November 13, 2018
Family business or family-owned business is one which is essentially controlled by a family, either two or more within a generation or across multiple generations of a family. In a family business, control and ownership typically reside within a family. It is arguably the oldest form of business organization, dating back to the start of agriculture and farming. Most agrarian communities were organized along family lines, which meant that the larger the family size, the bigger the farmable land that can be utilized by the family. Interestingly, some form of this type of ownership and control continued to be adopted in later years.
In the 16th to 18th centuries, family-owned businesses were run within the family house, which made it easier for the owner’s children become his own apprentices. In more recent times, family businesses have been said to be largely in form of micro, small and medium entities, while some are gigantic multinational entities.
The world over, family businesses have been the backbone of major economies, significantly contributing to the gross domestic product, employment creation and economic development in general. It is estimated that the total economic impact of family businesses to the global gross domestic product (GDP) is over 70%. In fact, it is reported that the 500 largest family firms globally can be likened to the third-largest economy given the fact that their combined annual turnover is about $6.5 trillion.
In the United States, for instance, family businesses account for 64% of the country’s GDP, generating 62% of the country’s employment, and accounting for 78% of all new job creation. In India, the gross output of family businesses accounts for 90% of the country’s industrial output, 79% of the country’s organized private sector employment, and 27% of overall employment. In addition, it has been reported that European family businesses’ turnover is around 1 trillion Euros, which is about 60% of all European companies, creating over 5 million jobs (about 50% of the continent’s overall employment).
In Nigeria, the informal sector, which is largely made up of small and medium family businesses, accounts for over 60% of the country’s economy. There is also a significant number of family-owned and family-controlled entities in almost all the industries that make up the formal sector of the country.
While family businesses present lots of opportunities for global economic development, they are also bedeviled by certain unique threats that stem from their very nature and composition. Of note among the threats are succession threat and management overlap threat. According to the Family Firm Institute, 30% of family businesses survive into the second generation, 12% make it to the third generation, while only 3% of all family businesses will still be active by the fourth generation. In emerging markets, such as Nigeria, statistics present a far worse situation. In addition, the interplay between family members and the management of the family business poses a serious threat to the survival the business, which may lead to the slow and gradual demise of the family business. This article introduces our series on governance of family business and the need for a functional governance framework.
A family business can be differentiated from a regular enterprise on the basis of its ownership and management. In most situations, the owner of the business plays the role of the chief executive officer amongst other major roles. In other instances, the roles are split among family members, who may not necessarily possess relevant qualifications. As you can imagine, in a family business arrangement, family affairs slip into business management and decision making, thereby clouding business decisions with sentiments and personal interests.