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Definition: family business from QFinance: The Ultimate Resource

business owned and run by family a small or medium-sized enterprise that is controlled and operated by members of a family. It may be organized as a sole proprietorship, partnership, corporation, or limited liability company

Summary Article: Family Business
from SAGE Encyclopedia of Industrial and Organizational Psychology

Family businesses exist at the intersection between two separate, but connected systems—the business and the family. The intersection between business and family is not always clearly demarcated, which results in vague boundaries. Further, lack of clear boundaries between the two systems creates difficulties for clearly defining family business enterprises. Therefore, family business definitions can range from broad, inclusive definitions to more narrow and specific definitions depending on the family involvement and which stage in the life cycle the family business is in.

  • Broad definition: A family business can be broadly defined by the level of influence a family or a small group of families have on business operations through some degree of family participation, while maintaining the control of the firm’s strategic direction.

  • Narrowing: Narrowing this definition would include that the current founder or descendant of the founder plays an integral role in running the business and has intentions to pass the business on to another member of his or her family.

  • Narrowest definition: The narrowest definition includes multiple generations of the family involved in business operations with more than one member of the owner’s family having management responsibility. Further, family businesses may consist of a variety of familial combinations, including parents and children, husbands and wives, extended family members, or some confluence.

Family businesses may be the oldest form of business organization and represent a major social and economic institution in today’s global economy. Approximately 90% of firms in the United States and a majority of businesses in the world can be classified as family businesses. Family businesses range in size from “mom and pop” corner shops with fewer than 20 employees to large, multinational Fortune 500 business firms (e.g., Wal-Mart, Ford, Mars). Additionally, family businesses account for half of U.S. employment as well as half of the gross domestic product. Besides the influence of family on business operations, family businesses differ from non-family businesses in some key areas. Family businesses are more commonly associated with long-term outlooks or horizons, their commitment to quality (which is often associated with the reputation of the family name), and their care and concern for employees.

The intersection between business and family contributes to distinct challenges or issues that other firms are unlikely to face. These issues include misalignment of family and business interests, succession, and unclear roles, among others. However, the family business may provide particular advantages over other modes of business organizing, such as long-term orientation and unique resource capabilities.

Issues may arise in family businesses that are not prevalent in non-family firms due to the dual family-work roles that family employees hold simultaneously. Conflict and conflict resolution in the family context is typically a different process than conflict resolution in the business context. Issues may arise when the interests of a single family member may not be aligned with the interests of the business. For instance, a family member may desire a promotion but lack the qualified skills to fill the desired position, resulting in conflict about what is best for the family member and what is best for the business.

When the entire family’s interests are misaligned with the interests of the business, it can result in outcomes that are detrimental to the business. In these types of situations, the family may be making decisions that are best for the family as a whole at the expense of the business, which could prevent growth or jeopardize the likelihood of survival. Further, issues may arise between the family business and non-family employees. Attracting and retaining non-family employees can be difficult due to non-family employees being inserted into family conflicts, the limited amount of opportunities for promotion, and the sometimes perceived special treatment of family members. Lastly, when family members have competing interests with one another, the family business is caught between the feuding family members. Under these situations family members may have competing goals or desires for the family firm’s future and fight over which course of action to take. These desires and goals can relate to the strategic direction of the firm as well as future plans for succession.

Conflict may arise in family businesses due to issues and challenges surrounding succession. Succession is the transfer of ownership and control from the current owner to another member of the family due to retirement, inability to perform the duties of owner, or untimely death. The succession commonly occurs across family generations, whereby the ownership and control are given to members of the next generation, such as children, nieces, or nephews. Succession is a complex task that requires detailed planning.

Succession planning is a process that takes place over a period of time, typically many years. Succession planning not only addresses who the next generation of owners, leaders, and managers are going to be, but also plans for financial issues related to succession, such as taxes and liquidity. Due to the various stakeholders involved in the process, succession requires collaboration. The combination of numerous stakeholders and the associated emotions of stakeholders surrounding the succession process adds to the likelihood of conflict occurring and increases difficulty of implementation.

Approximately 90% of family business owners have intentions or believe that a member of their family will control their business in the near future. However, the rate of family succession for family businesses is low. Only about 30% of family firms are successfully succeeded into the second generation, 12% survive into the third generation, and only 3% of all family firms continue operations into the fourth generation or beyond. In order to overcome these failure rates, a successful succession plan will involve an efficient and fair method for the distribution of assets from older to younger generations, passing the control of the business from previous owner to new owner in a way that maintains effective business leadership and maintains family and business harmony. When succession plans are not detailed, a lack of role clarity and unstructured governance can manifest.

Family businesses, more often than non-family businesses, are prone to adopt ineffective or inefficient governance structures due to nepotism (i.e., favoring relatives) and circumscribed management practices. For example, when business managers are selected on bloodline rather than merit, managerial quality can decrease. These inefficient governance structures lead some family firms to underperform more than their non-family counterparts. Although not found with certainty, there is compelling evidence that firms controlled by second and succeeding generations are less profitable than those same firms controlled by founders.

