Family Business - Basics

Q.1  What does one mean by Family Business ? 

Ans : Family Business refers to a company /firm where the majority voting rights are in the hands of the controlling family; including the founders who intend to pass the business to their descendants.

Q.2 What are the strength of  Family Business ? 

Ans : Several studies have shown that family-owned companies outperform their non-family counterparts in terms of sales, profits, and other growth measures.

1.Commitment. The family—as the business owner—shows the highest dedication in seeing its business grow, prosper, and get passed on to the next generations. As a result, many family members identify with the company and are usually willing to work harder and reinvest part of their profits into the business to allow it to grow in the long term

VCS TIP - We have observed that the commitment level keeps on reducing as the generations pass unless something concrete is done to maintain such high levels of Commitment

2.Knowledge Continuity. Families in business make it a priority to pass their accumulated knowledge, experience, and skills to the next generations. Many family members get immersed into their family business from a very young age. This increases their level of commitment and provides them with the necessary tools to run their family business

 VCS TIP - There is a compulsory need to have a formal KT (Knowledge Transfer) Process as most of the Indian Family Business are very poor in documentation and archiving . 

3.Reliability and Pride. Because family businesses have their name and reputation associated with their products and/or services, they strive to increase the quality of their output and to maintain a good relationship with their partners (customers, suppliers, employees, community, etc.).

Q.3 What are the weaknesses (in addition to normal business weakness ) of  Family Business  ? 

Ans :  We have a saying in GUJARATI - "ત્રીજી પેઢી તીકમદાસ"  It means that most of the time the THIRD GENARATION losses everything made by first two generations.

Perhaps the most often cited characteristic of family businesses is that many of them fail to be sustainable in the long term. Indeed about 2/3  to ¾ of family businesses either collapse or are sold by the founder(s) during their own tenure. Only 5 to 15 percent continue into the third generation in the hands of the descendants of the founder

1.Complexity - Family businesses are usually more complex in terms of governance. Adding the family emotions and issues to the business increases the complexity of issues that these businesses have to deal with. Family members play different roles within their business, which can sometimes lead to a non-alignment of incentives among all family members.

2.Informality - Because most families run their businesses themselves (at least during the first and second generations), there is usually very little interest in setting clearly articulated business practices and procedures. As the family and its business grow larger, this situation can lead to many inefficiencies and internal conflicts that could threaten the continuity of the business.

3.Lack of Discipline - Many family businesses do not pay sufficient attention to key strategic areas such as: CEO & other key management positions’ succession planning, family member employment in the company, and attracting and retaining skilled outside managers. Delaying or ignoring such important strategic decisions could lead to business failure in any family business

4.No Formal Succession Planning Process - Most of the family businesses keep the topic of succession planning under the carpet and they do not want to open the "Pandora's Box" and face hard questions. This leads to "Trust Deficit"  and than sour relations and finally "Business Partition" and loss of value.