We explain what a family-owned business is, its characteristics and importance. In addition, we provide examples of successful family businesses.
What is a family business?
A family business is a type of business organization in which two or more members of a family are the founders and have the majority of ownership, i.e. are the major shareholders in the company, in addition to controlling the direction of the business.
A family-owned business is one in which the capital contribution and investment comes from the family group, but the management, control and handling of financial information are in charge of non-family employees assigned to each area.
Depending on the type of trading company, the business may or may not remain a family business.
For example: In a company registered in a given country as a Limited Liability Company (LLC), the partners can transfer their shares to another partner, spouse or children. In contrast, in a Corporation (Corp.) the shares of a company can be passed down to future family generations or can be sold to third parties outside the family group. If a third party purchases the majority percentage of the ownership, they become the company’s owner.
- In a family-owned business, the majority of ownership and control of the business lies within one or more families.
- A family-owned business may be a corporation (often referred to as an Incorporated company or Inc.) or a limited liability company (LLC). Both structures allow the transfer or inheritance of shares to the future generation of the family group.
- Family businesses are typically managed and controlled by a single family or group of families across multiple generations.
- See also: Multinational corporation
Origins of family businesses
Primitive humans evolved from a nomadic to a more sedentary life, after discovering farming and animal breeding. These activities, which required the work of a group of people, allowed them to settle in one place and provide food to all individuals.
Over time and with advances in farming techniques, humans learned to live in large communities, supply themselves with food, and develop the first commercial activities in which the surplus of what was produced was exchanged with neighboring populations.
Tribes, city-states and great civilizations were able to exercise increased control over natural resources and labor. The means of production were structured until they became the private property of the most powerful groups.
During the Middle Ages, between the 5th and 15th centuries, the middle-class population carried out various economic activities, such as farming or trades that were passed down from generation to generation. As for minority groups, such as the nobility or the more affluent bourgeois class (from the 17th century onwards), families passed down power and control of their businesses through lineage, as a way of preserving them within the family.
Nowadays, the development of entrepreneurship and family businesses are key factors in a region's economy. Thanks to technological advances and globalization, these businesses manage to promote investments and the development of national industries to satisfy both domestic and export consumption.
Characteristics of a family business
Family businesses can be very diverse, ranging from small businesses, start-up ventures or trades to multinational corporations. Regardless their size and structure, the main characteristics of a family business are:
- One or more families hold the majority percentage of shares and control strategic decision-making.
- The owning family can transfer their shares to their descendants, through inheritance. For this reason, this type of company is usually controlled by multiple generations of the same family.
- Most executive positions are held by family members and are passed down to the next generation.
- Small family businesses or ventures often have informal structures in which the owners themselves and a few employees handle multiple tasks.
- Small family businesses are often reluctant to incorporate specialized staff to contribute to the growth of the organization, as this implies changes in the business structure and financial situation.
- Large family businesses have formal structures in which the business’ administrative management and the control of company departments are in the hands of specialized professionals.
- Customer service provided by family businesses is usually of high quality compared to large corporations, as it is a strategic advantage that makes them competitive in the marketplace.
- Small family businesses often do not have a formal business plan, which can slow their growth. A good business model allows company management to improve decision-making.
Examples of family businesses
Some family businesses have managed to remain as such over time; others started as a family business, grew, split, and later merged with other companies or incorporated non-family shareholders. Some examples of family businesses include:
- Grupo Bimbo. It is a family business that started in Mexico in 1943 with the Servitje family, and has been dedicated to the production of bakery products. Today it has a wide range of products and presence in 32 countries in America, Asia, Africa, and Europe.
- Dell. It is a technology company that was started in 1984 by Michael Dell, as he conceived the project in his dorm room at the University of Texas. Today, the Dell family owns 75% of the company.
- Adidas and Puma. While at present they are two different companies, they started as a single family business in 1924 in Germany, with brothers Adolf and Rudolf Dassler. Due to personal conflicts, they separated and set up their own companies: Adolf under the Adidas brand and Rudolf under Puma.
Importance of family businesses
Family businesses usually impact a region's growth, by generating employment, promoting national production and boosting the economy both for domestic consumption and export. This situation is favored by technological advances in communications and transportation, among other factors.
Family businesses face constant challenges during their development: at the initial stages of the business activity, as they grow and develop, and as they seek to remain active over time.
The main challenges of every family business include:
- The creation of a business plan. It is one of the most important points that family businesses should attend to, especially at the startup stage. It allows them to clearly define their mission, vision and long-term goals.
- Accounting and administrative advice. These are services that can be outsourced and are key for a family business to be effective, to foresee possible problems and endure over time.
- Leadership succession. It is a complex process, as is often the case that unskilled family members take over executive positions, which has a negative impact on the business.
- Kachaner, N., Stalk, G. Jr. & Bloch, A. (2012). What you can learn from family business. Harvard Business Review. HBR.
- González, J. (2013). Empresas familiares en México: el desafío de crecer, madurar y permanecer. KPMG in México. Assets.
- Mucci, O. O. & Tellería, E. D. (2003). Empresas familiares: introducción, características y roles.