In this short paper, we shall look at the life expectancy of family run businesses. In general, and independent of the economy of a country, family run businesses tend to constitute between 75 to 90 percent of all enterprises globally. This percentage is much higher in Turkey with 95 percent of enterprises family run. Koç Holdings, for example, accounts for 9 percent of the GDP in Turkey.

However, it is to be noted that most family run businesses cease to exist during the second generation, and those that survive to the third generation struggle to continue. In fact, the ratio of businesses that are transferred to the third generation in Turkey, by example, is currently only ten percent. This ratio further drops if the company manages to reach the fourth generation. The following discussion will look at the main causes and effects of this.

But what are the reasons for such a low survival rate?

Family businesses cease to exist due to several reasons.

There are not only challenges arising from the environment in which the companies operate, but also challenges that develop from as a consequence of the family firm's internal matters. Family and business are two different environments; family members might adopt a certain way of treating each other and sustain communication in that certain way regardless of the environment they are in. Conflicts arise when roles assumed in the family system intrude on roles in the business, when communication patterns used in family system are used in business or when there are conflicts of interests between the two systems.1

A conflict of rights may arise amongst others due to three reasons:

One reason is that Family members who work for the business but are not shareholders may have the feeling that they are not treated fairly.

The second reason is that their expectations regarding their salaries and rewards are often high and not based on their abilities or efforts.

The third reason is the expectation of family members to be paid more than the non-family employees they have the same skill sets.

Other reasons may arise due to intergenerational disputes. If there are family members from more than one generation working together in a family business, factors such as vague job descriptions, confusion regarding roles and responsibilities, different levels of self- sacrifice and diverse world-views might lead to conflicts.

Another issue, the difference between female family members’ familial and business roles might also often result in conflict. Brothers, sons or husbands might feel uneasy when a female member of the family starts working at the family business, when in the family life she normally serves her husband and carries out motherhood responsibilities.

The eldest son may think that he is automatically eligible for transfer of management due to his seniority and the founding entrepreneur may approve such an approach. However this may lead to significant conflicts within the family. If the eldest son is mature and experienced enough and well educated, conflicts may not arise, but if the opposite is the case, familial disputes are predestined and this will negatively impact all employees, hence the whole business and its surroundings.2

Challenges that arise from the environment in which the companies operate, like unawareness of policy makers of specific of family businesses, and their economic and social contribution or financial issues; challenges that develop as a consequence of the family firm’s internal matters for example unawareness by family firms of the importance of planning business transfers early, the balance between the family, ownership and business aspects within the enterprise or difficulties in attracting and retaining a skilled workforce; challenges related to educational aspects, which have an impact on both the business environment and on family firms’ internal matters for example lack of entrepreneurship education and family-business-specific management training and research into family-business-specific topics, plus effective coordination with education systems to ensure proper follow-up.

Divergences between the multitude of players and interests involved may cause conflicts, and may even endanger the existence of the company. The risk heighten as intergenerational transfers take place and the complexity of the family involved in the business growth.

What Is the Solution for the Sustainability of a Family Business?

There are several factors determining the sustainability of family business. Family and management system, planning, transfer of authority, management with professional executives and corporate governance are only some of the factors.

Beside these factors, one of the most important factors is the corporate governance factor of which the family constitution is an enormously important part.

Due to the opinion of many researchers the process, families go through to prepare, the family constitution, is more important than the outcome itself. It is during this process that family business need to 'make an effort to identify and make explicit and transferable to the subsequent generation and to other stakeholders to main reasons for its own commitment to the business; the philosophy that inspires the family in its relationship with, and control of the business; goals pursued by the family and the business, and the rules that govern the relationship between the family and the business.3 Developing a structure that will enhance communication between family members and ensure the family’s goals improves the trust between family members. The establishing procedures to administer these matters require time and a good coordination. Therefore it's very important to cooperate with an experienced lawyer, leading the whole procedure and acting as a mediator between the family members.

The family constitution expresses the values, philosophy, rules and expectations of family members, as employees or employers, in matters that involve them.

This constitution is a living document.

Its contents must be flexible and revised regularly in order to meet the changing needs of the family.

In principle, this constitution is a compendium of policies arranging the manner in which the family and the business interact with each other. Generally, it includes the family’s mission statement as well as the family’s philosophy or vision and values.

The family affects the business and the business affects the family. The family-based business plan is different from the plans of other business sectors. While establishing a family constitution, it is important that the goals and business strategies of the family are aligned.4

What Can Be Regulated in a Family Constitution?

Certain Constitutional Policies

Entry, Employment and Leave
Who can work in the family business? How are promotions determined?
Benefits and Bonuses
How are they determined, and who makes the decision?
Partnership Agreement
Who can own shares? Who may sell them, when and to whom?
Converting Shares into Cash
At what price may shares be bought? Who determines the price, and is there a formula?
Family Council
Who can participate? What are the members’ roles, and how are benefits determined?
Dividends
How are dividends determined, and who makes that decision?
Communication
How does the family communicate with the business and the public? Which matters are confidential, and what is disclosed to family members and shareholders?
Ethics
What conduct is expected from family members?
Charity
Are the family’s charitable activities coordinated? What are the priorities, and how are initiatives financed?

At the end decisions taken regarding these matters should satisfy all members of the family.5 Otherwise, decisions not internalized would have a considerable cost and endanger the implementation of the family constitution; as a consequence a constitution which is only on paper would not contribute to the sustainability of the family business.

References

  1. Bowman-Upton, N. (1991), Transferring Management in the Family-Owned Business, U.S. Small Business Administration, Emerging Business Series, p. 5.
  2. The Role of the Family Constitution in Sustainability of Family Businesses and an Evaluation in Light of Implementation Problems, Research Journal of Business and Management, Volume 1, Issue 1, 2014, pp. 18, 26.
  3. Gallo, M. and Tomaselli, S., Formulating, Implementing and Maintaining Family Protocols, in Handbook of Research on Family Business, Edward Elgar, UK, 2006, p. 298.
  4. Corporate Governance Association of Turkey Publications, Governance Guide for Family Companies in the Light of Corporate Governance Principles, p. 20.
  5. Deloitte Times, September–October 200.