Emergic: Rajesh Jain's Blog

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Family Business

November 7th, 2004 · No Comments

The Economist writes: “More family firms are facing up to their biggest problem: avoiding a crisis as the business passes from one generation to the next.”

The vast majority of family businesses consist of a single founder-owner or founder-couple, sometimes employing relatives who come into the business to help or to find a job. A study by four family-business gurus, published seven years ago (Generation to Generation), reckoned that about three-quarters of family firms in America took this form. A further 20% are sibling partnerships; and 5% are cousin consortia. Succession is the ultimate test of a family business, say the authors. Once the business has been transformed from an individual venture into a family enterprise, its continuity becomes a unifying concern. The very task of keeping the family firm in existence may thus sometimes provide the glue that holds quarrelsome relatives together.

Succession in a family business is not an event but a process. Rarely does the patriarch sit with his lawyer for a morning and hand over the family company at the stroke of a pen. Instead, there is typically a two-stage process. It involves the transfer of both management and ownership. Succession is not complete until both management authority and ownership rights pass on, says John Davis of Harvard Business School. But they tend not to pass at the same time. The older generation may hang on to ownership until deathor even beyond, in a sense, if ownership is vested in family trusts.

Parents may willingly hand over the burden of management to the next generation, long before they give up the privilege of control. Passing on the key right to vote shares involves transfers of power, of status and even of identity, says John Ward, who teaches family-business management at two business schools, one on each side of the Atlantic: Kellogg in the United States and IMD in Lausanne.

Tags: Management

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