Managing Succession in Family-Owned Businesses
Today, the development of family entrepreneurship becomes an important condition for the formation of a mechanism of continuity and entrepreneurial skills as well as the extensive growth of the middle class as a basis and a factor of stability for the economy of any country. The return of a family to entrepreneurship will help to unite its members in labor and to initiative various joint activities (Jaskiewicz & Combs, 2015). Having a common cause for the entire family will help unite the work of children and members of families with a limited work capacity as well as to return to an expanded form of organization such as family traditions. The question whether family business is good or bad is often asked by young entrepreneurs, but nobody can find a definite answer to it for a long time. Many people find this question very conradictive. Thus, some believe that family members in business are the most reliable support, while others are of the opinion that a common cause disrupts family ties. Some people are sure that work and family are incompatible in principle, and others think that the relations of people working together are stronger than family ties are. This topic can be argued, but it is obvious that everything depends on specific cases (Brokaw, 1992). One family can demolish a common business, while the other will fortify it since each case depends on family relations, type of business, the distribution of roles, but a family-owned business has common management features as well.
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Reasons to Start a Family-owned Business
Small family companies contribute to the formation of a competitive environment, and naturally, they are less prone to monopolization. Through self-employment they activate labor activity and improve the labor market situation in the country. Family businesses give the necessary flexibility to a market economy through reacting more quickly to the changes in market conditions due to the individualization and de-standardization of consumer demand (Brokaw, 1992). Moreover, they contribute to the formation of a more balanced system for the provision of services, especially in peripheral areas (The Economist, 2015). One cannot ignore that the predominant share of family firms operates on local raw materials and on the local markets, thus making them more active. According to Mendoza (n.d.), small family-owned businesses have a high synergetic effect. This affect is achieved as the consequence of the inheritance of the case, the identification of the functions of the owner and the entrepreneur, the development of the system of labor motivations, organizational unity, and psychological compatibility when combining production relations with the most effective type of non-productive ones – closely related relations.
Many believe that relatives will be more scrupulous about their job responsibilities, and they will not fail their manager. Moreover, they will try to justify the trust they have shown, doing their best while working on a project. At the same time, it is much easier to find a mutual understanding with close people in the process of interpersonal communications or to reach an agreement when solving professional issues (Mendoza, n.d.). Relatives perfectly know the strengths and weaknesses of each other, and, therefore, they are capable of determining what tasks a person does best. Finally, they will be able to support each other at the right time. People usually trust their loved ones, and they know that they will not betray them or spread rumors behind their backs, or even leave their company and go to the rivals with important information. Thus, family business assumes a high level of trust between partners. Consequently, if one wants to work in an organization where their relatives work, they should think whether they truly want it. If this desire is predisposed by the family tradition only, success in this endeavor is not guaranteed.
Types of Family-owned Enterprises
The most obvious example of the financial success of family businesses is the business empire of the Rothschilds and the Rockefellers. The representatives of both families do not head the popular lists of the richest people in the world as they are convinced that money likes silence. According to Norton and Bettinger (n.d.), in small business, the scale of operations is not as significant as in big ones; however, the principles of joint business remain the same. Regardless of the scale of the enterprises, the main idea is reliance on the family because only close people can provide what they cannot buy for any money – loyalty. Nevertheless, the problem is that a company built on a family basis cannot always be effective and viable.
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A family business in the structure and dispersal of capital, in the management of organizations, and in terms of the size of the companies themselves can be conditionally divided into two groups. The first one implies a family business in a narrow sense, or a company, in which family members and their immediate families work. As a rule, these are small companies with the staff rarely more than 10 people. At the same time, it is possible to identify such isolated subclasses as the business of one family, where only close relatives – husband, wife, son, brother, father – work for the common good. There is no clear official division of powers in such companies as there is no very structure of subordination or hierarchical levels. Here, leadership belongs to the head of the family, while others do their work as they understand it (The Economist, 2015). Small shops are often built on this principle, where the child is the seller, the wife is the accountant and the supplier, and the father is the head and driver in one person (Caspar, Dias, & Elstrodt, 2010). The same principle can be applied to building consulting firms, recruitment agencies, and family-owned small publishers. At the same time, there are no job descriptions, there is a functional interchangeability, and all members of the family are vitally interested in the survival of their small family business.
