Family business

FAMILY BUSINESS
AND STRUCTURES
Rajendran Ananda Krishnan

https://www.facebook.com/ialwaysthinkprettythi
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SYLLABUS
 Importance of family business
 Types, History
 Responsibilities and rights of shareholders of a
family business,
 Succession in family business,
 Pitfalls of the family business,
 strategies for improving the capability of family
business,
 Improving family business performance

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DEFINITIONS
 Family business is a corporation that is entirely owned
and managed by members of a single family.
 Family firm is a corporation that is entirely owned by
members of single family. It is also known as company
owned, controlled and operated by members of one or
several families.
 Family business is one in which one or more members
of one or more families have ownership, interest and
significant commitment towards business.

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CHARACTERISTICS OF FAMILY BUSINESS
 Family business are ideal in nature as they are
loyal to the principles of the founder and thus ensure
uniformity in their operations.
 Succession is one important decision which
determines future effectiveness in terms of company
operation.
 family business comprises of family members in
business operations ensuring effective utilization of
in house talent in family.
 Single minded dedication of family members ensures
survival of family business through toughest times.

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 Effectiveness and existence of family business is
determined depending on understanding persisting
within the family.
 Family business may be comprised of one or more
then one family in business operations.
 Family members who are not contributing or not
involved in business are part of business.
 Family business values are reflection of values
possessed and followed by family members.
 Members of family have legal control over business.

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IMPORTANCE OF FAMILY BUSINESS
 Contributing to economic development : family
business play crucial role in economic development
of most of the countries. Retail sector, small scale
industry, and service sector are owned by family
business.
 Spirit of entrepreneurship : family business as
contributes towards development and has been
successful in country like India it paves way to
various families to initiate and bring up new ventures
in country.
 Philanthropy : family business in India along with
their development have also concentrated towards
welfare of general public by investing on hospitals,
educational institutions, construction of roads etc.
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 Trust Lowers transaction cost : partnership and
other forms of business involving outsiders usually
leads to conflict in long run. In case of family
business as all the parties in family are affected by
loss incurred in company do not involve any sought
of conflict and difference in point of view arises they
try and solve it internally in the family ensuring
business is not affected by the same.
 Small, nimble and quick to react : as managing
team size in family business is small compare to
other form of business decision making process
involves less period of time which helps to take
timely decision.
 Information as source of advantage : as family
business is private firm it is not required to take
decision in accordance with pressure from other
sources and strategies of business need not be
revealed to outsiders of business.
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TYPES OF FAMILY BUSINESS

Family owned
business

Family owned
and managed Family
business business

Family owned
and led
business

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TYPES OF FAMILY BUSINESS
 Family owned business : is a profit organization were
number of voting shares, but not necessarily majority of
shares are owned by members of single extended family but
significantly influenced by other members of family.
 Family owned and managed business : is a profit
organization were number of voting shares, but not
necessarily majority of shares are owned by members of
single extended family but significantly influenced by other
members of family. In this business has active participation by
one family member in the top management of company so that
one or more family members have ultimate management
control.

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 Family owned and led company : is a profit
organization were number of voting shares, but not
necessarily majority of shares are owned by members of
single extended family but significantly influenced by
other members of family. In this business has active
participation by one family member in the top
management of company so that one or more family
members have ultimate management control. But in this
method one member has major influence on business
activities who in charge of regulating activities of
business and members of family business.

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3 CIRCLE MODEL OF FAMILY BUSINESS

Ownership

Family Business

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3 CIRCLE OF FAMILY BUSINESS
 Business system : comprises of start up,
expansion, formalization and maturity of business.
 Family system : young business family, entering
business family, working together etc.
 Ownership system : controlling owner, sibling
partnership, cousin consortium.

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GOVERNANCE OF FAMILY BUSINESS
 There are three components to governance of family
business :
1.Perodic assemblies of family
2. Family council meeting : if the size of the family is
small in size than members of family can meet on
frequent basis, when the operation of the family business
expands geographically each team has to choose in
representative for every unit who on behalf of every area
can meet on regular basis to decode on plans, create
policies, and strengthen family business communication.

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 Family constitution : family policies and guiding
vision and values that regulate members relationship
in business. Developed plan may be detailed or
simple in nature but every family is benefited by the
same.

