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7/27/2019 Chapter 05 Revised
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PowerPoint Presentation by Charlie Cook
The University of West Alabama
Copyright 2006 Thomson Business & Professional Publishing.
All rights reserved.
Part 2 Starting from Scratch
or Joining an Existing Business
The FamilyBusiness
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 53
What Is a Family Business?
Family BusinessA company in whose ownership and/or functioning two
or more members of the same family are directly
involved
A firm whose ownership passes from one generationof a family to another (succession)
Smith Family HardwareEst. 1935
Welcome
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 54Exhibit 5.1
Family
1
6
3
7
5
2
Business
Ownership
4
The Three-Circle
Model of Family
Business
Source: Three-Circle Model developed by Renato Tagiuri and John A. Davis. Found in Bivalent Attributes of the Family Firm. 1982.
Working paper, Harvard Business School, Cambridge, MA. Reprinted 1996, Family Business Review, Vol. IX, No. 2, pp. 199208.
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 55
Family and Business Overlap
Family Concerns Care and nurturing of family
members
Employment and
advancement in the firm
Loyalty to the family
Business Concerns Production and distribution
of goods and/or services
Need for professional
management
Effective and efficient
operation of the firm
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 56
Advantages of a Family Business
Strength of family relationships during challengingperiods of business change
Financial sacrifices that family members make for the
good of the firm
Operation as a family business distinguishes the firmfrom its competitors
Higher levels of concern for its community and non-
family employees
Capability to plan and prepare for the long haul
Emphasis on quality and value
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 510
Family Roles and Relationships
Parental Concerns in Passing the Business On:Does my child possess the temperament and ability
necessary for business leadership?
How can I, the founder, motivate my child to take an
interest in the business?
What type of education and expertise will be most helpful in
preparing my child for leadership?
What timetable should I follow in employing and promoting
my child?
How can I avoid favoritism in managing and developing mychild?
How can I prevent the business relationship from damaging
or destroying the parentchild relationship?
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Family Roles and Relationships (contd.)
HusbandWife TeamsOpportunity to share more in each others lives
Business differences interfere with family life
Work doesnt leave time for family life
Sharing family responsibilities eases the load
Sons and Daughters
Personal preferences different from the business
Personal qualifications insufficient to assume role inbusiness
Desire for personal freedom to choose another career
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Family Roles and Relationships (contd.)
Sibling Cooperation, Sibling RivalryBest case: siblings work as a team, each contributing
services according to his or her abilities.
Worst case: siblings compete as rivals and disagree
about their business roles.
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Family Roles and Relationships (contd.)
In-laws In and Out of the BusinessDisagreements about how to treat and reward in-laws
and family members/children
Assign to different branches orto different business roles
The Entrepreneurs Spouse
Communication between
entrepreneur and spouse is
critical for them to perform asan effective team for both the
business and the family.
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Professional Management
of the Family Firm
Best Practices (John L. Ward)
1. Stimulate new thinking and fresh strategic insights.
2. Attract and retain excellent managers.3. Create a flexible, creative organization.
4. Create and conserve capital.
5. Prepare successors for leadership.6. Exploit the unique advantages of family ownership.
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 515
Professional Management
of the Family Firm (contd.)
Nonfamily Employees in a Family Firm
Hazards:
Competition with family members for advancement Getting caught in the crossfire and politics of family
competition within the firm
Solution:
Identify family-only reserved positions in advance. Treat both family and nonfamily employees fairly in matters of
reward and promotion.
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 516
Professional Management
of the Family Firm (contd.)
Family Retreats
Are a gathering of family
members, usually at a
remote location, to discussfamily business matters
Use of an outside facilitator
may be necessary.
Guidelines
Set a time and place.
Distribute an agenda prior to
the meeting.
Plan a schedule in advance.
Give everyone a chance to
participate.
Keep it professional.
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 517
Professional Management
of the Family Firm (contd.)
Family Councils
An organized group of family members who gather
periodically to discuss family-related business issues
Represent the family to board of directors
Useful in developing family harmony
Increases understanding of familytraditions and interest
Family Business ConstitutionA statement of principles
intended to guide a family
firm through times of crisis and change
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 518
The Process of Leadership Succession
Available Family TalentMentoring
Guiding and supporting the workand development of a new or less-
experienced organization memberAllowing only qualified competent
family members to assume leadership
roles in the firm increases the value of
the firm for all who have an ownershipinterest in it
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 519
Exhibit 5.4
Stage IPre-Business
Stage IIIntroductory
Entry of Successor
Child becomes aware of
facets of firm and/or
industry. Orientation of
child by family member
is informal.
Child is exposed to
business jargon,
employees, and the
business
environment.
Stage IIIIntroductory
FunctionalChild works as part-time
employee. Work
becomes more difficult.
Includes education andwork for other firms.
Stage IVFunctional
Potential successor begins
work as full-time employee.
Includes all nonmanagerial
positions..
Stage VAdvanced FunctionalPotential successor assumes
managerial position. Includes
all management positions prior
to becoming president..
Transfer of Leadership
Successor assumes presidency.Includes period in which thesuccessor becomes dejureheadof company.
Stage VIIMature Succession
Successor becomes defacto
head of company.
Stage VIEarly Succession
A Model of
Successionin a Family
Business
Source: Justin G. Longenecker and John E.
Schoen, Management Succession in the
Family Business, Journal of Small Business
Management, Vol. 16 (July 1978), pp. 16.
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 520
Conditions Favoring Successful
Leadership Succession in a Family Firm
A sound, profitable business
Stable, healthy family relationships
Advance planning for leadership succession Positive family leadership and a team-oriented
management structure
Presentation of career opportunities withoutpressure
Open communication on family business issues
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 521
Succession in a Family Firm
Transfer of ownershipPassing ownership of a family business to the next
generation
Who will inherit the family firm?
Should each heir receive an equal share?
Should ownership be transferred gradually?
How to handle tax considerations?
What to do with other wealth and assets of the foundingentrepreneur?