Furthermore, a family business of this type can include already mature ‘family’ companies with a clearly defined organization and subordination structure, where family relations become ‘business’, and it is necessary to consider that some of the relatives become managers, and some – their subordinates. Often, at the stage of the company’s transition from the family company itself to the inter-family association, serious administrative problems of the separation of power and the capital accumulated by the firm might arise. Family grievances from undeserved promotions in the position of some members and short-term lapses of others, the beginning of family squabbles and scandals can ultimately lead to the closure of the company itself.
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The second large group of family businesses is the firms that are possessed by entire family groups from the time of their foundation. As a rule, this group, which forms foreign family capitalism, includes large and very large companies such as international corporations with many subsidiaries. In this case, the ‘family’ only owns control over the company at the expense of a family shareholding. In each country, the family needs to maintain a different percentage of shares for their enterprise to be entitled to be called a family firm. For the USA and Germany, it is enough to accumulate only about 25% of the shares in the hands of one family, provided that this is the most significant of all joint-stock packages of this company, and the remaining shares are dispersed between multiple small owners of small blocks of shares (Aronoff, n.d.). Consequently, it is possible to retain control over the firm and simultaneously attract additional capital that is so necessary for the development of any firm.
A Successful Family Business Started by Henry Ford
One of the most famous examples of a successful family-owned business is Ford Motor Company. It is one of the most beneficial organizations in the world, while also being one of only a handful few to survive the Great Depression. As the biggest family-controlled organization on the planet, Ford Motor Company has been in an uninterrupted family control for more than 110 years. Henry Ford was an American industrialist, the owner of automobile manufacturing plants around the world, the inventor, the author of 161 US patents, and an extremely talented manager. Probably, Ford’s main secret was not so much in the innovations in production as in the human relations with others: “My secret of success lies in the ability to understand the point of view of another person and to look at things from him and from his point of view” (Andersen, 2013). This principle helped Henry Ford to build a successful business. He used this principle while communicating with outsiders but not with his family and especially, his son. Such a situation happens very often with family members who work in the same business: businessmen treat their relatives at work based on their personal relations with them but not their actions.
Ford decided that his son had to be involved in his business so that it became a family corporation in the future. He was suspicious of higher education, thus making his son Edsel start working at Ford Corporation immediately after school. Edsel did his best to complete all the tasks received from his father who created the most dependable auto on the planet, and the sone likewise envisioned that these autos would be the greatest as well. After some time, Henry Ford abolished Edsel’s orders and fired his staff. Eventually, Edsel generally stopped making any decisions whatsoever. Such a problem appears very often to the businessmen who have high or unrealistic expectations from their family members. The company was led by Ford’s most trusted aide Harry Bennett but not his son, and the business was in crisis. After the death of Ford and his son, Henry Ford II, his grandson, took the lead at the company and used a completely different management style. This chipper, sociable, and agreeable individual turned into the embodiment of the organization (Andersen, 2013). Owing to Henry Ford II, the corporation again worked smoothly. As it can be seen, in running his company, Henry Ford trusted the wrong person who did not care about his business as much as his family members would do, which led to the change of management style and a crisis for the corporation. Luckily, Ford’s grandson could overtake the management of Ford Motor Company and do his best to make the company successful.
Henry Ford II had an amazing flair for efficient people and new ideas. The history of Ford Corporation could end very badly had Henry Ford I not made his grandson the main president. It was a big luck that a total contrast of the management style helped to save the company. Throughout the years, the Ford family has remained on the board of directors. This example shows that trust can be given only to those who care about the future of the company. The family members have contradictions, but they remember the times when they could lose their family business and they do not want to repeat the mistakes again.
The Failure of Barings’ Bank family-owned Business
Another example of a family-owned business is Barings Bank. The bank of the Brothers Baring was one of the oldest trading banks in the world until its collapse that was caused by unauthorized actions of one of the bank’s employees in 1995. In 1762, the sons of a German immigrant from Bremen, Johan Baring, founded a company and called it the John and Francis Baring Company. The company was run by Francis Barring and his older brother John, who, incidentally, took a rather passive part in business. In 1800, John left the business and Francis’ newest partners were his eldest son Thomas and son-in-law Charles Wall. Since 1803, an active role in the management of the bank began to shift from Francis to his children as younger brothers Alexander and Henry became Thomas’ companions. In 1804, three brothers retained a leading role in the management of the bank. The Barings business shows an example of the family that wanted to work together on one common purpose. They saw each other as the best partners they could ever have because they trusted each other like they could not trust anyone else.
