Understanding the
Business Family
Booklet 1
The Law Society of Scotland commissioned the Scottish Family Business
Association to produce three booklets designed to help members of the legal
profession understand business-owning families and their businesses better.
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UNDERSTANDING THE BUSINESS FAMILY
Introduction to the Series
The Scottish Family Business Association are delighted to work with The Law Society
of Scotland in the production of this booklet. The project was part of a much larger
partnership between the two organisations to bring to the profession a deeper
awareness of the distinctive nature of this major client group together with practical
ways to learn to advise clients on the many challenging issues that arise in business
families and their family businesses.
We believe this partnership is a world first, bringing together the main body representing family
businesses and a national body representing the legal profession. As such our joint effort serves
to confirm the far-reaching and ground-breaking cultures of the two organisations.
We hope you find this booklet of use as well as of interest and we welcome your thoughts
and responses to it.
Martin Stepek
CHIEF EXECUTIVE OFFICER
SCOTTISH FAMILY BUSINESS ASSOCIATION
Family Businesses and Business Families
A family business is a common sight in our daily lives. Most of the local newsagents,
corner shops, independent retailers are family concerns, to the extent that most people will
automatically assume that such shops belong in this category of business ownership.
Moreover certain famous brands are also known to the general public as being produced by
family businesses: Walkers Shortbread, Baxters soups, Tunnocks Caramel Wafers, to name
just a few Scottish household favourites.
But these examples present a challenge when we try to define precisely what is a family
business. A village newsagent seems very far removed from a company like Walkers, whose
traditional shortbreads are sold around the world and whose tartan tins are an iconic vision of
Scottish produce globally. And what of global giants owned or controlled by single family lines,
such as Walmart, who own ASDA, or IKEA or Mars? Can they be described as a family
business. Surprisingly the answer is yes. Although all these examples are radically different in
many ways, still they retain certain shared qualities, strengths and unique challenges.
One of the simplest of the many definitions of a family business states that it is any business
in which a majority of the ownership or control lies within a family, and in which two or more
family members are directly involved. However at the Scottish Family Business Association
we prefer a simpler method of definition: if the people who own a business think of it as a
family business it is almost certain to be a family business. Even this definition leaves out one
important group of businesses; businesses which are in fact family businesses but who have not
yet recognised the fact. Time and family-related issues usually correct this misunderstanding in
a somewhat abrupt manner.
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UNDERSTANDING THE BUSINESS FAMILY
Turning the term family business around we find ourselves faced with the concept of the
business family. This can be a simple but effective way of helping the business-owning family
and their advisors to see the entity in a new light. Even with the semantic difficulties of defining
a family business just explored, it is relatively clear what a family business is, if only because we
can usually point to the business as a distinct body. The concept of a business family however is
much wider than just the business which the family owns. Whilst it includes any family business
the family own, the term business family changes the emphasis from the business to the family.
Thus the client or clients becomes people as people rather than people as shareholders or
directors of a company. Moreover as we shall explore in another booklet in this series the
question of who is the client becomes much more complicated when we perceive the entity
as a business family rather than a family business.
A business family clearly refers to a particular family but unlike a family business which has
legally defined boundaries, a family is not so clear a term as it at first glance suggests. When
dealing with a business family is it simply the nuclear family we are referring to? What about
separated or divorced members of the family, children, three generations, maybe four, or cousins,
in-laws, adopted family members, step-parents or step-children? In short who is in and who is
out when we try to pin down what comprises any single business family?
Again we shall explore this complex issue in more detail in another of our booklets, but in the
meantime it is sufficient to be aware of the hidden complexity within both family businesses
and business families, and as importantly, to be aware that each family will have to define for
themselves the extent and nature of their own family. A good advisor can help guide them
in this often difficult task.
THE IMPORTANCE OF FAMILY BUSINESSES IN SCOTLAND
Family businesses can be compared to the air around us. Air is everywhere, is of crucial
importance to our survival but we take it for granted and only recognise its importance when
it is no longer available to us. So too with Scotland’s family businesses.
The dominant economic paradigm in Scotland, as elsewhere across the globe, is that business
falls into two main categories; large stock-listed public companies, and SMEs, within which a
plethora of start-ups or self-employed individuals predominate. For the majority of the public,
and the mass media, public listed companies are what is understood when the word business
is used. This paradigm of how the world of business looks is usually held equally firmly by
government at all levels, political parties, and their economic agencies. It is the prism through
which they view the world.
