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What is Family Business and its Characteristics

From experience, I can mention that to define what a family business is, it is complex. Especially because one of the many problems that exist in family businesses is the lack of an understanding of what they are. Some other problems are the proper assignation of roles, or see where every member of the family stand within the company environment.

What is a Family Business?

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It is known by those involved that the characteristics of a family business are in a somewhat different magnitude to another company.

Knowing what belongs to whom, and what activities should make such a person is important for harmony remains within the company and the family. If the company is in the stage of the founder, it is easy for him to have control over and decide how they will be allocated the resources generated by the company. But once the second generation begins to grow, and have a desire to continue with the company, it is important that the roles of each of those involved are defined.

To learn a little more to this complex world I have added the following.

Definitions of a Family Business

Here I will mention some important concepts surrounding a family business.

“It is one in which the property and decisions are dominated by members of a group of emotional affinity.” (Carsud, 1996)

“The property control is allocated to a member or members of a single family.” (Barnes and Hershon, 1989)

“A company in which one family owns most of the capital and has total control. The family members are also part of the management and make important decisions.” (Gallo and Veen, 1991)

“The company that will be transferred to the next generation of the family to the command or control”. (Ward, 1995)

“Family business is one in which a family group is able to appoint the chief executive of the company, setting the business strategy of it all with the aim of generational continuity, based on the joint desire of founders and successors to maintain control of ownership and family management.”(Crown, 2004)

“A family business is any business in which several family members assume management or active responsibility as owners. One has a family business if you work with someone from your family in a business belonging to the two or belong to them someday . the essence of a family business is that blood is shared, work and ownership of the company. ” (Jaffe, 1991)

The concept of family business is used when the aspect to be emphasized is linked more to the family institution, the group of people who also share a family relationship, owns, controls and / or directs a particular business, assets or business organization.

Given what is a family business, you need to understand what they control.  The family business maintains relationships at various levels to professional and personal. The complexity of family businesses lies especially those relationships. 

The main characteristics of a family business

Family

Families are a group of people belonging to the same hereditary structure, assembled by genetic inheritance, biological ties and affinities. Its components include, in general, the direct descendants, spouses and cohabitants.

 

Ownership

“We define as a family company in which the majority of the ownership or control lies in a single family and two or more family members involved or participated in its time.” (Rosenblat, De Mik, Anderson and Johnson, 1985)

Business

The company is guided by economic objectives organization formed by people who play very different roles (shareholders, managers, workers) interacting with other social organizations in their environment (customers, suppliers, financial intermediaries, and public administrations) and also has with objectives and specific challenges and is imbued with a particular set of values.

Such compounds elements generate the special bond that formed the family business.

Family Business Three Circles Model

circles
Family Business Circles Model - Source: Shiftyourfamilybusiness.com

To understand more about what is a family business a model of three circles was generated. Each of these circles represents the family, property and business. The three circles model was developed by Tagiuri and Davis (1982) for the purpose of describing the various situations that arise in all family businesses. This system is based on the company, property and the family, where each circle represents a group of people with particular characteristics in their relationship with the family business. At intersections of the circles it can be found people who own both or all features.

Groups 1,2, or 3 are people who only have a connection with family, property or business. 4, 5 and 6, with the mix of family-owned, company-owned and company-family. Finally, those who are at the intersection 7 are those with the three characteristics. Normally the founder is a person who has all three.

1. Family

It is the group of people is made up of family members who do not have any property or participating in the company.

2. Family & Ownership

Are the family members who have shares in the family business without work within it.

3. Ownership

Are the people who have shares in the family business without being family or work within it.

4. Ownership & Business

Non family members holding shares and do work within the company.

5. Business

Employees working within the organization who are not family members, or owns stock.

6. Business and Family

Those who work in the company with any position and are members of the family, but have no stocks.

7. Family, Ownership and Business

At the intersection of the three circles those who have shares, some position at the company and family ties are present.

Example of the Three Circles Model

Generate list of people involved with the company. They should include shareholders, employees of trust, family and children, siblings or parents.

Assign the number corresponding to the person. Example: If Antonio is a shareholder and member of the family but does not work in the company is assigned 4 (Family-Owned). Or if Martin works at the company, but not family and nor is shareholder is assigned 3. (Company) so on.

The question to answer, now what do I do with this list? Define the roles is only the first step of many to organize a family business. Get the roles within the diagram to identify where people are standing in the company. The dialogue and constant communication are important to not forget what position they are.

The development of these companies is much more complex than a simple list, so in the following items hope to continue complementing what is the world of the family business.

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Features of Family Business

Setting out a family business strategy is important to maintain a long term and sustainable growth of the family firm. 

Most small businesses are also compared to be family businesses mainly do to the easier family control of a certain size of a business.

Certainly it is that as family firms might be from different industries, they might have the similar distinctive attributes and features.

As we have already mentioned in the three circle model, it defines in a broad aspect the characteristics of the people that surround a family firm, but there are also features of family business that have an impact on the business strategic management.

Important is important for family firms to incorporate on their business plans a well aligned path to the desires of the next business generation in order to maintain a successful business that can last in the future. 

The following features of family businesses have an impact on the business strategy.

Generation stage

Family firms have among its features that it can be categorized according to the business generation they are in.

The first generation are the ones who set the family foundations and build up the business from scratch.

