Introduction to Family Businesses

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Entrepreneurship & Family
BusinessAn Introduction to Family Business

An Overview of the Course

Entrepreneurship & Family
Businesses are two of the most
important parts of the economic map
of nations.

Without entrepreneurs, innovations
don’t come to market leading to
employment opportunities, capital
creation and solutions to consumer’s
needs and wants.

Without family businesses, a great
deal of resources and wealth would
be lost to future generations because
they would not have been channeled
properly.

Both these business types are
significantly different while intimately
integrated.

Through this course, I will take you
through a guided tour from the
origins and impact of family business
on the global economy.

We will cover a number of different
aspects of running family businesses
effectively so that future generations
can be involved in the foundations
built by the original founders

Additionally, I will introduce you to the
concept of entrepreneurship and how
it interlinks with family business to
help it grow, develop and innovate.

My Background

HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLEDHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
My Background
Educational Background
Central Michigan University
– 1991
 Bachelor of Business
Administration - Marketing
 Bachelor of Computer
Science
University of Michigan –
1995
 Masters – Computer
Systems Engineering
Kellogg (Northwestern Univ.) –
1997
 MBA - Marketing
Professional Background
 SAP America – 7 years
 Cisco UK – 2 Years
 emagine group – 8 years
 Sit on Boards of Directors
and Advisories for
organizations around the
world
 Have consulted for
companies across multiple
industries and regions
 Speaker at regional and
international conferences
on Marketing, ERP,
incubation and venture
capital

emagine group
 Founded in 2003
 Global venture development firm with investments in 15
countries across multiple industries
 Since 2005, we have worked with entrepreneurs in every
stage of business development from brainstorm to
private equity investment both in our incubation center
and as independent ventures

At emagine,
we aren’t just venture capitalists,
we are venture catalysts.

Our Venture History
Our Venture Portfolio
 Fashion Houses (2)
 Hollywood Movies (3)
 Game Development Houses (2)
 Massive Multiplayer Online
Gaming Platforms (2)
 Search Engine
 Restaurants (3)
 Manufacturing Company (2)
 Furniture Company
 Biotechnology Company (2)
 Medical Equipment Company (2)
 Telecommunications Company
 Mobile Payment Provider
Recent Investments
 Middle Eastern Airline
 2 Hotels in Europe
 A Pakistani Fashion House
 Hydro Electric Company
 Mobile Company

Our History In Venture Capital
 In the past 6 years
– Heard over 1500 elevator pitches
– Received over 500 executive summaries
– Assessed 200 business plans
– Invested over USD 700 million in industries ranging
from technology to fashion and publications
 Current investment portfolio stands at USD 970 million
 We have a special understanding of entrepreneurship
and how to build successful businesses

How to Contact Me
 email – khalid@emagine-group.com
 cell – 0333 229 1234
 Web – http://www.emagine-group.com/
 Facebook
– http://www.facebook.com/khalid.muhammad
– http://www.facebook.com/emaginegroup/

What is a Family Business?
The Different Definitions

There are 21 different definitions
of a family business, each taking
in different aspects and
characteristics

Forms of a Family Business
 Sole Proprietorships
 Partnerships
 Limited Liability Companies
(LLC)
 S Corporations
 C Corporations
 Holding Companies
 Publicly Traded Companies
Worldwide, estimates
of all enterprises
considered to be
family businesses
range between 80%
and 98%

Family firms are different from
other closely held firms because
of the relationship between the
shareholders and the
management.

Two Things That Make It Different
 Family firms are differentiated by both:
– Active involvement of family in firm
management
– Intent of family members to retain ownership
of the firm

Definition 1:
A family business is an enterprise in
which two or more family members own
15% or more of the shares, family
members are employed in the business,
and the family intends to retain control of
the firm in the future.

Another Consideration
 Another aspect that must be accounted for is the
influence the family has on:
– Ownership
– Governance
– Management participation through strategic direction
– Direct family involvement in day-to-day operations
and/or
– Retention of voting control

Our Definition of a Family Business
A Family Business is any enterprise in which
an entrepreneur or next generation CEO
and one or more family members
significantly influence the firm.
The influence can be managerial or Board of
Directors participation, ownership control,
the strategic preference of shareholders,
and the culture and values family
shareholders impart to the enterprise.

 Preference – nature of involvement of family members in
the enterprise
 Ownership Control – rights and responsibilities family
members derive from significant ownership of voting
shares and the governance of the relationship.

 Strategic Preference – risk preferences and strategic
direction family members set for the enterprise through
their participation in top management, consulting, board
of directors, shareholder meetings, or family councils

 Culture – collection of values, defined by behaviors, that
become embedded in an enterprise as a result of the
leadership provided by family members, past and
present. Family unite and the nature of the relationship
between family and the business also define this culture.

