8/6/2019 ppt on edp
1/35
Family Business
MODULE 5
8/6/2019 ppt on edp
2/35
Definition- Family business It is defined in terms when there is
ownership control by members of a family,
strategic influence of a family in the
management of the firm, concern for family
relationship and the dream continuity across
generations. Family firm is a corporation that is entirely
owned and managed by the member of a
single family.
8/6/2019 ppt on edp
3/35
Another definition A business in which one or more members of one or
more families have a significant ownership interestand significant commitments towards the business.
In some countries, many of the largest publicly listedfirms world wide are FAMILY OWNED
Examples-Wal-Mart (USA), The Gap (USA),
-Samsung group(South Korea)
-LOreal ( France), IKEA (Sweden)
-Tata Group ( India), Mc Cain Foods ( Canada)
-Fiat Group ( Italy), Grupo Modelo ( Mexico)
8/6/2019 ppt on edp
4/35
Characteristics of Family businesses in India
FB are loyal to the principles and ideals of the founder.
Family relationship is the most imp factor in
determination of the position a person holds in the
business.
Family influences the business and business environmentinfluences the family.
Family members who are not contributing to the
business are also included in the board of directors.
It provides true reflection of the values of their foundersand of the people who pass them on from generation to
generation.
8/6/2019 ppt on edp
5/35
Contd
Succession is the final test for family business. Most of the family businesses face unique
management challenges because of the differences
in attitudes and aspirations of the family. It has
been observed that just 13 % of the family
business survive till 3rd generation and only 4 %
go beyond 4th generation.
The single minded dedication of the CEO and thefamily ensures that the family- owned business
survives through the toughest times.
8/6/2019 ppt on edp
6/35
Importance of Family Business
FB are the engines that drive socio-economic
development and wealth creation around the world.
FBs are centuries old and have consistentlycontributed towards significant wealth creation andnation building.
FB contribute all over the globe more than half ofthe GDP, employment and account for a bigproportion of market capitalization.
FB not only contribute to the economicdevelopment but also in Philanthropy like inseveral areas- Education, Environment, Health ,Culture, Welfare of victims of Natural Calamities
and Heritage Conservation.
8/6/2019 ppt on edp
7/35
Estimates show the following facts about
contribution of family businesses
About 85% of businesses in European Union & 90%of US businesses are family controlled.
Worldwide family businesses account for approx75% of the top 100 companies.
In Holland, small family businesses represent 75% ofall companies.
In US FB generate 60% of all employment.
Of Italys top 100 companies 43 are family owned. In India 95% of the registered firms are FB which
include Tatas , Birlas , Ambanis, Singhanias,
Chidambrams, Kirloskars , Goenkas etc.
8/6/2019 ppt on edp
8/35
Characteristics of family firms and professional firms
1. Types of Market- Professional firms(PF) perform very well in emerging
markets than Family firms.2. Age of the firm- Family firms are younger or middle aged while PF are older.
3. Size of the firm- Family firms are smaller or medium sized but PF are
comparatively larger in size.
4. Category of entrepreneurship- The first generation firms accounted for 80% of
family firms,1/3rd were professional firms and 10% were foreign firms.
5. Ownership of firms- 61% of all firms were closely held by families, 32%
widely held and 8% were foreign equity owned.
6. Legal ownership- Very large number of family firms were privately owned
whereas the PFs were public limited.
7. Consistency of sales growth- 64% Professional firms had consistent salesgrowth of over 20% for last 3 years and remaining skewed towards the family
firm.
8. Group affliation of the firm- Predominantly professional firms were affiliates
of Indian business group or foreign subsidiary, while family firms more often
stand alone companies even though they have multiple businesses.
8/6/2019 ppt on edp
9/35
Types of family business
Sole proprietorship
Partnerships
Limited Liability company
Holding companiesFamily controlled companies
Various forms of ownership can be-
Sole proprietorship Partnership
Joint stock company
Co-0perative organization
8/6/2019 ppt on edp
10/35
Sole Proprietorship The individual form of business
organisation is an organisation at the head
which stands an individual as the one who
is responsible who directs its operations and
he alone runs the risk of failure.
8/6/2019 ppt on edp
11/35
Features of Sole Proprietorship Individual ownership.
Unlimited liabilities.
Free from legal formalities.
Limited scope of operation.
Personal Interest.
Freedom to start and to end. Monopoly on profit.
Business Secrecy.
8/6/2019 ppt on edp
12/35
Merits of Sole Proprietorship Easy formation.
Less expensive to establish.
Least government interference. Complete control.
Prompt decision.
Business Secrets
Feasibility.
Tax benefits.
Retention of profits.
Personal interest.
8/6/2019 ppt on edp
13/35
Demerits of sole Proprietorship Limited resources.
Unlimited liability.
Possibilities of wrong decisions.
Limited ability.
Lack of specialization. Uncertain existence.
8/6/2019 ppt on edp
14/35
Suitability of sole Proprietorship It is the best form of ownership in the
following cases.
1. Where business is on small scale.
2. Where capital requirement is very small.
3. Where promptness of decisions is very
important.4. Where customers demand personal
attention.
8/6/2019 ppt on edp
15/35
Partnership As per Indian partnership act of 1932.
Partnership is a relationship between who
have agreed to share the profits of a
business carried on by all or any of them
acting for all.
8/6/2019 ppt on edp
16/35
Features Plurality of persons.
Contractual Relationship.
Existence of business.
Profit Motive.
