978-1305405745 Chapter 5

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Chapter 5: The Family Business

CHAPTER OUTLINE

Spotlight: C.F. Martin & Co.

(http://www.martinguitar.com)

1) What Is a Family Business?

LO1: Define the terms family and family business.

i) Family – A group of people bound by a shared history and a commitment to share

a future together, while supporting the development and well-being of individual

members.

ii) Family Business- an organization in which either the individuals who established

or acquired the firm or their descendants significantly influence the strategic

decisions and life course of the firm, leading to success or failure of the business.

iii) Owner-Managed business- A venture operated by a founding entrepreneur.

iv) Sibling Partnership- A business in which children of the founder become owners

and managers.

v) Cousin consortium – A business in third and subsequent generations when

children of the siblings take ownership and management positions.

a) Family and Business Overlap

i) Families and businesses exist for fundamentally different reasons

(1) Individuals involved, directly or indirectly, in a family business have interests

and perspectives that differ according to their particular situations. This is

graphically displayed in Exhibit 5-1: The Three-Circle Model of Family

Firms).

(2) Competing interests can complicate the management process

(a) Ask students if they can name businesses that are family businesses in the

local community.

(b) Ask students if businesses such as Ford and Wal-Mart should be

considered family businesses.

b) Advantages and Disadvantages of a Family Business

i) Advantages:

(1) Trust among family members

(2) Loyalty to the family

(3) Commitment

(4) Knowledge

(5) Long-range thinking

(6) Close communication

ii) Disadvantages:

(1) Mistrust by nonfamily employees of incompetent family employees

(2) Lack of loyalty to the firm

(3) Entitlement

(4) Lack of knowledge

(5) Demand for instant gratification

(6) Failure to communicate

(7) Discuss advantages and disadvantages with students then have the students

indicate show these are different for a family business as compared with other

forms of business.

2) Dynamic Family Businesses

LO2: Explain the forces that can keep a family business moving forward.

a) The Imprint of Founders on the Family Business Culture

i) Research indicates that founders leave a deep impression on the family businesses

they launch.

b) The Commitment of Family Members

i) All organizations develop a culture, intentionally or otherwise.

ii) Factors committing family members to the business may be as follows:

(1) Family control and influence.

(2) Identification of family members with the firm

(3) Binding social ties

(4) Emotional attachment of family members

(5) Renewal of family bonds to the firm through dynastic succession.

c) The Fear of Commitment

i) Commitment is not automatic. Members of the succeeding generation in family

firms may have emotional resistance to joining the firm. Typical fears include:

(1) Fear of failure

(2) Fear of success

(3) Fear of commitment

(4) Fear of disappointing your parents

(5) Fear of disappointing others

d) Commitment Through Unity

i) A study conducted to survey family business owners to assess the relationships of

unity to the firms found the following:

(1) Family unity and cohesion were found to be critical to family business

success, especially when family members identified unity as an important

goal.

(2) Considering business matters such as strategy, ownership, and management,

82.9 percent of the owners said that they were completely or very unified as

an ownership group.

(3) Unity of the ownership group is significantly associated with family

commitment to the business in each generation, predictions of sales growth,

and demonstrations of past growth.

(4) Family unity affects other stakeholders as well.

3) Family Roles and Relationships

LO3: Describe the complex roles and relationships involved in a family business.

a) Co-Preneurs– some family businesses are owned and managed by couples teams

known as co-preneurs.

b) Mom or Dad, the Founder – the idea is that business and family will grow and

prosper together. Entrepreneurs with children think naturally in terms of handing the

business o to the next generation. Of all the relationships in a family business, the

Chapter 5: The Family Business

parent-child relationship has been recognized for generations as the most

troublesome.

c) Sons and Daughters

i) Should children be recruited for the family business or should they pursue careers

of their own choosing?

ii) How about personal freedom? The son or daughter may prefer music, or medicine

to the world of business and may fit the business mold very poorly. One must give

consideration to this.

iii) A son or daughter may feel the need to go outside the family business, for a time

at least, to prove that he or she can make it without help from the family.

d) Sibling Cooperation, Sibling Rivalry

i) At best siblings work as a smoothly functioning team, each contributing services

according to his or her respective abilities.

ii) Squabbles within a family may also generate competition and this affects family,

as well as nonfamily members.

e) In-Laws In and Out of the Business

i) Marriage can bring rivalry and conflict

ii) When an in-law joins a company, effective collaboration may be achieved, by

assigning family member to different branches or roles within the company.

f) The Entrepreneur’s Spouse

i) Even if a spouse does not work in the business, he or she may still play a critical

role behind the scenes.

ii) Ideally, the entrepreneur and his or her spouse form a team committed to the

success for both the family and the family business.

iii) Ask students to indicate whether they are involved in a family business. If they

are, have them tell about the business—how started, form of business, etc.

4) Good Governance in the Family Firm. See Exhibit 5.4 for Best Practices for Family

Business.

LO4: Identify management practices that enable a family business to function

effectively.

a) Nonfamily Employees in a Family Firm.

i) Few parents will promote an outsider over a competent daughter or son who is

being groomed for future leadership.

ii) Those outside the family are family sometimes caught in the crossfire between

family members who are competing with each other.

iii) Sometimes the leader of a family-owned enterprise might decide to bring in a

nonfamily member as an executive to:

(1) Bridge the gap between generations

(2) Set new directions for the firm

(3) Deal with change

(4) Provide new skills and expertise

b) Family Retreats

i) A gathering of family members, usually at a remote location, to discuss family

business matters

ii) Retreat is the beginning of a process of connecting family members

iii) Suggestions from David Lansky, CEO of a family business consulting include:

Chapter 5: The Family Business

(1) Be clear about the purpose of the retreat.