But the reality is much different from this world-view – 69% of all businesses in Scotland
define themselves as family businesses. Research undertaken by Professor Peter Rosa at the
University of Edinburgh in 2007 revealed that 41 of the 100 largest firms in Scotland were
family-owned, a figure that rose to 43% of the top 250. It is estimated that Scotland’s family
businesses generate 45% of the country's Gross National Product and employ 50% of the
private sector workforce.
These figures show that the family business model of business is the most important and most
common type of business in Scotland. This should come as no surprise; similar figures have
been found for almost every country in the EU, and the figures in the USA, Australia, Japan and
elsewhere are higher still.
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UNDERSTANDING THE BUSINESS FAMILY
There is another side to the importance of family businesses. Over and above their economic
importance nationally, family businesses contrast with stock-listed companies by usually retaining
their headquarters in or nearby the community in which they were founded. This retains
employment and wealth creation at a local level, a feature which one can see spread across each
and every region, island, town or village in Scotland. The social importance of this phenomenon
is hugely under-estimated because it is little understood, and this is especially so with reference
to the large swathe of Scotland that is rural. In these areas, by far the majority of the Scottish
mainland and all of the inhabited islands, family businesses essentially act as social as well as
economic enterprises. Probably the two clearest examples of these are Walkers and Baxters
whose head offices are in the villages of Aberlour and Fochabers, neither of whose populations
exceed 1600 people.
THE PARADOX OF FAMILY BUSINESS SUCCESSION
Clearly our economy and local communities depend on the continuity and success of the family
owned businesses. At first glance this seems to be secured; family businesses are largely
successful models of business, have a track record of resilience and survival in times of recession,
and around three-quarters regularly state in surveys their intention to pass on the business to
the next generation.
However the paradox is that despite their success as businesses and clear desire to pass on the
business to their children only 30% managed to achieve this goal. More than two-thirds of
family businesses disappear around the time of succession from one generation to the next.
This alarming feature recurs regardless of which generation of the family is passing on the
business, so two-thirds of third generation businesses vanish just as do second generation
or first generation family businesses. The figures are too low to say whether the feature recurs
for older generation family businesses because the numbers are too small to discern an
accurate pattern. Thus it appears that there is built into the organic culture and structure
of a family business a tendency to implode at times of succession.
The Scottish Family Business Association was launched as a charity in January 2006 by leading
Scottish family business owners to reduce these horrendous figures.
WHY FAMILY BUSINESSES HAVE ISSUES UNIQUE TO THEIR MODEL
Most family businesses, though not all, do not set out to be family businesses. Usually one
member of a family has an idea for a business, seizes an opportunity, such as redundancy
payment, to work for themselves, or starts a business because they cannot find employment
elsewhere. On starting the business the entrepreneur seeks people who can help them in their
endeavour, and they seek two qualities in these people: trust and low cost. In most people’s
lives other family members most immediately fit the qualities required. As family members they
can usually be trusted to be honest and often can be persuaded to do work for no pay because
they know the rewards from the success of the business will revert to the whole family.
Over time, many of these initially informal working relationships with family members develop
into formal employment and thus some years down the line the business finds that it has
unwittingly become a family business. This is the most organic and natural model of business
and process of development of any business type in the world, and it is seen equally imbedded
in every country across the globe, developed and under-developed.
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UNDERSTANDING THE BUSINESS FAMILY
The advantages of having family members in the business include the two mentioned above:
trust and low pay. The latter often develops from inherently low or even no pay to a culture
where the family members usually reinvest any profits from the business back into the
enterprise to help it flourish so that the long-term security and wealth of the family is made
more likely. Similarly in bad years for the business, family members often instinctively take pay
cuts because they perceive that the survival of the business is of greater importance to family
financial security than the short-term gain of maintaining salary levels.
In this way, the family’s interests and personalities become deeply intertwined with the business
culture, values, goals and day-to-day activities. This has both great advantages for the business
and the potential for major crises. The advantages are encapsulated in the shared culture and
values of the business, and the passion and deep attachment which family members show in
the workplace. These positive qualities spread to the employees and a cohesive family business,
over time, builds a remarkably powerful team of people clearly focussed on achieving their
objectives. This is often done at a completely unconscious level, being the result of the organic
way the family develops its influence in the business.
