The Purview of Family

Business
Definitions of Family business

 Family business is a commercial organization in which decision-making is

influenced by multiple generations of a family related by blood or marriage who
are closely identified with the firm through leadership or ownership.
Conceptual Overview

 Family business is the oldest and most common model of economic organization.
 majority of businesses throughout the world--corner shops to multinational
publicly listed organizations with hundreds of thousands of employees are
considered family businesses.
 Ownership is distributed through trusts or holding companies, and family
members
 A firm is said to be family-owned, if a person is the controlling shareholder; that
is, a person can garner enough shares to assure at least 20% of the voting rights
and the highest percentage of voting rights compared with other shareholders.
Some Examples of family business

 Aditya Birla Group

 Ford
 Mittal Steel
 Raymond Group
 Samsung
 Tata Group
 Toyota
 Trump Organization
 Wal-Mart, etc.
Family Business Management in India:

 "Family Business has to be efficiently managed in a liberalized environment and

efficient managers are more likely to be outside the family rather than within. You
have no choice but to bring them in to run the family businesses." - Rahul Bajaj,
Bajaj Autos.
 Family businesses are the lifeline of India’s economy.
 Almost 90% of Indian businesses are family-owned, which makes the rest of the
business community largely dependent on them.
 Family Business contributes 60-70 percent of GDP of most developed &
developing countries.
Family as a business system

 “A family business is a company owned, controlled, and operated by members of

one or several families. Many companies that are now publicly held were founded
as family businesses. Many family businesses have non-family members as
employees, but, particularly in smaller companies, the top positions may be
allocated to family members”.
The Three Circles Model
Continued….

 The Three-Circle Model of the Family Business System was developed by Renato
Tagiuri and John Davis at Harvard Business School, and was circulated in
working papers starting in 1978. It was first published in Davis’ doctoral
dissertation, The Influence of Life Stages on Father-Son Work Relationships in
Family Companies, in 1982. In 1996, the Family Business Review published it in
Taguiri and Davis’ classic article, “Bivalent Attributes of the Family Firm.”
Continued….

 A three-circle model is show the three principal roles in a family-owned or

-controlled organization : Family, Ownership and Management.

 This model shows how the roles may overlap.

 Family

 Ownership

 Management
Family Business Succession

 Family business succession is the process of transitioning the management and the
ownership of the business to the next generation of family members.
 The transition may also include family assets as part of the process.
 Family members typically play a controlling role in both the management
succession as well as the ownership succession.
 Succession is like changing in the three circles of FB - changing in family,
ownership and business.
Problem with valuation in ownership
succession
 Family communication
 Timing of the ownership transition
 Who can own shares in the family business and why?
 How will the ownership transfer be funded?
 What will happen if an owner (current or future) becomes incapacitated, dies, or
decides to voluntarily leave or retire from the ownership ranks of the business? In
other words, what is the exit strategy?
 What are the criteria for next-generation family members becoming owners? Should
they require a certain level of education and experience? Who will determine the
criteria and if it has been met?
 Do the owners have a current shareholders agreement that reflects and supports the
succession objectives/plan?
Needs of older Generation

 As per parental concerns in passing the business from 1st generation to 2nd
generations on:
 Does my child possess the temperament and ability necessary for business leadership?

 How can I, the founder, motivate my child to taken an interest in the business?

 What type of education and expertise will be most helpful in preparing my child for
leadership?

 What time table should I follow in employing and promoting my child?

 How can I avoid favoritism in managing and developing my child?