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The secret of Barring’s success was in their unity and good partners. Despite the partnership, the Barring family continued to stand at the helm and occupy the main positions in the presidium of the bank. Despite surviving the Great Depression and two world wars, in 1995, the family business was destroyed by the unauthorized actions of Nick Lyson, the head of the Singapore department of derivatives sales. Instead of following the strategy approved by the management, Leeson bought futures and then held them, waiting for a more profitable course. If a businessman follows this strategy, even a small percentage change in the futures’ prices can bring millions in gain or loss (Caspar et al., 2010). Thus, the bank went bankrupt in 1995 due to the fact that the Barring family had trusted the wrong person. This can happen to any businessman, and there is no way to escape such a situation. Nevertheless, the top managers of family-owned enterprise must control the work of their employees even if they trust them (Caspar et al., 2010). Since initially it was only the Barring’s family business, they trusted their partners fully, which could be one of the shortcomings of a family business.
Private Example of a Small and Successful Family-owned Restaurant Little Greece
The restaurant Little Greece is an example of a true family business. It is headed by twin sisters Agatha and Erasta who had immigrated to the USA from Greece for university studies. In marketing matters, they are assisted by their elder brother Robert, while financial issues are the prerogative of their father, but no decision is made without the mother of the girls as she is also always close. All members of the family are engaged in a common cause. The twins claim that this business would not be possible without their family’s help.
The idea of opening a restaurant came to their mind when they helped their parents with a small hotel business back in Greece. The girls helped their parents on vacation, and the rest of their time was dedicated to studies and sports. The sisters were raised in the atmosphere of discipline and regime thanks to their father and sports, which helped them build a life within certain limits, and the sisters are very happy about it. After school, they decided that they should develop themselves somehow. Thus, the sisters had the opportunity to go to the USA and get a Bachelor’s degree in Hospitality Management there. Their older brother accompanied them in their move to a new country. They graduated from the university and acquired valuable practice, although, perhaps, in this area, studies were not as important as work experience. While in the USa, the sisters seriously thought about the fact that they would open the cafe of their dreams here. They wanted to create a place that would remind them about their motherland Greece. The sisters personally participate in serving the visitors of their restaurant. In such a way, the owners make sure that their customers are happy with the service and food.
The secret of the success of this family lies in their unity, mutual support and assistance. As for the properties that one should have to open a restaurant, the sisters belive that one ought to be courageous, ambitious, discilplined, and very communicative in order to launch a successful business. This example shows how the new generation has opened a new business and the older generation has supported it. They preserved their family values and they managed to work together. For a family business, a strong leadership is particularly important, especially combining unchanged family values with concern for the success and development of the business. The predictions for the restaurant Little Greece are very good since the business is managed in the atmosphere of understanding among the owners and the customers. In the future, the twins want to open a new restaurant with the same name. In such a way, each sister can work on her own business part. Nevertheless, they always appreciate their family’s support and help in everything they do. The story of the owners is a bright example of the family who has proved that they make a good team. Mutual business has become their family tradition as it happens very often for thousands of families.
Common Advantages and Disadvantages of Managing a Family-owned Business
Only a proper organization of the family business and the appropriate use of each member of the family in it can bring positive results. Consequently, all participants of the business will be able to benefit from its advantages. The first of these positive effects is the unity of all family members as they work for a common cause. Li and Daspit (2016) are of the opinion that general business and the same interests will give additional topics for conversations and, accordingly, will the family bring together. The second benefit is the maximization of profits and the rapid increase in the family budget. The third one is the absence of misunderstandings between business participants and the planning of further business steps for long terms ahead. The fourth advantage is the opportunity to involve children in business from the middle school age. Children can start working immediately after they have the appropriate desire. Under the law, people can officially work only after they reach certain age, but in the family business, children can help their families at any time (Norton & Bettinger, n.d.). This chance should not be underestimated by the parents, but at the same time, it is a good opportunity for children to have some work experience and understanding of the way money is earned by their parents.