Our Working Definition of Family
Business
 Ownership control (15% or higher) by two or more
members of a family or a partnership of families
 Strategic influence by family members on the
management of the firm, whether by being active in
management, by continuing to shape the culture, by
serving as advisors or board members, or by being
active shareholders
 Concern for family relationships
 The dream (or possibility) of continuity across
generations

Characteristics that Define a Family
Business
 The presence of the family
 The overlap of family, management, and ownership, with
its zero sum (win-lose) proposition, which in the absence
of growth of the firm, render the family business
vulnerable during succession
 The unique source of competitive advantage derived
from the interaction of family, management, and
ownership, especially when family unity is high
 The owner’s dream of keeping the business in the family
(the objective of business continuity from generation to
generation)

Characteristics that Define a Family
Business
 The fact that the family business managers are dealing
with their own money and the inheritance of their
children and are not as subject to the quarterly whims of
Wall Street allows for more patient capital
 They will act intelligently but boldly at critical junctures,
knowing that the benefit or loss will directly affect the
family
 That knowledge keeps family managers making
decisions that steadily contribute to the family’s
incremental and long-term wealth
 The goal is for each generation to grow the company’s
value leaving behind a stronger and better than the one
they inherited
 This makes them more imaginative, innovative and
progressive in their decision making

Family Business
Worldwide Impact of Family Businesses

Entrepreneurial companies often
become family-owned
businesses

The real transition from an
entrepreneurial to a family
business typically happens when
the children of the company
founder join the business as
employees.

The business may continue to be an
entrepreneurial company and may
prefer to be known that way because
owners are concerned with the
perception of nepotism and lack of
professionalism associated with
family businesses.

Once “next generation” family
members join the ranks of
employees and/or shareholders, the
nature of the firm changes, as do its
challenges and its unique
competitive profile

Family-owned and family-controlled
firms account for approximately 90%
of all incorporated businesses in the
United States

That is the equivalent of 17
million family firms in the US
economy today

1/3 of all Fortune 500 companies are
family-controlled and about 60% of
publicly traded firms are under family
influence.

Most family businesses are
small, but there are about 138
billion-dollar family firms in the
United States alone.

19 in France
15 in Germany
9 each in Italy and Spain
5 each in Canada and Japan

In the US, family firms account
for 64% of the Gross Domestic
Product – about $6 Trillion

85% of Private Sector
employment and 86% of all jobs
created in the past decade

In Germany, about 80% of all
businesses are family firms and
employ 80% of the working
population

In Spain and France, about 80%
of all companies are family
owned and account for 75% of
employment

In Italy, India and Latin America,
estimates are skyrocketing with
90 – 98% of all companies being
family firms.

So as you can see, family-owned
and family controlled firms have
had a huge impact on the global
business environment

Now, many people believe that
family firms are nepotistic and
conflict ridden underperformers,
family firms perform better than
non-family firms.

35% of the Standards & Poor 500
firms are family controlled and
have outperformed non-family
controlled firms by 6.65% in
return on assets during the past
decade.

Family firms were also
responsible for creating an
additional 10% in market value
between 1992 and 1999,
compared to the remaining 65%
of S&P firms.

Research shows us that family
firms are the primary engine of
economic growth and vitality not
only in the United States but in
free economies all over the
world.

Outside of financial
outperformance, families are a
significant factor in the creation of
new ventures.

While the venture capital industry is
usually credited for its role in the
growth of new ventures, it is the
wealthy individuals and families in
business that provide the large share
of seed capital and early-stage
funding for large segments of the
entrepreneurial population.

Of the 286,000,000
entrepreneurs worldwide who
launched new ventures since the
mid-1990s, only 19,000 were
financed by venture capital firms,
totaling US$ 59 billion.

Families provided US$ 271 billion
in the same period of time

Drawbacks of the Family
Business

While we can see a great deal of
advantages with the family business,
there are also a number of factors
that have a negative impact

Approximately 85% of all new
businesses failing within the first 5
years of operation.

Among the 15% that survive, only
30% are successfully transferred to
the 2nd generation of founding family
owners

This high failure rate amounts to the
wastage of opportunities for job and
wealth creation in many
communities.

Not all family businesses that are not
passed down to the next generation
go on to close their doors, but many
do.

The odds get worse between the
2nd and 3rd generations – 12% &
the 3rd and 4th generations – 4%
remain in the family.

Today, there is a widespread belief
that a company is prehistoric and on
the road to extinction unless it is
“high tech” or has grown to be a very
large, diversified multinational
corporation.

The Myth
There is a widespread
myth that a company is
prehistoric and on the
road to extinction if it is
not “high tech” or has
grown to be a very
large, diversified
multinational
corporation.
Murdoch
Graham
Sulzberger

Some Family Businesses

Next Week’s Lecture

Next Week
 We’ll look into the family business culture,
stewardship and relationships
 We will also look at the different types of family
businesses that are created and managed in
today’s economic marketplace

Introduction to Family Businesses

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Introduction to Family Businesses