(2) Set small, attainable goals.

(3) Use an agenda and stick to it.

(4) Give everyone a chance to participate.

(5) Know the difference between consensus and agreement.

c) Family Councils

i) An organized group of family members who gather periodically to discuss family-

related business issues

ii) Useful for developing family harmony

d) Family Business Constitutions

i) A statement of principles intended to guide a family firm through times of crisis

and change

ii) A family business constitution, sometimes labeled a family creed may include the

following topics

(1) The core values that all family members should follow

(2) A process for decision making

(3) The benefits that family members may receive from the business

(4) A mechanism for introducing younger members to the family business and its

governance structures

(5) A dispute resolution procedure

(6) The philanthropic ambitions of the family.

5) The Process of Leadership Succession

LO5: Describe the process of managerial succession in a family business.

i) Because everyone is so uncomfortable with the subject, plans for succession often

are not well developed or at least are poorly communicated.

a) Available Family Talent

i) A family firm should not accept the existing level of family talent as

unchangeable.

ii) Mentoring is the process by which a more experienced person guides and supports

the work, progress, and professional relationships of a new or less-experienced

employee.

b) Preparing for Succession

i) Successful management and ownership transitions require thoughtful action by

both the current and the future leadership teams.

ii) Responsibilities for the Senior Generation

(1) Before children take on the role of senior management, the senior generation

should consider the following:

(a) Communication

(b) Planning

(d) Owner development

(e) Long-term planning

iii) Responsibilities of the Junior Generation

(1) Be open to communication

(2) Develop a personal action plan

(3) Implement the personal action plan

(4) Prepare for ownership

(5) Design life plans

c) Transfer of Ownership – Passing ownership of a family business to the next

generation.

i) With several children, decision on who to transfer ownership could be a problem

(ownership structure could be changed)

ii) Tax concerns

iii) Personal holdings should be kept separate

ADDITIONAL DISCUSSION QUESTIONS

1. How are family businesses different from nonfamily businesses? In what ways

are they the same?

A family business is one that involves family members in the business in some

way. That is, the business must be more than a one-person venture. However,

2. Suppose that you, as founder of a business, have a sales representative position

open. Your sister has a step-daughter who is looking for a job and asks you to

hire the young woman. What action would you take? Why?

3. What advantages result from family involvement in a business? What are some

disadvantages?

4. You have been offered a job with a family-owned company. You are not related

to anyone in that business. What factors should you consider in deciding

whether or not to accept the offer?

5. If you start a venture and expect some of your family members to join you, what

rules do you think you should write down in advance?

Answers will vary among students but should include discussion about

6. With a college-level business degree in hand, you are headed for a job in the

family’s business. As a result of your education, you have learned some of the

latest practices in management. You know that these new ideas have not been

adopted in the company, but the business is showing a good return on

investment. Should you “rock the boat”? How should you proceed in correcting

what you see as obsolete approaches?

7. Describe a family business with which you are familiar. What strengths or

weaknesses do you see in the business relationships among the members active

in the company?

The question calls for individual answers.

8. Should a son or daughter feel an obligation to carry on a family business?

What might happen if that prospective successor chooses not to join the firm?

license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5-7

9. Assume that you are an ambitious, nonfamily manager in a family firm and

that one of your peers is the son or daughter of the founder. What, if anything,

would keep you interested in pursuing a career with this company?

Interest of the nonfamily manager might be best maintained by making the

10. In making decisions about transferring ownership of a family business from

one generation to another, how much emphasis should be placed on estate tax

laws and other concerns that go beyond the family? Why?

SUGGESTED ANSWERS TO YOU MAKE THE CALL EXERCISES

Situation 1

1. What would you do if you were Stefan? What would you do if you were Dillon?

2. What advice would you offer to Stefan and Dillon to maintain strong family

relationships?

Chapter 5: The Family Business

license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5-8

a lower salary and is no longer an executive. A third option could be to suspend

Lou for a period of time and see if that causes him to realize that he is causing

problems within the business with the employees.

Situation 2

1. What advice do you have for Morris and Ellen?

2. What recommendations do you have for preparing children to lead changes in a

company?

Situation 3

1. How do you think growing up in a family business affects career decisions by

children of the owners?

2. If you were going to run a business with a family member, how would you go

about deciding on the organizational culture you want to create?

SUGGESTED SOLUTION TO CASE 5: IACCARIO & SON

1. If you were in Fran’s shoes when he was running his own company, what factors might

have attracted you to close your business and join Iaccarino & Son? What factors might

have discouraged you from entering the family business?

Chapter 5: The Family Business

license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5-9

Student answers will vary, but the sense of duty might have been one attraction to Iaccarino

& Sons. If the family business was more profitable than Fran’s, that also might have attracted

him. The weight of walking not in one but two generations of family shoes might be a

deterrent, as well as any possible underlying politics.

2. Why do you think Carl wanted to retain ownership and decision-making authority over

Iaccarino & Son after bringing Fran into the company?

3. When the recession hit in 2008, what advice would you have given Carl and Fran to

increase the chances of survival for Iaccarino & Son?