Each person has ambitions, and everyone likes it when they are praised, especially older and more successful people. According to Aronoff (n.d.), skills and knowledge of doing business, received from parents, are much more valuable than dry theoretical lectures that come from even the best specialists. Finally, perhaps, the main advantage of the family business is the possibility of transferring it to future generations, thereby ensuring a stable and comfortable future for their children and grandchildren. Positive effects of a successful family-owned business can be listed endlessly. A family business can become an important background for children’s development, their character, and future life in general.
Any successful enterprise changes its structure when moving from the small business sector to medium and large. The problems of growth remain the same as in the family way of doing business. The overwhelming majority of family businesses lose manager-relatives and acquire professional top managers who effectively manage a competitive enterprise. Realizing that standing at the helm of a rapidly growing enterprise does not always mean being an effective manager and that it is sometimes more difficult to keep the leadership positions than to achieve them, the owners employ professional managers. At the same time, they perform an observational and corrective function. In the end, a rapid growth can be achieved owing to a positive market situation or a successful marketing step, but competitors remain vigilant and they will use these innovations to their advantage.
At the same time, suspension from operational management of the company reduces the control of relatives over their growing company. Family relations can be destroyed due to misunderstandings in the financial plan, especially when the project starts to make a profit. It is not uncommon for one representative of a firm to suffer from the reputation and incomes of other members of the family business because of the negligence of one representative of the firm. There is a discrepancy between the employee’s status and the position they hold. In this case, the principal owner of the company must show firmness. If the employee does not want to perform the duties assigned to then fully, they are a subject to either dismissal or retraining. It is important to recognize family relations and business properly. A weak founder of the company could lose the authority and respect of other family members.
Leadership in business can re quire two or more people. The main problems of running a family business lie precisely in the psychology of family relations. According to Jaskiewicz and Combs (2015), before someone starts a serious business with their family, they should think about whether the team will be able to work closely in the future, whether the business will have a potential for development, or whether the business will have to be divided by the first income received in a court. There are many cases of family members destroying their relations following the failure of their family-owned business. At the same time, there is always a risk that the next generation will not have a desire to continue the family business (Li & Daspit, 2016). Business consultants recommend to set leadership roles before opening a family business and to follow them directly.
Recommendations on Management of Family Business
To open a family-owned business, it is important to follow recommendations suggested by business consultants. All documents relating to the company must be compiled in full compliance with the law. It is necessary to consider such possibilities as divorce, a division of the company, the features of purchase, and the sale of shares. It is important to indicate the wages of each employee in their contracts, to make a schedule of work and vacations, and to specify the level of responsibility, including material ones. In order for the business model to become viable and bring an income, a business scheme must adhere to all norms and rules. Personal relations and work are not the same. Each employee is an individual, but it is worth sticking to the rules that in the work process everyone is equal and must bear responsibility for their actions and poorly executed work. The family business is possible only if the head of the company is a charismatic leader, to whom all other employees will be supordinated (The Economist, 2015). The leader must be able to distinguish clearly between working and personal time. This is one of the most important recommendations for managing the family business and each member’s time and effort.
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There are also other tips for the management of a successful family-owned enterprise – a family must act like a team. The team should only consist of those people whose personal and professional qualities will contribute to the harmonious development of the business. If children do not want to participate in building a family business, it is better to give them the freedom of choice. Each member of the team must do their part of the work. It is essential that during working hours, subordination is observed and all employees are treated as colleagues, not relatives. The work of each employee (as well as relatives) must be rewarded on time. At the same time, the movement and distribution of financial flows should be performed under a clear control. If each family member makes a financial contribution to starting a business and the incentive to work will be even more pronounced, they will want to share the capital with everyone.
A family business is very popular and effective nowadays because any business progresses more easily when one has a support that family provides. The most important is to remember that business is psychology and a real art of cooperation. This means that if the family decides to thrive in a joint business, this is a wonderful family, in which members understand each other. Obviously, there can be no standard prescriptions that would help avoid problems in business. For a family-owned business, there is only one way to deal with them by having an absolutely open and honest discussion of all difficulties and jointly developing the ways of solving them. One should not try to start a common cause if there are at least the slightest misunderstandings in family relations, considering that their family business can cause additional stress within an unstable family and become a catalyst for destructive processes. Each family business is unique, but the discussed business stories can teach how to avoid common mistakes and help build a successful family enterprise.