By Deepak Ghadge
Ease of Doing Business for MSMEs: The world’s oldest family business is Hoshi Ryokan, a hotel based in Ishikawa in Japan. It was founded in 718 and is approximately 1305 years old. Its 46th generation is still running this business.
Isn’t this impressive holding the business for 1300+ years? Every family-owned business should visit this hotel and learn from them their succession planning and success. Here is why? Studies have shown that family-owned businesses successfully businesses perish by third or fourth generation due to various challenges which are elaborated below.
The oldest business model has been the family business where for generations the business has been passed from the father to the son and to the next generation thereafter. All other business models are a spin off from the family business mode, that is, the first model of business which came into existence was family business and the other business model or corporate structures evolved from it like the Proprietary Firm, LLP, Private and Public companies.
In fact, approximately 35 per cent of the fortune 500 companies are family-owned enterprises in the US contribute to 50 per cent of the country’s GDP and 60 per cent of the jobs. Walmart, Ford, Dell, Berkshire Hathway are some of the great family businesses in the US. BMW Group from Germany is another successful family business. Samsung, LG, Hyundai are great family business examples from Korea. Midea, Wanda group, Evergrande group are a few great names from China. Tatas, Godrej, Birla’s, Reliance, Wadia’s, Goenka group, N R Group, Chettiars, Mittals, Mafatlals, are some of the famous family businesses in India. In fact, the consulting firm Ernst and Young was started as a family business too.
Here it would be important to take note of the different types of Family businesses.
Family-owned: Two or more family members are involved and majority of the stake lies within the family.
Family managed and owned: A single family or an individual member of the family owns the controlling stake of the business. The major owner allows the family to create and decide upon the objectives, policies and methods.
Family-led and owned: The owner can belong to the family or a member of the family, at least another family member should be a member of the company’s board of directors. The family member can therefore influence major strategies, direction and plans.
However, there are some common challenges typical of family businesses.
Setting up the right compensation and benefits:
Paying a high salary to the founder’s brothers, wife or children for work or little work or no work creates a lack of motivation amongst the employees. Solution is to create a level playing field for all and processes were good work is rewarded.
Company Culture:
Following old culture as dynasty protocol and not keeping with the current trends will be difficult for outsiders to adopt and work for long term. Create an open culture, review the values to stay relevant and ahead.
Other challenges: Reluctance to hire senior leaders from outside the family. Lack of succession or transition planning. Nepotism, failure to innovate and be futuristic, rifts within the family. Lack of long-term strategic planning and vision and alignment to the market.
Several years ago, researchers David Sirmon and Michael Hitt examined the strategies behind successful family businesses. They found that success is tied directly to how well a company manages the five unique resources every family business possesses:
1. Human capital. The first resource is the family’s human capital, or “inner circle.” When the skill sets of different family members are coordinated as a complementary cache of knowledge, with a clear division of labor, the likelihood of success improves significantly.
2. Social capital. The family members bring valuable social capital to the business in the form of networking and other external relationships that complement the insiders’ skill sets.
3. Patient financial capital. The family firm typically has patient financial capital in the form of both equity and debt financing from family members. The family relationship between the investors and the managers reduces the threat of liquidation.
4. Survivability capital. The family company must manage its survivability capital-family members’ willingness to provide free labor or emergency loans so the venture doesn’t fail.
5. Lower costs of governance. The family business must manage its ability to hold down the costs of governance. In non-family firms, these include costs for things such as special accounting systems, security systems, policy manuals, legal documents and other mechanisms to reduce theft and monitor employees’ work habits. The family firm can minimise or eliminate these costs because employees and managers are related and trust each other.
Deepak Ghadge is the author of the book ‘Dhool Dhoop Dhakka: Entrepreneurship by Design’.
