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Family Business: Who's In Charge?

Is the ownership structure of your family business building or destroying your legacy for your family? Here's a quick guide.

Family Business: Who's In Charge?

With the various family-owned businesses we’ve consulted and mentored with, we’ve seen how the ownership structure can be pivotal in the long-term success or failure of the business.

But the weird thing is that there’s no single “right” structure. While any two family-owned companies might share the same ownership protocol, their fortunes could easily be headed in opposite directions.

A family business is a business owned by 2 or more family members, either concurrently or consecutively across generations. In South Africa, family businesses are increasing in both number and economic impact. Despite there being far fewer family businesses as a proportion of all companies than in other countries, they contribute 50% toward economic growth. In the USA, they contribute 50% of GDP and account for 80% of all businesses. (“An exploration into family business and SMEs in South Africa”, 2014)

With most family companies being small businesses, they often fit the stereotype of all SMEs. According to Family Firm Institute of Boston, “30% of family-owned businesses survive to the second generation…while only 12% survive to the third generation.”

Fun fact: did you know that Jose Cuervo, the world-renowned tequila maker that sold its first bottle of tequila in 1906, is now managed by its sixth-generation leader? (Wikipedia)

Except, what makes family businesses unique is the heavy influence of personal relationships as well as the overlap between family relationships and shareholder control. This is where ownership structure could be reinforced by the family dynamics or where family dynamics could work against the chosen ownership regime.

Hence, ownership structure is not just a “simple” legal formality like it might be with most other businesses. I’ve noticed with many of our clients how shareholding amplifies or restricts family members’ involvement, which can often show up as a latent cause of conflict both in the business and in family relationships.

We’ve noticed critical lessons from our work with dozens of family-owned companies. Here’s a summary of them, organised into a four-part framework (framework sourced from Harvard Business Review, January-February 2021):

Sole owner is where a single person is responsible for all decisions. Works well where decisive leadership is needed to execute an agile strategy in dynamic conditions. For this to work, though, either the business must reliably create enough cash for the family, or the family must have a low financial dependence on the business.

I’ve noticed that this structure works best when the family head is also the owner i.e. when domestic and business relationships are congruent.

“Partnership” family businesses limit shareholding to only family members who are active in the business. The advantage is that ownership can be based on merit and there’s little dead weight in the business. Shareholders can earn their place competitively, not just through inheritance or a trust fund.

However, conflict is likely if the rules governing admission to ownership are unclear, or when performance management can’t be objectively measured or implemented.

Distributed ownership allows any family member into the owners “club”, often through inheritance. The upside is that acquiring ownership can be done fairly if shares devolve to descendants in equal ratios.

The pitfall, though, is the challenge that’s typical of silent partners: shareholders who are “too” silent seldom fulfil their shareholder duties, or they’re seen as freeloaders. This not only hinders the quality and speed of executive decision making, it can cause resentment and the breakdown of family relationships.

Concentrated ownership is effectively a mash-up of the distributed ownership and partnership structures, where any family member can be a shareholder, but with decision-making in the hands of only a sub-set of shareholders.

This approach makes for a more agile leadership team when decisive execution is not slowed by absent shareholders.

Almost without exception, though, the challenge I’ve noticed among my clients with this structure is that shareholders without power can easily lose interest. They then become obstacles through apathy, passive resistance or even active sabotage, damaging family relations in the process. Very hard to recover from this scenario. To avoid this outcome, it takes mature leadership and strong family relations to sustain an inclusive approach.

Some of our most rewarding work has been with family-owned companies, when our “whole person” philosophy is automatically put into practice. After all, we don’t just grow businesses, we help owners grow their wealth and make a difference through their business.

If you want to build your business as a legacy to your family, which of these four structures would fit your family dynamics and business strategy best?