There is another type of a very popular business which is a family-owned business.
It is a business organization that is actively owned and managed by at least two members of the same family. In most cases, the family that established the business will also retain a complete ownership of it, for example IKEA, a Swedish furniture manufacturer, has been owned and managed for many decades by members of the same family.
In other cases, the founding families still retain a controlling interest (over 50% of all shares).
Size of family-owned businesses
Family-owned businesses are very important in almost all economies around the world, especially in newly industrialized countries in Asia where family businesses make up 50% of all public limited companies. In India, this number goes up to almost 70%. Not all family-owned businesses are small. Many large companies in South Korea are also owned by families.
In other parts of the world, approximately 80% of all business organizations in South Africa are family-owned and managed. In Malaysia, even though small, roughly 60% of all companies on the market are also family-owned and operated.
Evaluation of family businesses
Advantages of family businesses include:
1. Commitment. Family members show dedication in working hard for the family business, happily reinvest a part of their earnings back into the business allowing it to grow and prosper in the long term, so it can be passed down on to the future generations.
2. Reliability and pride. When it comes to family businesses, it is all about reputation. Not only the reputation of the business, but the reputation of the entire family as well. Because family businesses have their name and reputation associated with their products, which are easily identifiable within the local community, family members will strive for maintaining high quality of their goods and services, and maintaining very good relationships with all stakeholders.
3. Continuity of knowledge and skills. As older family members take pride in their family-owned business, they will make it priority to pass their accumulated knowledge, experience and skills to the next generations. Many children get involved in the family business from a very young age to learn necessary skills and expertise to be able to run that business in the future.
Disadvantages of family businesses include:
1. Succession problems. This is one of the biggest problems for family businesses. There are so many family businesses which fail to be sustainable in the long term, hence have poor rates of continuity. Usually, most of the family businesses do not last longer than into the third generation of the descendants of the founders. Nowadays, many business schools around the world that run wealth management programmes teach how to successfully pass down the ownership of the family business.
2. Lack of management abilities of later generations. The high rate of failure among family businesses can also be associated with low interest of younger family members in running the family business. Later generations often get disinterested in the management responsibilities as they want to get involved in some other activities.
3. Informality. Most smaller family businesses do not have a formal organizational structure with clearly defined roles and responsibilities. Because most families run informally on daily basis, there is usually little interests in setting clear and formal business procedures after all. And, when both the family and its business grow, this poor structure can lead to significant inefficiencies.
4. Attachment to traditional values. There is quite often a strong reluctance among older family members to change systems and procedures even a little bit, as they prefer to continue to operate the family business as it was historically run.
5. Conflicts. Internal problems within the family will also reflect on management of the business and will negatively influence effective decision-making. Also, there might be many potential conflicts between two or even more generations within the same family.
