MANAGING FAMILY OWN BUSINESS

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WHAT IS A FAMILY BUSINESS?

• Family Business can be defined as Two or more members of the same family are directly involved in managing the business

• Ownership control passes from one generation of a family to another (succession)

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WHY FAMILY BUSINESS IS IMPORTANT?

• Family businesses are pervasive and significant

• Family businesses are more profitable

• Family businesses are better place to work

• Family businesses are complex

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Global Families Indian Families

Ford Motor Company GMR Group

Marriott International Dabur Group

Cargill Murugappa Group

Perrier Mineral Water Apollo Hospitals

Heineken Beer Godrej

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FAMILY OWN BUSINESS

GLOBAL COMPANIES

FORD MOTORS

CARGILL

HEINEKEN BEERS

PERRIER MINERAL WATER

MARRIOTT INTERNATIONAL

INDIAN COMPANIES

GMR MOTORS

DABUR GROUP

MURUGAPPA GROUPS

GODREJ GROUP

APPOLLO HOSPITALS

FAMILY VS. NON-FAMILY BUSINESSES

• Agency theory provides a framework for understanding differences between family-owned businesses and non-family-owned businesses or agent-managed businesses.

• Agent-managers, as contrasted with owners in this context, are the managers who run a business without having an ownership stake.

• Owner-managers, by contrast, are predisposed to create business value because their motivations are different ...their wealth is generated from the successful growth of the business, not a salary paid to them by the business.

INDIA TOPS IN FAMILY FEUDS OVER FAMILY WEALTH

• Forty percent of the globe's wealthy population have direct experience

of their family fortune leading to disputes, but the percentage is even

higher in India, where 61% of the rich have seen relationships

deteriorate into feuds over money, according to a new report. In

contrast, 53% of respondents in Singapore, 51% in Hong Kong have

experienced family tension as a result of wealth, as against just 11%

in Qatar.

• 35% of global high net worth individuals do not have confidence in

their children to protect their inheritance.

CONTINUITY PLANNING

Medium Term Business Strategy

Ownership and Management Succession

Development of Next Gen

Estate, Investment and

Safety Net

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ADVANTAGES OF A FAMILY BUSINESS

• Strength of family relationships during challenging periods of business change

• Financial sacrifices that family members make for the good of the firm

• Operation as a family business distinguishes the firm from its competitors

• Higher levels of concern for its community and non-family employees

• Capability to plan and prepare for the long haul

• Emphasis on quality and value

DISADVANTAGES OF FAMILY BUSINESS1. The joint family under the strict control of head of family tends to be

conservative and orthodox. It cannot change with times.

2. Member of family lack initiative because fruits of their initiative will ultimately be shared by other members who may be lazy and idle. Therefore, nobody puts in hard labor, which is so necessary for advancement in standard of living.

3. Due to lack of initiative in its members, the economic condition of the joint family goes on deteriorating.

4. disharmony due to generation gap in the family which affects the progress of the family adversely.

5. In a joint family the women look after household chores. Thus their talents are wasted and their lives are rendered miserable.

6. The common property is looked after by none and its condition worsens for want of proper attention.

FAMILY ROLES AND RELATIONSHIPS

• Parental Concerns in Passing the Business On:

• Does my child possess the temperament and ability necessary for business leadership?

• How can I, the founder, motivate my child to take an interest in the business?

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

• What timetable should I follow in employing and promoting my child?

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

• How can I prevent the business relationship from damaging or destroying the parent–child relationship?

FAMILY ROLES AND RELATIONSHIPS (CONT’D)

• Husband–Wife Teams

• Opportunity to share more in each other’s lives

• Business differences interfere with family life

• Work doesn’t leave time for family life

• Sharing family responsibilities eases the load

• Sons and Daughters

• Personal preferences different from the business

• Personal qualifications insufficient to assume role in business

• Desire for personal freedom to choose another career

• Sibling Cooperation, Sibling Rivalry

• Best case : siblings work as a team, each contributing services according to his or her abilities

• Worst case : siblings compete as rivals and disagree about their business roles.

• In-laws In and Out of the Business

• Disagreements about how to treat and reward in-laws and family members/children

• Assign to different branches or to different business roles

• The Entrepreneur’s Spouse

• Communication between entrepreneur and spouse is critical for their performance as an effective team for both the business and the family.

FAMILY ROLES AND RELATIONSHIPS (CONT’D)

PROFESSIONAL MANAGEMENT OF THE FAMILY FIRM

• The Need for Good Management

• Best Practices:

• Stimulate new thinking and fresh strategic insights.

• Solicit outsiders’ input to keep perspective.

• Attract and retain excellent managers.

• Create a flexible, creative organization.

• Create and conserve capital.

• Prepare successors for leadership.

• Exploit unique advantages of family ownership.

