In India, some of the notable challenges family businesses face include family problems, poor training, pressures of hiring new employees, informal structure, wealth management, etc.
What Is a Family Business: Types and Characteristics
Just like its name suggests, a family business is a business which is owned, operated and controlled efficiently by one or more members of a single family that use their abilities to achieve long-term goals in future. Here, the members are related by blood, adoption, or marriage.
One can also say that family businesses are those which are passed between generations. If you are wondering what a family business is, how it operates, and so on, keep reading to learn more.
What Is a Family Business?
What Are the Types of Family Businesses?
Mentioned below are three common types of family businesses prevalent in India:
Family Owned Business: Family-owned businesses are considered one of the oldest forms of business. As its name suggests, a family-owned business is an entity wherein the controlling size of an ownership stake is owned by a family or by the members of the family. For example, Reliance Industries, Aditya Birla Group, and Tata Motors are three top-notch family-owned businesses in India.
Family-Owned and Managed Business: In a family-owned and managed business, its control and ownership belong to a single family or a single member of that family. In this business requires the active participation of a minimum of one family member at the top level of the organisation so that one or more family members can have ultimate control over management. For example, Godrej, Bajaj, Hindujas, etc.
Family-Owned and Led Business: In a family-owned and led business, one or more family members are appointed as the majority of ownership. Here, a minimum of one member from the family is a member of the board of directors, and one family member is deployed at the position of a majority stake. This way, they can formulate the best strategies and plans to achieve their business goals. For example, Thapars, Adanis, Mahindras, Jindals, etc.
What Are the Characteristics of a Family Business?
A successful family business tends to have values and vision, proper planning, family governance, cohesion and interaction, and clarity on their leadership roles and principles. Some of the common characteristics of family business are discussed below:
- Families can connect effectively, expressing and admitting each other's feelings, needs and ideas clearly with a positive mindset of accepting differences and not keeping secrets.
- Any disagreement and conflict inside the family are evenly managed with respect, clear communication, and honesty.
- The family supports and encourages individuality in their members, both regarding their strengths and weaknesses, and sometimes this may affect the family business.
- The family can diligently identify when and where to do the needful concerning the family's essentials and when to consider the business's requirements.
- Business, management and operational infrastructure, systems and methods are authoritative, well-documented, and reviewed regularly for enhancement.
- Successful family businesses come with an efficient board of directors or mentors comprising at least two non-family members.
- Family members or relatives joining the establishment should fulfil the same job qualifications, eligibility criteria, compensation standards, performance evaluations and so on as non-family members.
- Family businesses are equipped with skilled and intelligent leaders known for their vision, competence, respect and outstanding communication skills with their employees, sellers and consumers.
- The family business organises a 'Family Council' every year, comprising all family members, spouses, and kids above 16 years. The main purpose behind this council is to formulate family and business plans. It also assists the family members and prepares them to participate in the business sooner or later.
What Are the Merits of Family Business?
Mentioned below are some of the effective reasons that make the family business a unique occupation:
Stability: There has been stability in a family-based enterprise due to the longevity in a leadership position. In this type of business, the front-runner retains their position for years, with various life events such as retirement, disability, death, etc., causing changes at the top.
Commitment: Family businesses tend to pay more attention to commitment and responsibility than non-family establishments due to their necessity for business and family. These characteristics help understand the business, job and organisation, efficient marketing and healthy customer relationships.
Creative Freedom: When it comes to a family business, being the business owner, you will get the chance to work in the field of your preference. You can use your skills and aptitude effectively and earn personal satisfaction by implementing your innovative ideas and seeing your business prosper.
Long-Term Perspective: Non-family businesses need to formulate plans and decide on goals on that basis. However, in the case of a family business, they can think about the goals in advance. This long-term outlook helps them make prudent decisions quickly throughout the business.
Flexibility: Regarding non-family businesses, they must conform to delineated responsibilities while running the organisation. Conversely, the participants of family enterprises can carry out the tasks outside their predetermined roles.
In contrast to the beneficial factors, a family business also has certain disadvantages.
What Are the Demerits of Family Business?
Mentioned below are some disadvantages of a family business:
Lack of Structure: Since family businesses are concerned about trust and loyalty, they can lack robust internal rules alongside external corporate law.
Lack of Family Interest: In some cases, future generations might not show the same keenness towards the business as their preceding generations. This can lead to apathetic, uninteresting, and disengaged workforce management.
Nepotism: Several family businesses encourage the family members to top managerial positions, even if these members have inadequate education, skills and knowledge to carry on with those responsibilities. This is a major disadvantage that adversely affects a company's success.
Conflicts Between Family Members: Another disadvantage of family businesses is conflicts among family members, illicit family history, sibling rivalry, etc. Furthermore, an imbalance between business life and family life can lead to confusion and conflict.
Succession Planning: Plenty of family-based enterprises run on pre-determined succession plans. During an emergency of appointing a successor due to illness or death of the business owner, it can become questionable for the business whether the successor can maintain the same glory of the enterprise or not.
From the above discussions, you have understood what a family business is. Knowing every detail about this occupation may help you set up your family business efficiently and successfully. However, while running this business, make sure that you follow its rules and regulations thoroughly and encourage more family members to participate in the business in due course of time.
FAQs Related to All About Family Business
Today, almost 85% of every incorporated organisation in India comes under family businesses. They have contributed immensely to the country's economic growth, including contributing to the national GDP, creating job opportunities, and assisting in the nation's development.
To run a proper family business, you must conform to several factors, like retaining healthy relationships with families and customers, focusing on long-term commitments, formulating a structured plan, operational excellence, etc.
Other Important Articles Related to Financial Planning For Family
Important Articles About Financial Planing
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.