Family business:

A family business is a business that is owned, operated and handles by two or

more members of a family.
A family-owned business has to have the following qualities-

 A sole family has to own the majority percentage of the ownership

 Has to have control over the voting system.
 Possess power in strategic decision-making.
 Multiple generations of that single-family have to be involved in that
business.
 The same family has to draw the senior management of that firm.

Types of family business:

1. Family Owned Business: This kind of business refers to the one which
controls the size of the significant and controlling ownership stake. This
stake is controlled and owned by the family members.
2. Family Managed and owned Business: In these businesses, a single
family or an individual member of the family owns the controlling stake
of the business. The major owner allows the family to create and decide
upon the objectives, policies and methods. 
3. Family Led and Owned Business: In this kind of business, while the
owner can belong to the family or a member of the family, at least
another family member should be a member of the company’s board of
directors. The family member can therefore influence major strategies,
direction and plans.
THREE-CIRCLE MODEL OF THE FAMILY BUSINESS
SYSTEM

The Three-Circle Model of the Family Business System was developed at

Harvard Business School by Professors Renato Tagiuri and John A. Davis in the
1970s. It describes and explains the family business system at a single point in
time, helping us to understand the important characteristics of the business,
family and ownership group and how these groups interact to influence the
performance of the business and the family. It is the dominant paradigm for
understanding family business systems worldwide.

This framework clarifies, in simple, graphic terms, the three interdependent and
overlapping groups (family, business and owners) that comprise the family
business system. As a result of the overlap of these groups, there are seven
interest groups, each with its own legitimate viewpoints, goals and dynamics.
The Model reminds us that the views of each sector must be respected and
integrated in order to set direction for the family business system. The long-
term success of family business systems depends on the functioning and mutual
support of each of these groups.

Its durability is because it is simple, has immediate face validity and captures
enough complexity in family business systems to help researchers, academics,
managers and families think more clearly about the strengths and challenges of
these systems.

Before the Three-Circle Model, when the family business field first started, the
few thinkers about family businesses were focused almost entirely on the
business itself. Before too long, there was an understanding that family
dynamics were influential in the business and vice versa, so researchers thought
about two circles: family and business. People were already starting to think
about a system where what happens in the family influences the business and
vice versa.

However, they ignored the importance of ownership factors. The addition of the
third circle (Ownership) allowed much more attention to other issues that
couldn't be explained by the first two circles. Linking the family, business and
ownership circles fully defined what a family business system is, which is the
interaction of all three of these subsystems.

Challenges faced by family business:

Setting compensation and benefits

Keeping things in the family can be a good thing, but paying the owner’s child
for doing little work, no work, or bad work can create poor morale among staff
members who aren’t relatives. If the business employs both relatives and non-
relatives, it is important that salary and benefits be set according to the position
and not according to the relationship.

Company culture

The values of the owner’s family often become the values of the business.
One research report* suggests that “clan culture” is prevalent in family
businesses where loyalty and traditions are highly valued. This type of culture
can make it difficult for outsiders to remain and thrive.

Separate business from pleasure

Small businesses are often like family, with co-workers caring about each other.
But when that family is actually family because of relationships by blood or
marriage, special problems can arise. It can be challenging to make business
decisions and operate without bringing personal feelings into the mix.

Generational problems

When there are different generations within the family participating in the
business, this can be a wonderful thing. Having younger generations in the
business brings in new ideas. For example, the idea of implementing the latest
technologies may be spurred by younger family members. But there can be
problems, too. A parent who starts a business may view it as his or her baby and
may be resistant to having their actual children make changes in how things are
done. Younger family members may feel frustrated in being held back from
moving forward.

System theory:

The Three Circle Model is generally accepted as the standard model for family
businesses and includes family, business and ownership as the three main
components.  The acknowledgment that there are three separate circles is a
significant accomplishment for a family business.  Too often, the circles are
constantly intertwined.  This results in poor communication, resentment and a
lack of commitment to the future – the very things the business family is trying
to prevent.

Each circle has a governance structure and a plan. A family council would
govern the family and prepare a family plan. A management team would lead
the business and prepare a management development plan for succession and a
business plan. A board of directors would govern the owners or shareholders
and would be responsible for the strategic plan, continuity plan, contingency
plan and the succession plan.

Within the three circles, there are seven potential positions that intersect and
overlap and that various individuals can hold.  These positions can be the source
of future successors for managers and owners. People normally change their
positions over their lifetimes as they enter and exit the business or ownership. 
However, their family membership remains constant although their role in the
family will evolve as they move from childhood to adulthood.
Each circle contains various stages of development and each individual within
the family, business or ownership circle can be at various stages of
development.  Therefore, consulting to family businesses is complex and
requires the determination of the various stages of development for both the
business and the key individuals and family members that are involved. The
family stage depends on whether the next generation is working in the business
or interested in working in the business, but this paper assumes that the family
is at the passing the baton stage.