• Nonfamily Employees in a Family Firm

• Hazards:

• Competition with family members for advancement

• Getting caught in the crossfire and politics of family competition within the firm

• Solution:

• Identify family-only reserved positions in advance.

• Treat both family and nonfamily employees fairly in matters of reward and promotion.

• Family Retreats

• A gathering of family members, usually at a remote location, to discuss family business matters.

• Use of an outside facilitator may be necessary.

PROFESSIONAL MANAGEMENTOF THE FAMILY FIRM (CONT’D)

• Guidelines

• Set a time and place.

• Distribute an agenda prior to the meeting.

• Plan a schedule in advance.

• Give everyone a chance to participate.

• Keep it professional.

• Family Councils

• An organized group of family members who gather periodically to discuss family-related business issues.

• Represent the family to board of directors

• Useful in developing family harmony

• Increases understanding of family traditions and interest

• Family Business Constitution

• A statement of principles intended to guide a family firm through times of crisis and change.

THE PROCESS OF LEADERSHIP SUCCESSION

• Available Family Talent

• Mentoring

• Guiding and supporting the work and development of a new or less-experienced organization member.

• Allowing only qualified competent family members to assume leadership roles in the firm increases the value of the firm for all who have an ownership interest in it.

STAGES OF SUCCESSION IN A FAMILY BUSINESS

CONDITIONS FAVORING SUCCESSFULLEADERSHIP SUCCESSION IN A FAMILY FIRM

• A sound, profitable business

• Stable, healthy family relationships

• Advance planning for leadership succession

• Positive family leadership and a team-oriented management structure

• Presentation of career opportunities without pressure

• Open communication on family business issues

RELUCTANT PARENTS AND AMBITIOUS CHILDREN

• Transfer of Ownership

• Passing ownership of a family business to the next generation

• Who will inherit the family firm? When?

• Should each heir receive an equal share?

• Should ownership be transferred gradually?

• How are tax considerations to be handled?

• What to do with other wealth and assets of the founding entrepreneur?

CAUSES OF CONFLICT IN THE FAMILY BUSINESS

THE OVERLAP BETWEEN THE FAMILY AND BUSINESS SYSTEMS

Figure 4.1 C onflic t in Fam ily F irm sFam ily Business m anagem ent, Ibrahim & E llis

The

BusinessSystem :R esult-oriented C onflict

TheFam ilySystem :Em otionallybased.

CAUSES OF CONFLICT IN THE FAMILY BUSINESS

• Ambiguity of roles

• Differences in power and status among family and non-family members

• Hasty and /or unfair succession process

• Rivalries among family members

• Favorite Son/daughter syndrome

• Lack of clear and coherent policies regarding career development, compensation and hiring

• Lack of code of conduct

• Lack of proper job descriptions and clear boundaries

COMMON SOURCES OF CONFLICT

• Father-Son/Daughter Rivalry

• Rivalries between offspring

• Conflict between other members of the family

• Conflict between family and non-family members

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MANAGING CONFLICT

• Setting Clear Guidelines

• Jurisdiction, compensation, career development, code of conduct, objectives, performance assessment criteria

• Remove ambiguity

• Set clear expectations

• Managing confrontation

• Face-to-face meetings

• One-on-one meetings with CEO/Founder and employees involved in conflict

• Group meetings

• Breaking deadlocks

• Act early

CHALLENGES TO THE FAMILY BUSINESS

• Differing family member goals and expectations, and jealousy and interference from some disgruntled family members (and their in-laws) can plague the operation of family businesses in ways that do not affect non-family run businesses

• The degree to which the business depends on one individual, namely, the principal owner-manager or Godfather, substantially affects how well a family business works

• Many family business managers tend to be consumed with short-term operational issues such as taxes, finances, marketing, and day-to-day operating problems.

• Family businesses are commonly at a disadvantage when it comes to acquiring resources, largely because their owners are predisposed to being more risk averse.

• Many family owner-managers attempt to avoid bringing in outsiders as resources because they believe that it threatens the security of the family.

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THREATS IN FAMILY BUSINESS

1.Family Feuding:

2. Nepotism:

3. Letting Emotions Run the Business:

4. Losing Non-Family Employees:

5. No Succession Plan:

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TIPS TO MANAGE THREATS TO YOUR FAMILY BUSINESS:

• Clearly define the goals of the company and make sure everyone is on the same page.

• Outline each family employee’s role and responsibilities and hold them accountable.

• Keep an open line of communication at all times.

• Address all concerns quickly and in a non-emotional manner.

• Create a fair promotion and salary system that is based on individual merit and ability.

• Take a management course to learn how to separate your emotions from the management process.

• Provide opportunities for advancement in your business for non-family employees.

• Be prepared and create a succession plan to ensure your business lives on after you are gone.

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