The strength of the family involvement in the business can and often does become the source
of the crises prevalent in the family business. Sometimes senior family members develop a desire
to see their children join the business, regardless of the wishes of the child or the aptitudes and
attitudes they have. Mirroring this, the junior generation may sometimes feel drawn to the family
business even where their parents exert no influence for them to do so, and even when the
junior family member may have no qualifications or skills suitable to the business.
KEY ISSUES OF GOVERNANCE IN A FAMILY BUSINESS
There are a range of issues unique to family businesses. There are also issues which may exist in
other organisations, which the family aspect magnifies, developing it into a problem that would
not exist in other models.
Employing Family Members
The question of whether to employ family members is a key issue. Do family have an unspoken
or explicit right to employment in the business? What if one family member is highly regarded
as a potential employee but another is not? These, and similar issues, dog family businesses,
particularly with regards to ones children. The two cultures – family and business – clash.
As parents we wish to treat our children equally, and make allowances for foibles or
weaknesses of talent or personality. But as employers such a philosophy does not sit well with
recognised basic good principles of assessing between potential candidates for a job and giving
the position to the best.
Rewarding Family Employees
A second issue is how much to pay family members. Some aspects of this problem include
lack of professional training regarding benchmarked salaries for different roles, the practice of
combining benefits for family as employees and as owners within the one salary payment, the
ad hoc payment of pension contributions, and benefits or perks unrelated to role or position
within the business. These issues create in the longer-term a maze of complexity and absence
of cohesion which eventually requires to be addressed, often to the shock and anger of family
members whose financial benefits are questioned and may be redistributed in order to create
a professional salary and benefits system.
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UNDERSTANDING THE BUSINESS FAMILY
Managing Complexity and Change
ownership
family
management
The classic model in family business theory is the Three Circle Model. We can observe seven
different sections within the model. The theory states that individuals who belong within any
particular section will have predictable concerns and desires. Individuals in different sections
of the model will have correspondingly different wishes and concerns. Thus someone who is
employed in the business but has no shares is less concerned with return on investment and
more concerned with job security and perhaps the possibility of promotion and salary increases.
Contrasting this, someone who is a shareholder but neither a family member nor an employee,
normally is concerned with the size of return on his investment in the business. So if we plot
all family members and significant non-family individuals into their particular section within the
three circle model we can gain a picture of clearly different sets of concerns and wishes.
This is, in comparison to a stock-listed corporation or a sole entrepreneur’s business, a very
complex organisation to manage and direct. Moreover it changes and usually becomes
increasingly more complex over time. Time usually affects families in two ways; everyone gets
older, and new family members are born and grow up. What a shareholder wants from life
in their twenties is not always what the same individual wants when they reach forty or fifty.
Senior family members start to consider life after work, with all the financial, emotional and
psychological preparation this requires, particularly to someone who may have spent the past
forty years owning and running a business over which they had near total control. Junior family
members may be readying themselves for leadership roles, or trying to manage their
disappointment at not being chosen for such a role. Over time we see a predictable move
within a family business from owner-manager to sibling partners to what is known as a cousin
consortium. It is not difficult to perceive the different cultures and depth of relationships each
of these three models have in comparison with each other.
These generational family changes occur as the business too is developing, probably growing
and taking on more employees, thus requiring more senior management skills. As we all know
competitive forces, new technology, vastly increased data and knowledge, and many more
features of modern working life are also added to this flow and flux within the family
enterprise. It is little wonder therefore that family businesses find themselves struggling
to manage such complexity which changes significantly over time.
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UNDERSTANDING THE BUSINESS FAMILY
Communication and Planning
Family businesses are often poor at communicating, particularly within the family. This simply
reflects the reality of most families. Much, perhaps most, of the communication that goes on
amongst family members is unspoken, or simply a habitual response learned over decades to
repetitive everyday events, and frequently based on learned stereotypes of each other. Thus the
youngest sibling is always “spoiled” and doesn’t know what hard work is. The eldest is always
“pushy” and doesn’t know how to enjoy themselves. Views picked up when children, remain
when everyone is grown up.
This inherently subjective and often inaccurate form of communication is compounded by
family businesses’ tendency to govern and lead the business intuitively and spontaneously.
