertise and financial discipline. Structure
and accountability are established. Tension can arise as family members begin to lose some of
their freedom from structure, but they recognize that a lack of structure is causing frustration,
too. Finally the firm enters the professional stage, where it is driven by what is best for the
business. More goal-setting and market-driven strategic planning takes place. In determining
who will be the next leader of the family-owned business, it is necessary to recognize what stage
the business is in and select the leader with the most appropriate strengths and characteristics.

Family members who participate in family councils find it a good forum to voice their opinions.
They feel more like a team, and they see progress being made. Leadership of the family council
can be on a rotating basis, and the family business consultant may leave the facilitating role once
the forum is well established and emotions are under control. Stepping out too early, however,
can lead to a collapse of the entire system.

Advisory boards can be established to advise the president or board of directors. These boards
consist of five to nine non-family members who meet regularly to provide advice and direction
to the company. They too can take the emotions out of the planning process and provide
objective input. Advisory board members should have business experience and the capabilities of
assisting the business to get to the next level of growth. For example, a company with five
million dollars in annual sales should seek advisors who have experience with moderately more
profitable companies. In most cases, the advisory board is compensated in some manner.

As the family business grows, the family business consultant may suggest many different options
for the family. Often professional non-family managers or an outside CEO are recruited to play a
role in the future growth of the business. Some families operate with few or no family members
in the business and simply retain ownership. The family can retain ownership by serving on the
board of directors or setting up a holding company, which may manage several companies and
investments for the family.

One second-generation family in the steel business recognized a declining market for its product
and decided to sell off their divisions and liquidate the remaining assets. The dollars generated
from this process led to the sibling team staying together and forming an investment company.
Today they are in the business of buying other family businesses and putting in professional
managers to operate them. They now manage eight such companies in a variety of industries
throughout the United States.

THE FUTURE OF FAMILY BUSINESSES
Family businesses will continue to play a greater and greater role in world economies into the
next century. They will become more recognized as business organizations, and be studied and
written about in increasing depth. Schools and colleges will recognize the family business as a

career option of choice and provide direction and resources for students to pursue opportunities
there.

Over fifty percent of the leaders of family businesses in the United States think their businesses
will be owned and managed by two or more of their children, so the future looks bright. Even in
Eastern Europe entrepreneurs are emerging and rekindling family businesses from years ago.
They are starting family businesses for the next generation, and others are using family support
systems to launch new enterprises. In Italy, family businesses are so common that the Chamber
of Commerce tracks each family member and their position in the firm along with the traditional
business information which is regularly collected. Asians have a legacy of passing on their
family traditions in business and of all working together with a central business focus. The next
century will bring more research on how ethnicity affects families in business.

RESOURCES
There are a growing number of resources now available to families in business. The Family Firm
Institute is a group of more than 1000 professional advisors serving the field; it has more than
100 university-based programs. The Family Business Network is headquartered in Switzerland
and holds an annual convention. The American Alliance of Family Businesses was formed in
1995 to provide a full range of services to family-owned businesses, including lobbying,
information, and professional development programs.

A family business is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business

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A family business is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business