Aim of an Enterprise: Value Creation

For:
Founder and their families Employees Community Economy

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Who is an Entrepreneur?
The one who creates a new venture
whether in a start-up context or in an established organization (private, public, or non-profit).

Distinguished because they implemented an innovative concept. Could be born or not

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What is a Family Business?

are organizational entities in which either the individual/s who established or acquired the firm, or their descendants, significantly influence the strategic decisions and life course of the firm leading to success or failure of the business.

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Family Business
The family influence might be exerted through management and/or ownership of the firm Must be able to sustain the original entrepreneurial spirit

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Evolution of Family Business

From family firm into lone/team firms
Family involvement fades into background

From lone/team firms into family firms

Family involvement increases over time by providing various resources
Physical, Financial, Social, Emotional

Eventually leads to family members gaining ability to influence decisions

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Entrepreneurial Family Firms

Enterprising families create entrepreneurial family firms by:
Creating value across generations Achieving longevity Sustain the firms competitive advantage over time Must differentiate between management roles and governance roles

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How is Strategic Direction Maintained in a Family Firm?

Ensure continuous regeneration Plan seamless leader transition Determine who should lead
Family member vs. non-family member

Intergenerational working relationship

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Reasons for New Family Ventures

Reasons To pursue continued firm growth Make a profit on the sale of the business Support the family to achieve the goals of the next generation
Outcomes Longevity Short-term existence Short-term existence

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Sustaining the Business

To sustain the business beyond the founders life span family members must
Engage in creativity Ensure continuous innovation and regeneration throughout the life cycle stages of the business.

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How do Family Firms Maintain Longevity and Prosperity?

Information from Entrepreneurial Studies

Family business must combine both to achieve success

Information from Family Business Studies

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Forms of Family Involvement

Provide paid or free labour Act as customers or suppliers Part of the start-up teams Provide loans, gifts, investment through ownership shares Donate supplies (for example, office furniture, equipment, vehicles and so on) Business is a spin-off from the parents firm.

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Individual Life Cycle

Each stage:
Has its own unique characteristics Influenced by previous life stage Lays foundation for the next stage

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Who drives the life cycle?

Your choices influence:
Length of journey Composition (experiences and accomplishments)

What business leaders need to know:

Impact life expectancy and women have on the life cycle. How to plan for their longer journeys How to motivate different generations and genders.

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What does the life cycle drive?

Family and non-family members
Needs Wants Aspirations

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Individuals Life Cycle (St)ages

The stages and ages are not the same Different individuals will vary in the time they spend at each stage Family and business cannot be separated because they set:
Precedents Norms of behaviour Expectations

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Individual Life Cycle Stages

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Comparison of Individual & Standard Life Cycle Models

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Entrepreneurship Today
Business scholars study Interaction of the three life cycles (individual, family & business) Recognize that family is part of business life Field of Entrepreneurship Strategic management (organizational/ environmental fit) Focused on early and late stages Life Style applications Entrepreneur characteristics Professional to management firm transitions

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Sustaining Entrepreneurship across Generations

Firms need to be able to
Change with the environment Maintain their entrepreneurial spirit

Entrepreneurial spirit is maintained by

Adequately preparing the members for their roles Managing the timing and communication between the generations

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Stages of Generational Transitions

Owner managed business Training & development of the new generation Partnership between generations Transfer of power

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Successful Regeneration by the Next Generation

Learn from senior generation

Explore other opportunities

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Benefits of Gaining Outside Experience

Learn their market value Establish their own professional identity Learn from youthful mistakes Develop expertise and self-assurance Appreciate family business

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Reasons Family Businesses Do Not Last

No heirs Successor generation takes on alternative career Business is sold Business is no longer viable

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How does the Entrepreneurial Spirit Live on?

Technique
Working with senior generation Having the capacity to change

Communication
Vocal support Ability to communicate

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Business Life Cycle Stages

Birth
Creation of enterprise Degree of newness will determine survival rate

Growth
Business is established through customer acceptance of its products

Maturity
Business is successful, but growth is limited No more cash flow problems

Decline
No or negative growth is seen

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Identifying the Life Cycle stage of the Business

Owner needs to
1. Identify key stakeholder in the business 2. Determine the life cycle stage of:
The individual stakeholders The family

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The Three Circle Model

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Determining Organizational Life Cycle Stage

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Benefits of Knowing the Organizational Life Cycle Stage

Problems and opportunities at each stage help develop strategies to
Continuously renew the firm Determine optimal time for taking on new initiatives

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Forms of Capital Resources

Financial Capital Physical Capital Social Capital Human Capital

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Financial Capital
Usually provided by owners own equity Not easily obtained by non-relational people
Example: Banks

Successful procurement depends on

Well thought-out business plan Written agreements

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Physical Capital
Other non-financial assets like
Space Office material Equipment

Can be used to collateralize loans Important to distinguish between personal and company physical resources

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Social Capital
Benefits derived from social networks
Not easily transferred to the next generation

Two types of relationship links:

Bridge Bonds

To acquire, entrepreneurs need to:

Be known Have a positive reputation Maintain connections Have social competence

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Social Competence
Ability to interact effectively with others Make a good first impression Be persuasive Be emotionally sensitive

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Human Capital
There are four dimensions
Intellectual Dimensions Physical dimension Moral Dimension Psychological dimension

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Advantage of Family firms vs. Non-Family Firms

Provide access to various capital resources Allocation of resources varies from stage to stage in the various life cycles

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Strategies Used to Manage Capital Resources- Financial Capital

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Strategies Used to Manage Capital Resources- Physical Capital

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Strategies Used to Manage Capital Resources- Social Capital

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Strategies Used to Manage Capital Resources -Human Capital

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Strategies Used to Manage Capital Resources -Human Capital

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Strategies Used to Manage Capital Resources -Human Capital

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Strategies Used to Manage Capital Resources -Human Capital

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Causes of Decline
Failure to
Change with internal and external environments. Anticipate the need to change business strategies.