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BENEFITS OF CONDUCTING FAMILY ASSEMBLY
OR COUNCIL MEETING
 Develop clarity on roles, rights and responsibilities of
family members.
 Encourage members of family, family employees
and owners family to act responsibly towards the
family and business.
 Regulate appropriate family and owner inclusion in
business discussion.

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DUTIES PERFORMED BY FAMILY COUNCIL MEETING
 Plan assembly meetings, which otherwise has to be
arranged by CEO in company.
 discuss current business, ownership, family issues and
keep family informed about the issues.
 help family reach decisions and collectively focus on
attainment of single goal.
 Keep the board of directors informed about family views
on company and keep in touch with the board about key
business policies and plans.
 Develop plans and policies in line with the board, that
regulate family activity with business.

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 Try avoiding issues in family while seeing that key
family goals are satisfied.
 Develop loyal, informed and contributing family
shareholders.
 Scout the family for business talent.
 Create educational events to encourage education of
family members towards family business.
 Plan family social gatherings and rituals which help
to create healthy, harmonious relationship within the
family.

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REASONS FOR CONDUCTING FAMILY BUSINESS
 planning employment standards for next generation
 Career development policies for family employees
 Family employee compensation
 Succession process, including retirement ages
 Ownership agreements which comprises of buy and
sell agreements
 dividends

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HISTORY OF FAMILY BUSINESS
 History of family business refers to reason why
business came into existence, vision and mission of
company, people contributions towards success of
business and contribution of business towards
development of society on the whole.
REASONS TO CREATE HISTORY OF FAMILY
BUSINESS
1. Founders vision and mission : refers to reason
why business came into existence, operations of
company under various leadership and insight
about founder and his vision and mission.

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2. Historical accuracy : without valid information about
family business customers, employees of business may
be biased by wrong information through other sources
about purpose of business and its contribution towards
society to avoid these problems details of business
should be documented on timely basis.
3. Honouring long time employees : long-time or retired
employees who have contributed towards success of
family may have feeling that that efforts towards business
have been forgotten. If proceedings of business are
recorded in form of document past employees of
company develop form of belongingness towards
company.

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 Thanking customers and vendors : maintaining
good relationship with customers and vendors
specially the ones who have supported during critical
situation is very important. Owners by documenting
these peoples contribution get way to publically
thank these parties contribution.
 Background for the uniformed : new hires,
potential clients, bankers and investors may not
know the company's background during which
documented data of company will suffice to their
needs.

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BENEFITS OF HISTORY OF FAMILY BUSINESS
 Interdependence between company and community is
documented as is the owners individual contribution and
involvement in community affairs.
 Succeeding family members have valid resource from
which they can rely on for suggestion to overcome
persisting problems.
 Documenting company's contribution and commitment to
the community builds sense of confidence among clients,
potential clients which helps in strengthen relationship
between business and key individual related to the
business.

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 Content created for books can be recreated for other
media including company brochure, websites, press
release, news letters etc.
 Family business that create quality hand book will
always be valued and treasured.

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RESPONSIBILITY AND RIGHTS OF FAMILY
SHAREHOLDERS
 Be knowledgeable about company operations ( products,
services, locations top managers, industry, competition,
measure of performance )
 Have information about basic company finance, and be
able to read and ask questions about the income
statement and balance sheet of their company.
 Attend shareholders meeting.
 Understand board member qualification and participate,
in screening of board members.
 Constructively question management and offer
suggestions to management.

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 Publically support management decisions
 Keep appropriate company information in strict
confidence and recognize that shareholders are not
entitled to all company information on demand.
 Where possible and useful, generate business leads.
 Try and provide additional investment capital.

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Expectations of family shareholders from
managers of business
 Timely information on company strategy, important
organizational changes and company’s basic financial status
before information being released to general public.
 Openness by company board and management to
shareholders on the above mentioned information.
 Ability to participate in the election of board members.
 Fair policies that protect shareholders interest but also
requires their cooperation and risk taking.
 Acceptance economic performance by the company, including
reasonable dividends and capital gains.

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SUCCESSION IN FAMILY BUSINESS
1. First family succession plan, then business
succession plan : family business plan must
recognize and accommodate the needs, goals and
objectives of each member of family. Family
succession plan has to be developed first as if
business plan is designed in advance it proves to be
difficult for owner to coordinates goals of family
members towards business.

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Family business plan should include following
dimensions
 strategies to put business interest ahead of family
business.
 Emphasise merit over family position
 Income for working members of the family and
shareholders.
 The business environment during transition
 Treatment of loyal customers
 Tax consequences.