The second generation are the children of the founders, and mainly their aim at the organization is to preserve the family firm, improve it and boost its growth. This generation already has a proven business model that work and had business success, so it should be their focus to establish the business professionalization according to their industry business practices

The third generation has a more complex structure if the great children of the first generation are involved, because we are already involving different micro cultures between them.

That is why family governance structures are important to be set in order to maintain a healthy strategic management and growth.

Leading Family

Family firms are usually managed by high achievers and ambitious people who were the innovators at a point in the market. 

Among the core characteristics of a family of entrepreneurs is that they lead as an example for their communities and aim to be innovative business owners who serve their markets.

Family Values

Another aspect of family firms is that the values that the family has are intrinsically transmitted into the business.

If the family has the aptitudes of being insightful, courageous and resilient, these features will be spread out along the organization.

How the family behaves within their own circle, it will also have an impact on the organizational culture of the family firm.

In a business context where there is harmony in the family atmosphere, it will create a more prosperous environment to grow.

Family Conflicts

Usually, the problems in family firms are not the business itself, but the conflicts that may surge within the family.

The first generation is mainly managed by the married couple or only one person. As the family firms are mainly sole proprietorships, the decisions are taken just by one person.

When the children are still young, they barely have a connection with the business, but as the second generation grows and gets married, that means bringing up couples who have different mindsets.

Now we are talking about dealing with first and second generation families.

Family conflicts will arise, especially if they don’t communicate effectively their personal and professional plans.

If there are people who are inpatient, lazy, bossy, dishonest or selfish, this can bring up discussion within the family nucleus and destabilize the business.

A family who has set right their family values and have children who are conscious about the previous generation’s effort to build up a successful business can ensure the longevity of the business. 

Otherwise, a damaged family atmosphere will be falling down into their own trap making it harder or taking longer to have a successful business.

Family Governance

One important feature of family enterprises is when they have built up a family governance structure.

A family firm that sets a cooperative mindset between the family members can set a better business strategy that is oriented to the future.

When the family governance is authoritative, this can have as consequence rupture in the business communications.

This is why it is important to have an organized, professional, and sincere structure at the different levels, to reduce business conflicts.

Succession planning

Succession planning is needed when the first generation is ready to be relieved by the second generation, or in the case of the next one.

Succession planning is not a process that is handled right away, normally the process can take years since the next generation must be prepared to take control of the family enterprises.

This is one of the main family firm characteristics, since this is a process that happens the most to them.

The family ownership relies within the same group unless another is decided.

A correct succession planning has to be set up on the family foundations with the aim of a sustainable future.

At the moment, on average 70% of worldwide family firms succeed with the succession of second generation, but nearly 13% do the transition to third generation.

To increase this number it involves many factors, because it includes the desires of the family members.

The focus should be that the wealth that is in the family control grows over time with the right family business strategy, even if the brand that they build up disappears at one point.

But those successful brands are the ones who remain under family control, and are included in their business portfolio, regardless of the new ventures that family members have developed over time. 

Family business management tips

Spin-offs

When there are family members who are not interested at all in the industry that the previous generation started the business in, then the family should focus on developing an enterprising family who have an entrepreneurial mindset and that is able to find business opportunities.

The characteristics of a leading family firm of being innovators and creatives can easily spot the market needs and seek out how to serve the market.

This way the next generation of entrepreneurs can start their new business, but also taking within them the know-how of their family business strategy.

Having a family member becoming a first generation will give him the experiences of building a business from scratch and in his desired industry, just as the founders.

By building up new businesses, the family enterprise starts to be consolidated and remaining the family ownership of the businesses in the same group.

Acceptance and tolerance

These are some important family values that must be educated across the members, because there will be differences of thought between generations and peers.

Family firms will face different ideas on how to solve problems, and there has to be an agreement on how to proceed to move forwards.

Family firms have to work in communion to be able to move forwards.

Strategic budgeting

Another important tip to do for a great family business strategy is to set the budget for the expenses.

Unfortunately, the issue with family owned businesses is that the business owners think that the family firm cash is their own cash.

Having the family ownership over a business doesn’t mean that they can dispose of the business cash as their own.

It is important to set a budget for the payroll of the family members who are working at the family firm.

As well, it is important to do a business plan about the investment that they are going to do and how much will they allocate.

Long-term planning

One main advantage of an enterprising family is that they can plan for several years and since the family shareholders are the only ones who decide over the business future, then there is more family control.

For sure, it will be a matter to talk with the family members to see what are their desires, but as mentioned, if they have the entrepreneurial spirit, then it is more likely that they will also start their own small business until they grow it into a mature family enterprise.

Frequently Asked Questions about Family Business

“Family business is one in which a family group is able to appoint the chief executive of the company, setting the business strategy of it all with the aim of generational continuity, based on the joint desire of founders and successors to maintain control of ownership and family management.”(Crown, 2004)

A small family business is that one where the ownership relys on the hands of a family and they have less than 250 employees.

Lack of proper administration and commitment of the family members can affect the business itself on a negative way.

Practices such as including non working family members on the payroll, using the business cash flow as family cash flow, not setting a proper business plan, mission and vision are some of the family businesses disadvantages that can affect the organization.

Some 70 percent of family-owned businesses fail or are sold before the second generation gets a chance to take over, according to a 2012 Harvard Business School study. (Bizjournal, 2021)

Family businesses often fail and end up in a business divorce because:

  • A family feud among members with equal power is inevitable
  • Emotions run wild
  • The family is ill-equipped to handle complex business issues.