CHAPTER 1

FAMILY BUSINESS

WHAT MAKES IT UNIQUE?

1-2 FAMILY BUSINESS: WORKING
DEFINITION
• A family business is a synthesis of:
• Ownership control by members of a family or consortium of families
• Strategic influence of a family in the management of the firm
• Concern for family relationships
• The dream (possibility) of continuity across generations
1-3 FAMILY BUSINESSES . . .

• Constitute 80–98% of businesses in U.S. and other free

economies
• Generate 49% of GDP in U.S. and more than 75% in most
other countries
• Employ 59% of private sector U.S. workforce and more
than 85% of working population overseas
• Created about 80% of all new jobs in the 1980s and 1990s
1-4 OTHER STATISTICS

• Between 17 and 22 million family-owned businesses in U.S.

• Annual revenues exceed $25 million for 35,000 family
businesses
• Family-controlled companies comprise
• 37% of all Fortune 500 companies
• 60% of all publicly held companies
1-5 THE BAD NEWS

• In their first 5 years of operation, 90% of family-owned

companies disappear
• Of remaining 10%, 67% die or change ownership after first
generation
• Only 12% survive under current ownership past the third
generation
1-6 WHAT MAKES THE DIFFERENCE

• Presence of the family

• Owner’s dream to keep the business in the family
• Overlap of family, ownership, and management
• Competitive advantage derived from interaction of family,
management, and ownership
1-7 SYSTEMS THEORY

• Model shows overlapping subsystems of family,

management, and ownership
• Firm is dynamic system in which integration achieved by
adjustments to subsystems
• Individual perspectives of family and firm may differ, leading
to overemphasis on one sub-system at expense of others
1-8 SYSTEMS THEORY MODEL

Ownership

Family Management
1-9 BLURRED BOUNDARIES

• Boundaries among family, ownership, management systems

may become blurred
• Problems determining if decisions relate to family, ownership, or
management issues
• Family rules used in the business
• Problem-solving ability diminished by blurred boundaries

• Businesses may become family-first, ownership-first, or

management-first
1- FAMILY-FIRST BUSINESSES
10
• Employment in business is membership right
• Members of same generation paid equally
• Extensive family perks from business
• Secrecy often paramount and family members protect each
other
• Business becomes part of lifestyle
• Commitment to continuity depends on agendas of
individual family members
1- BUSINESS-FIRST FIRMS
11

• Employment on the basis of qualifications—family

discouraged from working in business
• Performance of employed family members reviewed as for
nonfamily
• Compensation based on responsibility and performance
• Conversation between family members is all business
1- BUSINESS-FIRST FIRMS,
12 CONTINUED

• Business growth, market share, profitability, return on

assets, return on equity constitute the scorecard
• Next generation viewed in terms of how they can manage
and grow business
• Family events often cancelled/delayed for business reasons
• No automatic commitment to family business continuity
1- JOINT OPTIMIZATION
13 ALTERNATIVE

• Family employment policy guides employ-ment of family

• Some family members are employees; others responsible
shareholders
• Performance of employed family members reviewed as
nonfamily
1- JOINT OPTIMIZATION,
14 CONTINUED

• Family members encouraged to work outside business to

get experience
• When family members meet, conversation is both family
and business oriented
• Commitment to family business continuity
1- AGENCY COST THEORY
15

• Traditional theory: Alignment of owners and managers

decreases need for agency costs
• Recent research: altruism of owner-managers leads to
increased agency costs
• Agency costs can be controlled by managerial and
governance practices
• Board of directors important in monitoring managerial
behavior and controlling costs
1- CHALLENGES TO CONTINUITY
16
• Shortening product life cycles
• High transfer tax penalties
• High market valuations of ongoing businesses by historical
standards
• Family businesses considered outdated
• Family structure far from stable
• Next generation family business leaders unable/unwilling to
accommodate
• CEOs living longer—obstacles to succession
1- RESOURCE-BASED THEORY
17

• Resource-based theory highlights unique capabilities or

resources that family firms convert into competitive
advantage
• These resources referred to as organizational
competencies
1- COMPETITIVE ADVANTAGES OF
18 FAMILY BUSINESS
• Speed to market
• Strategic focus on market niches
• Concentrated ownership structure
• Lower overall costs
• Quality of product/service
• Agility and flexibility
• Owner-manager and long-term view
1- CONCENTRATED OWNERSHIP
19

• Ownership structure impacts corporate productivity

• Stock concentration positively correlated to
• Related diversification
• R & D expenses per employee
• Training per employee
• Overall corporate productivity

Source: Hill and Snell, Academy of

Management Journal, 32#1.
1- LOWER OVERALL COSTS
20

• Cost of capital is nearly 0% when owner controls stock

• Financing for other businesses:
• 25–30% for venture capital
• 17–20% for mezzanine financing
• Prime rate for bank financing

• Administrative and control costs also reduced absent need

for principal supervision
1- AGILITY AND FLEXIBILITY
21

• Flexibility of new manufacturing and distribution technology

makes smaller runs economically attractive
• Customization, changing consumer preferences, shorter
product life cycles reward agility
• EDI/Internet-based partnerships make agility possible
across value chain
1- OWNER-MANAGER
22

• Focused on customers, family, employees, profitability,

lifestyle
• Experiences conflicts between family, management, and
ownership and optimizes links
• Average tenure of 18 years vs. 3 years for public company
CEOs