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2. Family first business or business first family :
important issue to be determined before beginning family
succession plan is whether yours is family first business
or business first family. It is often seen that most of the
business fail to succeed when managed by second and
third generation of business.
3. Succession management : business families take
advice of business advisory board who suggest on
eligible person for transition. Advisory board are not
experts in managing business but are consultants who
suggest strategies for effective succession management.

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4.Business valuation : may not be formal written report
but is required as part of annual strategic planning
process. Reasons for valuing family business are as
follows :
 Buying or selling shares to employees
 Retiring or selling to other family members
 Planning gifts for hires
 Anticipating estate tax problems
 Providing adequate key man insurance coverage
 Tracking of business plan towards achievement of
results.

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5. Bur or sell agreement : is used to transfer share
owownership for buy and sell agreement. This
agreement is established between related parties
and shareholders in family.
 It is an agreement to transfer a business interest to
hires for less than fair market value
 The agreement is real ; it is part of bona fied
business arrangements

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KEY POINTS TO BE CONSIDERED BEFORE
SUCCESSION PLAN
 Quick decision on business plan process will provide
more alternatives to the process.
 A child than having right to inherit business should have
ability to manage family business. Children's must be
encouraged to out of family business so that they have
better insight about competition persisting in market and
accordingly develop strategies for development of own
business.
 Establishing an outsider as advisor for family business
may prove to be risky for which experts in succession
planning should be chosen from management team with
in the family business.

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 Conducting family meeting on regular basis will help establish
and keep the family focused on rules, goals and objective
 Develop non business interest
 Develop financial resources that are independent of business
 Evaluate component successor : which requires to assess
whether person to be chosen as successor has potential to
lead the business, will he be accepted by all members in
family, check his willingness to control the business.
 Person who will be chosen as successor should be give an
appropriate standard to be achieved which will help him deign
effective strategy and have yardstick to compare his actual
performance with expected one.

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WAYS TO EASE TRANSITION PROCESS
 Hire most competent advisors ( attorneys,
accountants, financial planners, and business
consultants for succession planning. Succession
planning is complicated process and requires advice of
expertise on the same.
 Business valuation : when business transition takes
place it leads to change in controlling hands and
accordingly even present situation may change in
business. Depending on the purpose of the valuation,
cost vary accordingly. Usually business owners value
family business for purpose of strategic planning of their
business.

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 Funding to be considered as part of succession
plan : it is important to understand that business
may need to grow significantly in order to pay the
transition cost which includes which includes tax ,
insurance, professional advisors. Funds available for
expansion should be retained in the process for
transition.

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PITFALLS/ DEMERITS /PROBLEMS OF FAMILY BUSINESS
 lack of focus and strategy : family business initially perform
in effective manner but at later point of time when aspect of
transition comes into picture family business tends to lose its
track from its actual vision .
 Lack of professionalism : data maintenance practice in
family business usually will not be in par with that of private
companies which proves to be major hurdle during decision
making process.
 Difference in educational levels of family members which
drives some people to follow obsolete method while others
may focus on implementing latest technology and practices in
business.

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 Rivalries between sibling in company which may end up
in separation of family business.
 Difference of attitude towards employees in company
 Inability to separate family interest from the interest of
business
 Short term approach towards business , leading to an
absence of investment in employees and product
development.
 Insensitivity towards customers due to uncompetitive
market resulting in weaker market skills.

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APPROACHES TO AVOID CONFLICTS IN FAMILY BUSINESS
 Coping approach : which involves adopting to negotiation
among family members try and resolve conflict and agree on
common terms.
 Arbitrary approach : in this approach the elder person of the
family will be allotted with the power to frame rules and control
business activity. But this approach has not proven to be
successful as most of the time elder person in family may not
prove to be effective manager for business.
 Managed approach : this approach states that person who
has ability to maintain better relationship with key individuals
of business and have ability to understand business and
manage the same should be appointed as lead person for the
business.

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STRATEGIES FOR IMPROVING CAPABILITY OF FAMILY
BUSINESS
 Inculcate professionalism in family firms : professionalism
in business refers to retaining of effective talent in company,
proper documentation of business transaction, planning and
implementation of efficient strategies for success of business.
 Replenishing entrepreneurship : basically refers to expand
existing business and be role model for their families to open
business of their own.
 Good management : refers to proper communication of
information among family members about present business
and utilization of available resources in business.