Despite the above disadvantages, the intersection of family and business offers unique advantages. Family businesses are more often associated with long-term orientations. A long-term orientation values extended time horizons and places more emphasis on the future. The desire to pass the family business on to succeeding generations acts as a motivating factor to adopt long-term outlooks. These outlooks may involve long-term investments or decisions that benefit the long-term goals of the business, rather than the short-term payoffs. As such, a long-term orientation has been found to influence innovation, risk taking, and strategies on how resources should be deployed.

Family businesses have various resources that are distinct from non-family businesses. First, despite the disadvantages mentioned earlier, human capital within family businesses offers unique advantages as well. Some positive characteristics of family business human capital and human capital development relate to family members’ extraordinary commitment to the business. In addition, family members have intimate relationships with each other, resulting in lasting commitment outside of the business context. Family businesses can also develop human capital at an early age by introducing children to the business. Early introduction to the family business can help in the creation of tacit knowledge. Tacit knowledge is knowledge that is not easily codified or learned through written or verbal communication. Therefore, tacit knowledge is learned through experience or direct exposure. Early introduction of children to the family business has the potential to generate deeper levels of firm-specific knowledge that is often not found in non-family firms.

Second, family-derived social capital is a resource that is not easily imitated. Social capital is defined as the sum of the actual and potential resources embedded within, available through, and derived from a network. The family members in the business have connections or external relationships that can materialize through business or family networking. Social capital can influence many aspects of the family business. For instance, social capital can provide useful information relating to competitors or industry trends, new insights on technology, and access to new markets or coveted resources. Further, when leveraging social capital, family businesses can often enter into handshake agreements that may seem taboo to a professionally managed business. The ability to use relationships or family reputation in this way can limit the transaction costs of doing business as well as form relationally embedded ties.

Third, family businesses are more likely to have patient financial capital. Patient financial capital refers to situations when both equity and debt financers have medium- to long-term expectations for returns. When investors for the business are family members, the relationship between manager and investor reduces the expectations for short-term results, threat of liquidation, and rigidity for repayment structures. Thus, patient financial capital is distinct from typical financial capital due to the intended time of investment. The expectation on longer return on investments allows family firms to pursue more creative and innovative strategies.

Lastly, family businesses have what is deemed survivability capital. Survivability capital refers to the sum of personal resources that family members are willing to share, loan, or contribute for the good of the business. These resources can take the form of free labor or emergency loans to ensure that the business does not fail. Survivability capital is particularly important during poor economic times or failed growth initiatives. The compensation that is returned for the personal contributions is the continuation of the business. Family members are aware of the costs if the business fails. Therefore, it is preferable to loan, share, or contribute personal resources than to experience restarting the business or the loss of reputation with customers, suppliers, and the community.

Family businesses offer a unique context in which to study industrial and organizational psychology. The distinctness of family businesses from non-family businesses offers interesting implications to theoretical explanations of workplace phenomena. For instance, scholars can inform and extend current research on work–family conflict. Due to the interconnectedness of the family and the workplace, research can examine conflict that originates at work and spills over to the family or, more interestingly, conflict that originates from the family and spills over to work. Additionally, exploring how family businesses attract, select, and retain talented employees offers a different perspective given the nature of bequeathing the business to succeeding generations. The coupling of family and business provides a rich and fruitful area of research for scholars. Given this unique intersection, industrial and organizational psychology can offer significant contributions to the literature on family businesses.

See also Dual-Career Family Issues; Passion at Work; Servant Leadership; Strategy; Vocational Interests/Choice; Work–Life Conflict; Work–Life Enrichment

Further Readings
  • Astrachan, J. H.; Shanker, M. C. (2003). Family businesses’ contribution to the US economy: A closer look. Family Business Review, 16, 211-219.
  • Eddleston, K. A.; Kellermanns, F. W. (2007). Destructive and productive family relationships: A stewardship theory perspective. Journal of Business Venturing, 22, 545-565.
  • Gersick, K. E. (Ed.). (1997). Generation to generation: Life cycles of the family business. Harvard Business School Press Boston MA.
  • Handler, W. C. (1994). Succession in family business: A review of the research. Family Business Review, 7, 133-157.
  • Miller, D.; Breton-Miller, L. (2006). Family governance and firm performance: Agency, stewardship, and capabilities. Family Business Review, 19, 73-87.
  • Sharma, P. (2004). An overview of the field of family business studies: Current status and directions for the future. Family Business Review, 17, 1-36.
  • Zahra, S. A.; Sharma, P. (2004). Family business research: A strategic reflection. Family Business Review, 17, 331-346.
  • David J. Scheaf
    Copyright © 2017 by SAGE Publications, Inc.

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