The term family business is often accompanied by varying definitions that indicate it to be an ambiguous concept. The most common variables that indicate family involvement in a business are ownership and management. The presence of one, the other, or both variables is what many academics and researchers agree constitutes a family business. Miller & Rice (1967) state that family involvement is what makes a family business, while most researchers, such as Handler (1989), agree that involvement must include ownership and management. Others like Churchill and Hatten (1987) claim that the criterion of a family successor must be present in order to qualify a business as a family business. Over the years, many other definitions have arisen, all of which give varying importance to the aforementioned principle (Chua, Chrisman, & Sharma, 1999). The following paragraphs will utilize this definition in exploration of the organizational structure, family issues, and protection plans via succession and estate planning that are essential for any family run business.
The organizational structure of a firm can be divided into four categories; the division and specialization of labor, levels of authority, span of control, and formal communication channels. In a family firm, the overlap of family and business can create uncertainty in the organizational structure. For example, a father who owns a business and has his daughter handle accounts and finances may entrust her to these tasks and take her advice on these matters at work while at home she must respect his authority on family matters. The father spends his time and expertise on operations and stakeholder communications, but also manages the marketing department with minimal background knowledge. When she gets married to a marketing expert, it may be difficult to restructure the level of authority both at home and in the workplace, should the new family member be involved in both. Principles by which such problems, as well as other organizational problems, can be minimized include: the exception principle, decentralization, the parity principle, and the unity principle. The parity principle, for example, indicates that all responsibility is accompanied by authority and vice versa (Erven).
Planning for the Future
In a constantly changing business environment, succession planning is a crucial aspect of maintaining a successful family business. The planning process requires careful deliberation in the selection and grooming of a candidate for succession. Potential successors must be able to fulfill their personal and career goals within the context of the family firm. For a successor to feel comfortable in his or her new role, there should be a possibility for growth and advancement. Furthermore, the firm should explore both formal and informal training (such as mentoring, performance review and appraisal) and evaluation of potential successors in order to develop and assess the successor’s skills and development (Handler, 1994).
While one feels that handing over the firm and estate to a successor may be an emotionally hard thing to do, it is even harder than many believe. Once an owner gets over the fact that he or she will eventually have to retire or die, the owner must understand that succession is not an event, but rather a process, that can take anywhere from 3-15 years of training, teaching, and guidance. It is crucial to start estate planning and succession planning early. While succession planning is important, it is only the beginning. Other factors to be considered include wills and trusts, asset protection, insurance trusts, living trusts, among other factors, all of which can contribute to the often-occurring demise of a family business through estate taxes.
Protecting the future of the firm through strategic management is crucial. This is especially true for larger firms that have already gone public and are susceptible to hostile takeovers. Various tools help larger family business maintain ownership. These tools include transfer restrictions (in terms of shareholder agreements), such as a consent clause, a right to first-refusal, post-sale purchase right and mandatory buy-sell agreements via internal market creation (Sund, & Bjuggren, 2008).
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Chua, J.H., Chrisman, J.J., & Sharma, P. (1999). Defining the family business by behavior. Entrepeneurship: Theory and Practice, 23. Retrieved from http://www.questia.com/googleScholar.qst?docId=5002338619
Erven, B.L. (n.d.). Organizational structure of the family business. Unpublished manuscript, Department of Agricultural Economics , Ohio State University, Ohio, USA. Retrieved from aede.osu.edu/resources/docs/pdf/D3E57989-B26F-4D12-B7054694F29BA82C.pdf
Handler, W.C. (1994). Succession in family business: a review of the research. Family Business Review, 7(133), Retrieved from http://fbr.sagepub.com/cgi/content/abstract/7/2/133 doi: 10.1111/j.1741-6248.1994.00133.x
Sund, L.G., & Bjuggren, P. (2008). Protection of ownership in family firms the owner and management perspective. Informally published manuscript, Kasetsart University, Bangkok, Thailand. Retrieved from http://www.google.ca/url?sa=t&source=web&cd=5&ved=0CDMQFjAE&url=http%3A%2F%2Fwww.bus.qut.edu.au%2Fresearch%2Face%2Fdocuments%2FBANGKOKANDPROTECTIONOFOWNERSHIPII.pdf&rct=j&q=protecting%20large%20family%20business&ei=HLzOTaTIK8iD-waw5pTrCQ&usg=AFQjCNFNaSngfLhNsZic3UGV1UzHJXGumw&cad=rja