The Life Cycle of Family Businesses
The “life cycle of the family business " is intended to explain the crises which affect the family business. This model attempts to
show that family businesses are more likely to succeed if they can prepare to overcome the crises which arise from the mere fact of being a family business.
LIFE CYCLE OF THE FAMILY BUSINESS
Phase One: the founding of the business
In this initial stage of the life of the company, the founder emphasizes exploiting a perceived business opportunity and is excited to carry it forward. The founding man or woman is entrepreneurial, assertive, passionate, and has great ability to overcome difficulties. You
could say that the founder "sees an opportunity where others do not."
The founder’s business plan could be written on a paper napkin which he writes to tell a friend or family member about the business model which he aims to develop.
Here the founder plays a fundamental role since it is he who fulfills several functions and there is usually no one to share these decisions
which are based largely on intuition.
First crisis: lack of delegation
The founder's successes have allowed the business to grow to a point where they can no longer do everything themselves – and they may start to have problems in productivity, sales, or even not meeting obligations. To overcome this crisis, the founder must start to delegate functions which they previously did themselves. Overcoming this first difficulty creates the foundation for growth.
Phase Two: Developing a new style of leadership
The founder must develop new skills for leading his team. Communication can still be quite informal, but it needs to be somewhat more formal in the new organizational structure.
The founder needs to communicate a sense of mission to his people with such passion that they develop a strong sense of belonging. This helps employees to be committed to the goals of the company and thus provides the founder with a formidable competitive advantage which is unique to family businesses.
Second crisis: children joining the business
The founder is now in his 50s and his children have started working with him. While this stage can bring lots of enthusiasm, it is not without difficulties:
• Overlapping roles played by the same person in the family and the company.
• Involving children in roles for which they are not adequately prepared.
• Father and children having a vision or leadership styles which do not coincide. Seeing college educated children as a threat
to the business.
• Parents and children not accustomed to working in teams, and not knowing how to communicate effectively. The founder must be able to communicate his vision and business model, and be able to instill a passion for the business and be able to nurture his children’s dreams, and learn to listen to and understand the interests and expectations of the children. But above all the founder will have to
find agreement with the children and get commitment from them.
Phase Three: Entrepreneurial growth fueled by the contributions of children
If the owner manages to overcome the earlier crises, then the company can continue to grow and benefit from the synergies of the children and parents as they focus the company and perhaps start new businesses. These synergies with the founder, children and employees become a force which is felt especially in situations of crisis.
Third crisis: the death of founder and crisis of power between brothers
On an emotional level, the death of the founder and father - and mother - is a difficult time to overcome, particularly when death happens unexpectedly. This situation is usually an uncomfortable subject and difficult for the children to address, and thus the founder should plan for this eventuality rather than leaving it to the next generation. The founder can anticipate potential conflicts of interest, vision, and expectations, and deal with taboo subjects such as the poor performance of a brother or child of a brother.
Phase Four: Professional corporate governance
This phase involves moving from having power concentrated in one person to a model where the children must work together to make decisions that benefit the company rather than just their personal interests. This involves incorporating best practices for corporate governance of the family business to allow them to overcome the crisis of the previous stage.
The family should focus on improving the quality of governance unless they decide to sell the company (to family or others.) In both cases, sell or continue - the structures and dynamics of professional governance add value to the family business.
Fourth crisis: when there is conflict among family shareholders, the board and management
This crisis can be triggered by inadequate communication and controls – which often arise due to trusting people alone rather than also
relying on professional data and reports. In this situation there may not be sufficiently clear and understandable information for evaluating the performance of the company.
At this stage, governance must place an emphasis upon respecting the principles of transparency, accountability and fairness.
Failure to respect these principles can result in conflicts which are difficult to resolve and which may endanger the survival of the
family business and, most probably, the harmony and unity of the family.
Knowing the typical life cycle of a family business can allow the family and owner to take appropriate measures to prepare for crises in each stage. It is highly recommended that the family business develop protocols for governing the family business and develop defined
rules and criteria which the family business commits to follow. In this way it can be possible for the family to continue adding value to the company and not negatively affect the company.
Thus, family businesses can maintain the benefits and potential of the family business and not to fall prey to the crisis of each stage.
Prof. Santiago Dodero
Executive Director of the Institute for Family Business
ADEN Business School