Family Businesses

Your Family
Resiliency Business’s
Depends on Its
Structure
by Edmund (Ted) Clark
October 04, 2022

Vladana Stanojevic-Ilic/Getty Images

Summary. The ownership structure of the company is a decision every family

business owner must face. There are three ways to go when it comes to ownership
structure: 1) the solely-owned family business; 2) the sibling-controlled family
business; and 3) the diffusely-owned... more

To truly understand the issues that impact a family business, you

must see them for what they are: Family businesses are not a
monolithic block, but rather a “species” with various sub-species,
and any advice given to them should be tailored to fit that specific
sub-species.
To understand the variations, you must first identify the
“species”: A family business is a private business that has
experienced generationally transferred ownership within a family,
and is majority-owned by one or more members of the family. From
this broader definition, we can identify sub-species based on their
ownership structure, which is where three distinctly different
types of family businesses emerge: the solely-owned business; the
sibling-owned business; and the diffusely-owned family business.
These ownership types are not based or dependent upon the
generational transfer of ownership, but rather on an intentional
ownership transfer and its associated legal structure.

For example, one of the oldest family business in the U.S., Zildjian
Cymbals, was a solely-owned family business for 13 generations
before its ownership structure changed in 2002, and it went to
two sibling sister owners. There was a conscientious decision to
keep the business a solely-owned family business for 13
generations. But that changed in the 14th generation. And where
the sibling-owners take it in the future will also be a choice. The
family could decide to transition to diffuse ownership in the next
generation, or if they agreed, one sibling could acquire and
consolidate ownership back to that of a solely-owned family
business. You can’t go backwards generationally, but you can go
back to the type of company you were before when it comes to
ownership structure.
Within these three types of family businesses, we find distinct
advantages, disadvantages, and strategies for resilience and
longevity.

The Solely-Owned Family Business

In the solely-owned family business, ownership and control are
passed on to or consolidated with one owner. The solely-owned
family business is structured as an autocracy or monarchy. This
ownership structure has proven to be a stable, viable, and
successful form of long-term family business ownership.
Business issues aside, conflict within the family regarding
control, succession, and ownership is typically vertical between
the senior and junior generation, and is generally about when and
how changes of control and ownership of the business will occur.

Resilience strategies for solely-owned family businesses

Communication, as always, is important in solely-owned family
businesses, with a goal toward creating graceful entries and
dignified departures as ownership changes hands.
The senior generation owner must be emotionally and financially
prepared to exit the business when the time comes, and the next-
generation leader needs to be prepared in advance for their role
as the incoming owner and manager.
Opportunities should be available for the senior member to
provide advice and consultation within the business, if requested
and desired.
The ownership transfer should be structured to minimize any
financial impact to the owners and operations of the business.
Any financial disparities of wealth that may develop among
siblings not involved in the business should be addressed well in
advance of ownership transfers.
The departure of the senior generation owner should be
celebrated and memorialized, while acknowledging and
formalizing the transfer of ownership and control to the junior
generation owner.
A board of advisors is a necessity for a solely-owned family
business to ensure that you receive unbiased outside advice that
employees and family may be reluctant to provide.
The Sibling-Controlled Family Business
In the sibling-controlled family business, ownership, control, and
its associated power is diffused into the hands of more than one
sibling owner. As the business is owned and controlled by more
than one person, the governance structure is equivalent to that of
an oligarchy (e.g., two to six or so owners).
An advantage of having sibling owners is that family members
often have a shared desire to see the business succeed. Building
on the successes and the entrepreneurial spirit of the founding
generation, they often look to professionalize and grow the
business to accommodate the expanded ownership structure. The
oligarchy structure, however, is prone to conflict, particularly as it
moves beyond siblings.

The sibling-owned oligarchy structure has more potential for

conflict, with horizontal conflict among the sibling owners over
control, as well as vertical conflict with the next generation.
Additionally, the next generation has the potential for horizontal
conflict within itself.

Resilience strategies for sibling-controlled family businesses

In addition to the advice provided to solely-owned family
businesses, sibling-controlled companies should consider the
following:

If it hasn’t been done already, establish a board of advisors with

non-family-member involvement. In addition to seeking unbiased
outside advice, it is critical for siblings to acquire third-party
perspectives and validation to buffer potential conflicts.
Develop a “professional” management structure for the business
that is applied equally to family and non-family employees, and
includes procedures and policies such as employment
requirements, performance reviews, and compensation packages
based on position and performance.
Establish clear rules for entry into the business for the next
generation.
Establish clear guidelines for future ownership opportunities.
Establish buy/sell agreements that if invoked do not damage the
business.
Now comes the hard part. If longevity of the business is the family
goal, the sibling owner oligarchy should consider either:
 Returning to that of a solely-owned family business by acquiring
shares from other owners, or
Structuring the ownership of the business to be able to diffuse
ownership of the business broadly enough within the next
generation (which could have 10 or more owners) if possible, so
that no single owner could easily create a coalition to control the
business, or could afford to acquire ownership control.
The Diffusely-Owned Family Business
In the diffusely-owned family business, ownership and control
are passed beyond one nuclear family. Diffuse ownership does not
imply any particular generation or a number of owners beyond
two, but simply means that the owners are not from the same
nuclear family.

The problem for the diffuse family business is that the oligarchy
structure can be particularly prone to conflict, as coalitions
develop and struggle for power and control. This conflict can
become more pronounced as the familial relationships become
further removed from the founding nuclear family.

The decision, then, for the diffuse family business is to determine

what ownership structure works best for the family and the
business. Should you consolidate ownership, and to what degree
— to that of solely-owned company or just enough to remove the
conflict? Either way, this can be costly, and it is usually only a
temporary solution as the next generation will likely face the
same or a similar dilemma.

The other option is to change the legal ownership structure to

better resemble a public corporation or a democracy, and diffuse
the ownership of the business broadly enough within the next
generation (10 or more owners) so that no single owner could
easily create a coalition to control the business or could afford to
acquire ownership control.
Resilience strategies for diffusely-owned family businesses
If longevity of the business is the family goal, the owners should
consider changing the ownership to resemble a more democratic
or “corporate” structure. Follow this path if family members are
willing to potentially relinquish their control of the business and if
the business is large enough, financially stable enough, and
capable of developing the required infrastructure.
Legally mimic the structure of a public corporation, with a
representative set of family owners, while retaining the benefits of
remaining private.
Develop an owner’s council for the family owners to discuss and
share concerns.
At a certain point in the diffuse democratic family business,
leadership succession eclipses ownership succession. With fewer
and fewer shares in the hands of more and more owners, each
family member takes on the role of “shareholder,” as if the family
business were a publicly-traded company.

•••

So, which family business ownership structure has proven to be

the most resilient over the long term? The generationally
successful diffusely-owned “democratic” business structure is
often viewed as the aspirational template for the most successful
family business. However, these are difficult businesses to create,
manage, and maintain.

The future of ownership structure is a decision every family

business owner must face. And each one of them comes at a cost.
Consolidating ownership may result in hard feelings from those
not included. Diffusing owners to a more representative form of
ownership may result in feelings of loss of control of the business.
Staying in the middle ground with an oligarchy seems like an easy
choice with siblings, but that is likely only a temporary solution,
 as they may face the same dilemma later on. Whatever your
choice, put your family first, and make a reasoned and well-
discussed decision that’s best for your family.

EC
Edmund (Ted) Clark is the Executive Director
of the Northeastern University Center for
Family Business.

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