Is your business a family business? What are the challenges of that?

During my career I have observed the pervasiveness of family businesses. They may be more or less present in different economic sectors, but they are present for the reader to observe. Yet the commentary and literature readily available to family businesses, and business families, is relatively slim. There is a need to assist owners and managers of family firms, as well as guide members of owning families who may not be involved in active leadership or management roles, but who have an interest in ensuring their key family asset is well run in the context in which they operate.

I write from the perspective of a corporate lawyer, but as one who has business, management and investment education. I also write as someone with direct experience of working in well-established family businesses. I have worked in a longstanding, well regarded, British family owned meat packing firm (I even wrote the company history!) I also spent time seconded to a shipbuilding “Hidden Champion” of the German Mittelstand.

It is understandable that family firms are overlooked in the business media and professional commentary; despite their presence, they range from a George Formby figure cleaning windows to large enterprises of Indian business dynasties operating around the world. Despite this, family businesses share features that are worth exploring for insights for consideration in how your family business or investments can be better managed or could grow.

Perhaps I should define more precisely what I mean by a family business, or at least provide some character traits for it. Figure 1 provides four dimensions through which to judge if a business is a family business. There are several benefits of a flexible criteria to define family businesses. It avoids underappreciating the variety of family businesses. Therefore, it includes: the varying cultural definitions of family reflecting the social strength or weakness of extended families; the impact of step families and newer forms of marriage and civil partnership; and the various forms of family influence including management, ownership and investment.

Influence dimension. Cut off criterion distinguishing family from nonfamily firm. Rationale
Ownership For small firms: at least 50% of voting rights in family hands

For large firms: at least 20% of voting rights in family hands

Ownership rights, and in particular voting rights, equip actors with a decisive power to alter the strategic direction of the firm
Management Small firms: family involvement in top management team

Large and public firms: involvement often not required

Management involvement is what allows a dominant coalition (the family) to imbue a firm with particular values and to directly influence decision making
Transgenerational outlook Firm is controlled by a family with the intent of passing it on to the next family generation It is the desire for transgenerational control that distinguishes a family from a nonfamily firm
Later generation control First generation firms: founder-controlled firms

Later generation firms: family firms

Control that spans generations – and hence is not limited to a founding generation – is what constitutes a family firm

[Zellweger 2017]

Figure 1

By going to https://familybusinessnavigator.com (repeatedly choosing the English language option on each page) the reader can go through an assessment to see to what extent their business is a family business.  The end of the assessment produces a web-like diagram for the reader on the particular characteristics of their family business.  In addition, it produces a report on the challenges that go with such characteristics.  I recommend the reader takes the assessment.  I will consider these characteristics in my next piece, but I mention here that family businesses face particular issues as well as the gamut of issues facing businesses of any structure of ownership.  Governance in family businesses involves effective collaboration between owners of significant blocks of shares or interests who are family members.  Older family members as owners may hold accountable younger family members as managers.  Succession or exit are commonly recurring themes.  The members’ attitude towards risk impacts strategy, human resources and financial policy.

In later pieces I hope to take up particular themes to raise issues for consideration by members of business families, family businesses and management in such settings.  The pieces will address such topics to consider how those issues can be tackled.  Each family business or business family is set in their particular context with their unique set of personalities playing their roles to keep their family ships sailing on the high seas of commerce and industry.  Therefore, the issues I address will be of varying levels of interest to readers, as reflected by their situation.  However, all the issues will be of relevance to such readers at some point, assuming their family business concern goes from strength to strength over the years and generations.

For more information please contact Henry Clarke using henry.clarke@nexa.law

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