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 Ability to change : business environment is dynamic in
nature for which business have to renew their strategies
on regular basis to meet demand of changing situation to
compete in market.
 Have strategic plan : situations of business are
unpredictable in nature in nature so present plans of
business should be designed keeping in point about
future strategy in picture.
 Have active board of directors : refers to have
competent employees in business who can assess future
requirements and accordingly management business
resources and take decisions in business.

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IMPROVING FAMILY BUSINESS PERFORMANCE
 Core value of family business act like yardstick for family
members to act accordingly towards business. Core values are
comprised of training of family members newly entering family
business, future, finance and accountability of these members
towards the business.
 Impact of family values on business performance : when
members of family are clear about business expectation they can
formulate their strategy well in advance which helps them enhance
quality of their performance towards business.
 Training : members of family business should be trained about thee
family values, competition existing in market and skills required to be
possessed by in order to have competitive advantage in business
market.

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MANAGEMENT DEVELOPMENT PLAN IN FAMILY
BUSINESS
 Management development plan is generated by top
management people in company. The purpose is to
predict staffing needs and plan in for career growth and
development for family as well as non family members in
business.
 Management development plan identifies the key
jobs in the current company and career aspirants of
all key mangers. It predicts what jobs will or should be
vacant in future. It has to focus on balancing
development of hires in business and encourage
protective teamwork.

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 Who should create the plan : business plan should
be created by owner manager, human resource
person and top managers from key functions in
business

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CREATING A BUSINESS PLAN
 Draw company's five year organization chart.
 circle position of future organization chart, at all levels and the most
critical ones for the business.
 List the names of individuals in those jobs, their age now and in five
years.
 List set of employees who may retire and who are planning to leave
organization in future.
 What is the age of owner manager and he should be doing in future
five years.
 What is the age of successor and where should he or she be in five
years.
 What is best career path for the person in next five years
 What policy or policies ca be derived from these discussions ? What
should be communicated to the successor , manager and
employees.

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FAMILY REUNION GAMES TO PROMOTE FAMILY VALUES
 Family reunion basically refers to coming together of family
member for occasion ,event in family. These kind of events give
platform to family members to have discussion on various
matters in relation to family and family business..
 Family bonding : is crucial component of every successful
family. It leads to family communication system that encourages
growth and prosperity for business while building good bonding
among family members in business.
 Family values : influence the way in which family business is
managed and operates. Ethics of family business are shaped
by values of the family.

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 Family religion : plays important role in operation of
business. Business may not prefer market in certain
products which their religion do not permit for.
 Family secrets : may be in form of core values, ethics
and beliefs followed by family members of business
which is not preferred being revealed to general public or
media channels.
 Family rules : are implemented in business and are to
be followed people in charge and family members of the
business. These rules regulate activities of members and
family business on the whole.

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RULES TO SAVE FAMILY BUSINESS

Rule 1 Formulate policy frame work rules

Rule 2 Families must serve the business

Rule 3 Future outlook

Rule 4 Accountability addressing the issue

Addressing the issue
Rule 5

Rule 6 Creating shared vision
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RULES TO SAVE FAMILY BUSINESS
 Formulate policy framework and rules : succession
plan is one of the important aspect for formulating policy
framework and rules. Succession plan should outline
exactly how the transfer of leadership will occur and
should establish the criteria that hires must meet before
moving to role of leadership.
 Families must serve the business : members of the
family should give their best performance as per the
expectation of the company. Members of the family
business should perform as effectively as non family
members of the business.

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 Future outlook : business firms should have proper core
values which prove to be yardstick for performance of
business. Family members should believe that present
strategy prove to be obsolete in long run for the same
company should be flexible in nature in terms of adjusting
to changes taking place in business environment.
 Accountability : should be one of the major criteria for
transition process in family business. Family members
should be made clear about what is expected from them
by family business and they are required to prove their
efficiency through effective performance. They should be
responsible for decision taken by them during time of
their leadership.

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 Addressing the issue : family business who focus on
improving their overall company performance should take
structured approach through addressing the issue by
careful examination of its core values. Members of the
family are required to evaluate their core value and
understand their relevance in relation to success of
business.
 Creating shared vision : it refers to communicating
vision , objective of the company to family and non family
members of business. Communication of information
takes place through various sessions of meeting in
company. All the family members should have common
and shared vision towards goal attainment in company.

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THANK YOU

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