Lack of planning does not appear to be a problem at certain stages of the businesses’
development. Contrary to business theory, many hugely successful businesses have been started
and grown without a business plan ever having been drafted and with nothing other than the
sheer capabilities of the founder and their team.
However there is a time when planning is vital, particularly at the generational transfers of power,
known as succession. And this is when the habit of leading and managing without planning can
damage not only the business, but the family. Planning is not only a skill but develops into a habit.
It is not easy for a family business leader to suddenly change their working ways after decades of
success from instinct to planning, and many actively resist the idea. But having explored the scale
of complexity and change within the family business system it is absolutely necessary to plan for
the succession both of ownership and leadership of the business. The failure to plan for
succession is believed to be the most prevalent cause of family businesses’ demise.
FAMILY MOTIVES WITHIN A FAMILY BUSINESS
We are taught to believe in a public limited company paradigm of business whereby hired
company directors’ sole purpose is to maximise profits in the business for the benefits of
their usually anonymous, certainly distant shareholders. The alternative is perceived to be
the entrepreneur, a single man or woman, who seeks to grow a business within the implicit
assumption that they do so in order to become rich.
Clearly these are stereotypes but all too often perceived to be real. Family businesses, as we
have seen, are far more complex organisations with a far richer tapestry of motives and purpose.
Most family-owned business do not measure return on investment. This does not mean they are
unconcerned about wealth; it simply means this is not usually the way they measure results in
their company. Usually the most important financial indicators are checked solely to ensure that
the business remains secure and healthy for the foreseeable future. Very many wealthy businessowning families have achieved their wealth without ever knowing their return on investment.
Moreover family members often have non-financial motives and values. Amongst the key traits
of motives in family businesses are a sense of duty to do right by their suppliers and their
employees. Thus a paternalistic culture is common. An awareness that the business owes a duty
to the local community is also prevalent in family businesses, not least because “it is our name
above the door”. Business families usually live in or near the community where their head office
is based, and in common with most people, do not wish to have a bad reputation in their local
community. A more positive version of this relationship between family businesses and local
communities is the well-documented trait of family businesses being secret local philanthropists.
In contrast to the much-discredited concept of Corporate Social Responsibility, or CSR, widely
seen to be used for PR or marketing purposes, family business giving and inter-action with the
community is often kept private precisely because the owning family do not wish to be perceived
to be philanthropic for the wrong reasons.
Thus in a whole range of areas family business owners have more complex and different values
and motives than is considered normal in the corporate world.
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UNDERSTANDING THE BUSINESS FAMILY
Conclusion
The objective of this short exploration of the realities of family business and business families
was to help advisors understand that their business-owning family clients are far more complex
and challenging entities and people than is commonly perceived. In so many areas, from
whether to consider your client as a business or a family, to the scale of importance of family
businesses to this and virtually every other country on the planet, there is a need for a radical
change of mindset about family businesses. The instant response to the term “family business”
is of a cottage industry or an unambitious lifestyle operation, yet family businesses not only
include these types of business but almost every other kind imaginable, of every size and in
every business sector.
Their complexity is innate, their issues organic. The keys to excellent governance of family
businesses derive from understanding the family business as a dynamic, changing entity.
The family business sector needs to learn to know itself, something which at present it
manifestly fails to do; and their advisors need to understand family businesses at a much
deeper intellectual and emotional level than they currently do. We hope this introductory
booklet has helped to change this situation.
Martin Stepek
Anderson Strathern knows that advising family businesses requires more than just
legal expertise. Diverse skills are needed, including the ability to understand the family,
its values, its business and what makes these things tick.
It is crucial to understand the significance of issues such as stewardship, governance and
succession, philanthropy and the communities within which the business operates.
Above all, we appreciate the importance of personal relationships and the ability to see
the bigger picture.
Anderson Strathern is a full service law firm, winning Private Client Team of the Year
at the 2009 Scottish Legal Awards and Firm of the Year at the 2008 Awards.
For more information please contact:
John Biggar 0131 625 7233
John Kerr 0131 625 7240
or email us at [email protected]
For information about the assistance the Society can offer to those interested in this field,
please contact Laura Malcolm, Solicitor, Professional Support Team, [email protected]
THE LAW SOCIETY OF SCOTLAND
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