What is a Family Business Anyway?
Family firms and family businesses account for around two thirds of businesses around the world. This is a staggering number that might actually be even higher than we currently think. In every single country that you will look at and in every single economy, the private sector will be chiefly made up by family owned enterprises, many of which will of course be in the small and medium sized enterprise category. However, we also know that really notable huge name such as Walmart, Samsung, Lego, and Ikea are essentially family owned companies.
So the role that family businesses play in the world economy is not to be underestimated and just keeps on growing. We’re talking 70 to 90% of the global GDP annually that is created by family businesses. What’s also very important, in most economies, family businesses are the main job creators. It varies very much depending on the country you go to but on average we see ranges between 50 and 80% of jobs that are created by family owned companies.
And that’s not all, about 85% of start up companies are established with family money which means that for generations of family might be involved in one sector but then as a new generation joins, the money doesn’t leave the family but there’s a transformation from family business to business family. The family invests as a venture capitalist or as an investor in the next generations new business ideas.
So if family businesses are so frequent and so important, it’s all the more astonishing that there’s actually not one universal definition of a family company. So there are a myriad of academics and experts that have tried their hand at creating a one-size-fits-all definition of what constitutes a family business. However, definitions really range from a company that has a majority shareholdership held by a family but they can also be publicly listed to your mom and pop store around the corner that is fully owned by the same family members who also work in the business. So we have all kinds of shades of gray in between.
One of the better definitions that we’ve seen are the following two which are:
1. A family enterprise is an economic venture in which two or more members of the family have an interest in ownership and a commitment to the continuation of the enterprise.
Vague? Yes. Accurate? I would say yes too. Another more formal way of looking at it is:
2. A firm of any size is a family business if:
a. The majority of the decision making rights are in the possession of the natural person who established the firm.
b. The majority of the decision-making rights are indirect or direct.
c. At least one representative of the family or kin is formally involved in the governance of the firm.
d. Listed companies meet the definition of a family enterprise if the person who established or acquired the firm or their families or descendants possess 25% of the decision-making rights mandated by a share of capital.
This is a definition brought forward by the European Union in 2009.
As we can see, definitions vary according to cultural settings and depending on what kind of institutional environment there is as well. Total or full ownership doesn’t matter as much as influence or maybe influence on decision-making management so it’s really very much a gray area.
What we can see however, is a family business is continue to play an absolute paramount role in all of these economies and so the big question here becomes – if they are so frequent and we are so concerned about their well-being, why are we talking about them as if they were the exception and not the norm? We’re talking about family businesses as if they are the exception even though it’s the most frequent business ownership model in the world.
Until 20 to 30 years ago, they received relatively little attention when it came to the business management, business growth discussion. So in the 80s, the first few pioneers begin to look at the family business as a construct that needs separate attention when it comes to best practice and growth. Therefore, we’ve had a very recent and quite a young body of knowledge emerge over the last 20 to 30 years that looked specifically at what happens when the family is jointly involved in the process of building a legacy and building a business. This has provided us with an increasing body of knowledge that shows us more and more that families involved in their businesses together or families involved in owning a business together have very specific challenges but also have very specific advantages as we can see by many of the very successful and many of the catastrophic cases that we’ve encountered.
So the most important thing to understand is that the reason why it’s important to talk about family businesses is because their impact is so significant. For one reason or another, we seem to go back to the family business model over and over again and they seem to re-emerge over and over again. A family business is being born every single day basically. So the interesting part here is to understand that it seems to be a very intrinsic part of human nature to create businesses with family members. And that therefore, their sustainability in relation to the job creation and in relation to what it is that they do for the economy is extremely important and that’s why we have to talk about family businesses. We have to talk about how they can sustain, we have to talk about how they’re different from nonfamily corporations, but most of all we have to talk about continuing to try to define what is that constitutes a family business and why it matter so much.