PrincipalAgent Relationship.
Unlimited liability. Restriction on transfer of interest.
Implied Agency.
8/6/2019 ppt on edp
17/35
Merit of Partnership Easy formation.
More financial resources.
Collective decision making.
Sharing of risk.
Flexibility.
Complementary skills. CreditWorthiness.
Business Secrecy.
8/6/2019 ppt on edp
18/35
Demerit of Partnership Unlimited liability.
Uncertain existence.
Limited funds.
Transfer of share.
8/6/2019 ppt on edp
19/35
Suitability It is more appropriate if the business is of
medium scale. It is suitable in the followingcases.
1. Where financial requirement is moderate.
2. When business need persons withcomplementary skill.
3. Where business is to be carried on a medium
scale.4. Where collective decissions are required to be
taken.
8/6/2019 ppt on edp
20/35
Joint Stock company A company is an artificial person created
by law having a separate entity with a
perpetual succession and a common seal.
8/6/2019 ppt on edp
21/35
Features An artificial person created by law.
Separate legal entity.
Perpetual succession.
Common Seal.
Limited liability.
Representative management. Right to sue.
Transferability of shares.
8/6/2019 ppt on edp
22/35
Merits of Joint Stock Company Limited Liability.
Diffused Risk.
More financial resources.
Transferability of ownership.
Perpetual Existence.
Economies of Scale. Professional Management.
Capital formation.
8/6/2019 ppt on edp
23/35
Demerits of Joint Stock company Difficulties in formation.
Lack of personal interest.
Difficult to maintain business secrets.
Delay in decision making an execution.
Excessive regulations.
8/6/2019 ppt on edp
24/35
Suitability of joint stock company It is suitable for large scale org and the
following cases :-
1. When financial requirement is more or businessis to be carried on a very large scale.
2. When project is very risky and promoters are not
prepared to bear the risk.
3. Where due to nature of business professional
management is needed.
8/6/2019 ppt on edp
25/35
Co-operative organization According to cooperative society Act 1912.
Cooperative org is a society which has as its
objectives in promotion of the interest of itsmembers in accordance with the principles of
cooperation.
It is a voluntary association of individuals who
join together on basis of equity for the promotionof their common economic or business interest.
8/6/2019 ppt on edp
26/35
Features Voluntary association.
Democratic management.
Service motive.
Open membership.
Government Control. Limited liability.
8/6/2019 ppt on edp
27/35
Merits of Cooperative org Economy in Cost.
Democratic Management.
Service motive.
Government Regulations.
8/6/2019 ppt on edp
28/35
Demerits of cooperative org Limited financial resources.
Political interference.
Lack of personal interest.
Lack of professional management.
8/6/2019 ppt on edp
29/35
Suitability Where members individually are not in a
position to safeguard their interests.
Where there is willingness amongst
members to come together for the
promotion of their common interests.
8/6/2019 ppt on edp
30/35
Impact of family owned business (FOB)
Let us analyse the reasons for disappearance of most of family owned
businesses in 2nd or 3rd generation. Sole Proprietor as owners have little trust in anyone elses ability
to make decisions.
They dominate their children and other members of the family inthe same manner as they dominate someone else.
Proprietor dominate their children and keep power in their ownhands which deteriorates their relationships as they becomedependent and submissive.
Family business under a control of Proprietor are hardlyprofessionalized.
Sibling rivalry and dispute resolution. Estate planning and succession planning.
Clashes and differences between different generations.
8/6/2019 ppt on edp
31/35
Ten success principles for improving
family business performance
1. Communication Most families with an intentionto perpetuate their business follow this principle.They make conscious efforts to communicate with
their kin as stake holders in the business as silenceleaves room for different interpretation by others.
2. Trust The fundamental factor that bonds anyrelationship is the trust members have in eachother. So they ensure complete transparency inwhat ever they do.
3. Codify conduct - Variation in attitudes behaviourand conduct among family members are often asource of friction. A set of guidelines should befollowed to avoid feud.
8/6/2019 ppt on edp
32/35
4. Loose coupling Relationship often break up forwant of breathing space among different unitswithin a family. Business families should retain
their separate family and business identitiestherefore they ensure that they have enoughprivacy within their joint family system.
5.Handle money carefully There are many disputes
in business families which arise due to poormanagement of wealth. Money is a double edgedsword, if handled carefully it serves you, otherwiseit may leave you bleeding.
6. Professionalize the business- professionalization isan attitude. It helps in making business decisions,it functions irrespective of weather the business ismanaged by family members or by outsiders.
8/6/2019 ppt on edp
33/35
7.Ownership clarity- Many families tend to get into
trouble for want of clarity about who owns how
much of what. While taxation is an one
reason/excuse to have cross holding by family
promoted investment organisations. A family level
holding company model is the best structure toaddress this challenge.
8.Retirement and Succession- They are like the two
sides of the same coin. Leaders who have spent alltheir life in business hesitate to retire, so they need
career counseling on weather they should remain
associated with the business or not.
8/6/2019 ppt on edp
34/35
9. Groom early Business leaders should groom their
children to been good family member and business
people. Families need to plan and spend quality timewith children and tap outside resources appropriately
to groom their children with the right qualities.
10.Leadership - It is critical everywhere, especially it
is complex in family business. The leader should be
one with humidity as a value besides all other
qualities. Eldest is the best may not always stand true.They need to make a conscious choice to remain
together built their family wealth.
8/6/2019 ppt on edp
35/35