The Family Business Part 2 Starting from Scratch or Joining an Existing Business

Looking Ahead After studying this chapter, you should be able to: Discuss the factors that make a family business unique. Explain the cultural context of a family business. Outline the complex roles and relationships involved in a family business. Identify management practices that enable a family business to function effectively. Describe the process of managerial succession in a family business. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

What Is a Family Business? A company in whose ownership and/or functioning two or more members of the same family are directly involved A firm whose ownership passes from one generation of a family to another (succession) Smith Family Hardware Est. 1935 Welcome Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

The Three-Circle Model of Family Business 1 6 3 7 5 2 Business Ownership 4 Source: Three-Circle Model developed by Renato Tagiuri and John A. Davis. Found in “Bivalent Attributes of the Family Firm.” 1982. Working paper, Harvard Business School, Cambridge, MA. Reprinted 1996, Family Business Review, Vol. IX, No. 2, pp. 199–208. Exhibit 5.1 Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Family and Business Overlap Family Concerns Care and nurturing of family members Employment and advancement in the firm Loyalty to the family Business Concerns Production and distribution of goods and/or services Need for professional management Effective and efficient operation of the firm Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

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 Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Advantages of a Family Business Exhibit 5.2 Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

The Culture of a Family Business The Founder’s Imprint on the Culture The founder’s core values become a transmitted part of the culture (for better or worse) Organizational Culture Patterns of behaviors and beliefs that characterize a particular firm Cultural Configuration The total culture of a family firm, consisting of the firm’s business, family, and governance patterns Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Cultural Configuration of a Family Firm Business Pattern Paternalistic Laissez-faire Participative Professional Cultural Configuration of the Family Firm Governance Pattern Paper Board Rubber-Stamp Board Advisory Board Overseer Board Family Pattern Patriarchal Collaborative Conflicted Source: Adapted from W. Gibb Dyer, Jr., Cultural Change in Family Firms (San Francisco: Jossey-Bass, 1986), p. 22. Exhibit 5.3 Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

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? Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

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 Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Family Roles and Relationships (cont’d.) 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. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Family Roles and Relationships (cont’d.) 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 them to perform as an effective team for both the business and the family. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Professional Management of the Family Firm “Best Practices” (John L. Ward) Stimulate new thinking and fresh strategic insights. Attract and retain excellent managers. Create a flexible, creative organization. Create and conserve capital. Prepare successors for leadership. Exploit the unique advantages of family ownership. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Professional Management of the Family Firm (cont’d.) 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. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Professional Management of the Family Firm (cont’d.) Family Retreats Are a gathering of family members, usually at a remote location, to discuss family business matters Use of an outside facilitator may be necessary. 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. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Professional Management of the Family Firm (cont’d.) 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 Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

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 Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

A Model of Succession in a Family Business Stage I Pre-Business Stage II Introductory Entry of Successor Child becomes aware of facets of firm and/or industry. Orientation of child by family member is informal. Child is exposed to business jargon, employees, and the business environment. Stage III Introductory Functional Child works as part-time employee. Work becomes more difficult. Includes education and work for other firms. Stage IV Functional Potential successor begins work as full-time employee. Includes all nonmanagerial positions. . Stage V Advanced Functional Potential successor assumes managerial position. Includes all management positions prior to becoming president. Transfer of Leadership Successor assumes presidency. Includes period in which the successor becomes dejure head of company. Stage VII Mature Succession Successor becomes defacto head of company. Stage VI Early Succession A Model of Succession in a Family Business Source: Justin G. Longenecker and John E. Schoen, “Management Succession in the Family Business,” Journal of Small Business Management, Vol. 16 (July 1978), pp. 1–6. Exhibit 5.4 Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Conditions Favoring Successful Leadership 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 Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Succession in a Family Firm Transfer of ownership Passing ownership of a family business to the next generation Who will inherit the family firm? Should each heir receive an equal share? Should ownership be transferred gradually? How to handle tax considerations? What to do with other wealth and assets of the founding entrepreneur? Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.

Key Terms family business organizational culture cultural configuration family retreat family council family business constitution mentoring stages in succession transfer of ownership Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.