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So what is a family business?

Jan 16, 2018
So what is a family business?

Our Perth advice business only focusses on family owned businesses.  However many of our clients do not think of themselves as a “family business”.

We have defined a family business as:

A business that is controlled and significantly owned by two or more members of the same family with the hope that the business legacy will continue.
Each part of the definition is important to consider.

A business

A family business is a business.  However, the concept of business varies from person to person.  The business could be manufacturing, sales or managing rental properties.  What is important is that there is an asset that is managed in a business-like manner – be it with direct involvement of family members, under an outsider CEO, or with the engagement of professionals like real estate agents, and stockbrokers under the direction and influence of the family and the owners.

Controlled

The family does not need 100% control of the business for it to be a family business.

Many family businesses have looked to a share plan for senior management to create engagement.  And the family typically has the option to “buy back” senior management on retirements.

Good examples of this can be seen with Wolfgang Porsche who heads the Porsche family.  The Porsche family owns 32.2% of the Volkswagon Group but has voting rights for 50.73% of Volkswagon.

Two or more people

Further, the control of the business is undertaken by two or more people.  However at many times the family business has a “public face” of one person however the non-working spouse has a significant influence in the management through the support.

The recognition of this support in a family business is critical to its success.

Likewise, as the figurehead of a family business becomes older, the next generation are increasingly looked upon as the controllers and influencers (like it or not).  Even if the family business is run under management, the next generation will ultimately be the person who management looks to for ongoing direction and strategy.

Of the same family

The concept of family varies from person to person and from culture to culture.  Certainly in modern Australian culture family is typically thought of as the immediate nuclear family and in other cultures (or Australian sub-cultures) the concept of family can extend across to cousins and second cousins.

At Westcourt we define family as a person who can do horrendous acts to another and still retain a relationship.

And yes.  In some family businesses the relationship between family members is so neglected that the connection over many decades time is lost.

And that can be a tragedy.

Hope of a legacy

Many family business have an exit strategy of a sale.

However, simply selling the family business does not mean that the element of the family in business goes.

Many successful family business owners want to leave something to their children, their grandchildren or the wider community around them.  It does not always come to fruition of course, but a successful business owner is often motivated by something other than their immediate personal needs.

Understanding, and documenting these drivers for the founding generation is important.  It acts as a signpost and guide for future generations in how the business asset, or legacy asset, should be maintained.

So how is a family business different to a private business?

Relationships are more complex

In a private business a bunch of people come together to make something.  And the ownership is pretty clear.

You have staff, you have owners, and you have staff who are also owners.

In a family business you have the added element of family.  So you can actually have staff, staff who are family and staff who are family and owners.  You can have owners who are family and not staff.  And you can have owners who are not family who are staff and owners who are not family and who are staff.

The introduction of these different roles can potentially add a degree of complexity.  This complexity can be both a strength and a weakness for a family business.

Taxation law is different

Likewise taxation law can potentially operate differently for family business than it does for private business when the concept of the enduring nature of a family is considered and the permanence of family relationships is considered.

A legacy is important

A good example of a famly business is the Walton Family.  The Walton family, through inheritance control 50.8% of Walmart.  And the recent US government tax cut has allowed the Walton family to pass on part of the tax cut to Walmart staff as a pay rise.

However at Westcourt we don’t only help large families.  Yes we have helped 5 generation families manage their business affairs however the majority of our clients (especially the larger ones) are first generation families.

Perth is still very much a young city and pioneering families are very much the footprint and culture of Perth.

What is important to note is that the family has a hope of passing on a legacy.

A private business?

If you compare this to a private business the driver is different.  For example – a Big 4 accounting firm is not a family business.  With 180,000 staff nearly $40bn in revenue these companies are gigantic businesses run by an army of people.

The values and drivers of that business are very much chosen by a group of individuals and it is fair to say that not all of the owners are completely on page with the values of the company.

Values

In a family business the family values are mostly the same throughout the family.  And the permanence and continuity of these values gives the family business a distinct competitive advantage over a privately held business.

What is important to note is that a family business, with a clear governance mechanism in place, with a clear purpose, will have a competitive advantage over a private business.

The same will apply to a large business family managing extensive assets or a large family business with extensive assets.

The choice of advisors who understand the unique and competitive advantages of a family business is critical to the success of a family business.  A good source for advisors is Family Business Australia who have an accredited advisor program – with lawyers, accountants, and business coaches who understand family businesses all registered.

At Westcourt we are accredited family business advisors.  With one purpose only – to make family owned businesses great – we have a strength that few other people can reach.



Category: Family Owned BusinessPopular

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