Outside advisors can help owners evaluate their firm objectively.

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Driving Factors & Causes of the Decline Stage

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Businesses in the Decline Stage

Equipment is wearing out or becoming obsolete Decreasing market share Tightening margins Decreasing discretionary income

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Problems, Opportunities & Strategies in the Decline Stage The Individual

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Why Plan for Succession?

Set the stage for continued growth by preparing the next generation
Plan best use of capital assets

Sudden losses can provide opportunity for competitors.

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Problems, Opportunities & Strategies in the Decline Stage The Family

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Problems, Opportunities & Strategies in the Decline Stage The Business

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Problems, Opportunities & Strategies in the Decline Stage The Environment

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Challenges of Governance
Difficulty maintaining the entrepreneurial spirit because
Family is dispersed and differentiated Family is distanced from the functioning of the firm.

Ways firm can grow and maintain its legacy

Governance mechanisms Pruning the family tree

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Governance Tool Kit

Governance Structures Board of Directors/advisors Family meetings Family Councils Family Office Shareholder Council/Assembly

Legal Instruments Shareholder agreement Buy-sell and call options Wills Employment contracts Prenuptial agreements Family constitutions

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Three Circle Model For Family Governance Structures

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Board of Director / Advisor

Ensures perspective of the family, owner and management are heard. Provide objective advice Board of Director vs. Board of Advisor
Legal Status & Power Hard to dissolve
VS.

NO Legal Status &

Power

NO Need for Power

sharing
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Family Meeting
Ensures family vision for the firm is developed Least formal structure Opens family communication channels Helps families
Bond Understand each other Build family harmony

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Bastianich Recommendations for Family Meetings

Be held on a regular basis adhere to an agenda and document any agreements reached be run by a facilitator include younger family members as well as seniors encourage sharing and freeflow of ideas be non-confrontational appoint an arbiter to ensure smooth progress of meetings invite experts and customers when needed

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Family Councils
Ensures family vision for the firm is developed Created to
Facilitates communication Formalizes decision making processes

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Family Councils
Provides
Standards for family behaviour Support education programs Organize events

Family Constitutions
Drafted before or implemented by the family council

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What Does A Family Constitution Consist Of?

A mission statement A statement of the familys values and beliefs A family code of behavior Relationship policies between the family and the business A performance policy A retirement policy

A dismissal policy Stock redemption policies A non-compete agreement Job descriptions for the key positions in the governance structure Funding mechanisms for governance. The rules of entry

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Family Office
Purpose:
Help invest the familys wealth as a group

Provide
Economies of scale Advisory services

Start Family Foundations to

Minimizes taxes Enacts philanthropic values Strengthen family relationships

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Shareholder Council / Assembly

Useful when there is a mixture of
Family and non-family members Minority and majority shareholders

Helps shareholders
Express their perspectives Understand the perspectives of others

Executive / Management Council

Shares top management viewpoints Makes non-family members feel included

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Legal Instruments
Shareholder Agreement Buy-sell and call options Wills Employment Contracts Prenuptial Agreements Family Constitutions

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Selection of Governance Mechanisms

Depends on
Family involvement Family and firms life cycle stage Size of the business

Not all mechanisms are equally effective in all firms at all life cycle stages

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Pruning the Family Tree

Simplifies governance If done in a timely manner
Improves family harmony Business performance

Should be done before generational transitions take place Expert advice is recommended

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When is the Right Time to Prune a Family Tree?

Owners have divergent vision You have uninterested or incompetent family members You have talented and motivated non-family members You have competing family members/branches.

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What Have We Learned From Successful Entrepreneurial Family Firms? Each firm is unique Creativity and innovation are at the core of every entrepreneur. Following these principles, family firms should be able to
Maintain their entrepreneurial spirit Take entrepreneurial actions

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Seeding the Entrepreneurial Spirit in a Family

Role modeling Respecting within-family differences Practicing entrepreneurial skills Educating for business and life Adhering to rules, roles and responsibilities

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Launching an Entrepreneurial Family Firm

Agreements in writing Incubating family members and enterprises Learning from failure Delegating Forming advisory boards

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Growing an Entrepreneurial Family Firm

Managing growth Professionalizing the team Involving the family in ownership Creating a family council Growing through successors

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Maturing Family Firms

Tiered innovating Entrepreneurial career planning Financial planning Involving family in the community Evolving with macroenvironmental cycles

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Regenerating a Declining Family Firm

Accepting responsibility Bridging generations Trusting advisors Embracing progress Orienting towards the future

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