ENT211: ENTREPRENEURSHIP & INNOVATION

LECTURE 9:
Family Business,
Succession & Mentoring

Dr. Michael I. Elikwu

Email: [email protected]
07085524075:
Office: Multi-Purpose Hall: M14
 Introduction
Family businesses are the social and economic lifeline of most developed and developing
nations. The successes of these businesses contribute to the healthy development of any
nation.
► It is therefore important to understand how family businesses are run including the
dynamics of the family within the business and how these aid the performance of the
business enterprise.
Statistics shows that approximately
80 percent the world’s businesses are owned or managed by families thus the
possibility of you as a student working in or with a family business is high.
Family business is the most prevalent form of business in the world (Colli, 2003).
Throughout history and worldwide, families and business have co-existed mainly
because most businesses commenced with the motivation to earn a living and support a
family.
► While the business provides financially for the family, the family on the other hand
provides human resources which could be paid or unpaid for the business.
This implies that, families and businesses are inextricably intertwined. Micro, small,
medium or large, family businesses are represented in all business sectors
 Defining Family Business
A family is referred to as a permanent body consisting of individuals who are bound
together by “obligation‟ rather than by contract as it exists in corporate organisations
(Lumpkin, Cogliser, & Schneider, 2008).
► Historically, the family was traditionally made up of father, mother and children.
► In some rural and typical ethnic societies, extended family members made up of
brothers, sisters, cousins, uncles, aunties, grandparents are important when defining
family.
► This implies that, membership of the family unit is mainly by biology/blood and
marriage.
However, modern science and the legal system have introduced other means through
which individuals are admitted into the family unit.
i. Surrogacy (this is when a woman bears a child for a couple where the wife is
unable to do so).
ii. The legal system has also made it possible to become a member of a family through
adoption.

A family business is defined as a firm that is dominantly owned, managed,

governed/controlled by a family, with the intention to retain the ownership and control
of the business within the family across generations.
 Responsibilities of Individual Family Members
1. Obligation:
Family members are expected to maintain a sense of duty through being obligated to the
family, mostly placing the interest of the family above their individual interests.
Obligations tie each individual to the family, its beliefs, values, ethics, and other demands.
►
1. Culture:
This is the way of life built into individual family members.
Family culture represents beliefs within the family system which dictates their attitude,
influences their perception about issues and programs individual behaviour.
Individual family members are expected to live their lives and approach issues based on the
family culture.
►
1. Values:
Family values are usually viewed as positive attributes within the family system.
Family values teach unity, love, tolerance, honesty, giving to less privileged people and
entrepreneurial behaviour.
These are planted into individuals within the family system and are expected to be upheld by
each member of the family.
Family businesses are known not to be interested in transferring the
 Responsibilities ……Cont’d
1. Ethics:
Ethics creates a moral sense of right doing (Lumpkin et al., 2008).
Individual family members are expected to maintain a sense of loyalty to the family name hence
behave appropriately both within and outside the family circle.
1. Trust:
Individual family members are expected to make sincere efforts in maintaining their
commitments to the family especially along the following areas discussed above: duty; family
beliefs; family values and ethics (Sundaramurthy, 2008).
►
Trust is crucial to the survival of every family unit.
Trust is viewed as one of the competitive advantages present within the family (Lumpkin et al.,
2008).
►
1. Procreation:
The demand to carry on the family name leads to procreation.
There is a natural responsibility on each individual member of the family to ensure that the
family name does not go into extinction (Bertrand and Schoar, 2006).
The survivability of the family is crucial to the family and of the means of achieving this is to
ensure that the family carry on its existence.
This function of procreation also influences the desire to keep assets (whether physical or
 Ownership Structure of a Family Business
A family business comes in any business ownership form: Sole proprietorship,
Partnership, Limited Liability Company, or Publicly-Liability Company (but with
majority family ownership). Some attributes of family business are as follows:
i. The largest percentage of shares in a business is owned by a family
ii. When the family is actively involved in firm management and the intention of the
family members is to retain ownership of the firm
iii. A firm that has the owning family in executive and other key positions
iv. The number of owning family’s generations involved in the business
v. As one controlled and managed by a collection of relatives who represents multiple
generations of one family but has a significant number of non-family employees
vi. A firm in which the direct descendants of the founder have ownership and/or management
control
vii. As one with multiple members of the same family involved as major owners or
managers either contemporaneously or over time
viii. A business partly owned by one or more family members who together control at least
20% of the total assets outstanding
 Economic Importance of Family Business
i. Family businesses are the primary source of wealth and economic growth of free
economies all over the world.
ii. They are found in almost every sector of the world’s economies.
iii. The contribution of family firms to the economies of this country dates back centuries
and they continue to serve as growth engines for these countries.
► For example, there are interesting records of family businesses that has been in
existence for over a century in in three leading economies:
► Japan has 25,321,
► The United States of America has 11,273 and
► Germany has 7,632 (Yiu, 2017).
World Statistics
i. Family firms accounts for 80-90% of all businesses in the world;
ii. Family firms creates an estimate of between 75 to 90% of the world’s Gross Domestic
Product
iii. Family firms employ between 50 to 80% of the world working population
iv. 85% of start-ups from around the world were created with family money
v. In most countries around the world, family businesses are between 70 to 95% of all
business entities. Source: Global Data Points, Family Firm Institute (2016)
 Meeting Capital / Liquidity Needs of Family Business
The capital needs of a family business can be satisfied in a number of ways:

i. Through internally generated cash flows

ii. Through additional capital injections by current shareholders.

iii. By broadening the circle of shareholders (without floating shares on the

stock exchange), for instance, by inviting employees, directors or
investment institutions to buy shares.

iv. Through loans from insiders and/or third parties.

v. By selling parts of the business that do not belong to the core activities of
the business
 Conflicts in Family Business

► Conflict, a difference of opinion, is a necessary and natural part

of human relationships.
Most common types of family business conflicts are
control issues,
role definition,
recognition
salary policies
employment and
exit policies,

► Many conflicts in family businesses or enterprising families are

predictable, but they are not necessarily inevitable.
 Conflicts ……………………Cont’d
Guidelines for how conflicts can be managed in family business:
1. Create a culture or norm that genuinely invites appropriate one-on-one
discussions when conflict begins to build in family business.
2. Bring in an outside, third-party facilitator when necessary and appropriate.
3. Set a specific time and place for the discussions.
4. Strive to create a communication atmosphere that is safe for all parties-
where open and genuine sharing result in compassionate listening, not
defensive criticism.
5. Avoid attributing blame or responsibility for the conflict
Some of the significant problems that can be addressed in family
meetings include the following:
1. Frustration over alienation or lack of inclusion.
2. Anger over the unfairness of hiring practices, promotions, family benefits,
and other opportunities enjoyed by some but not by others.
3. Frustration over divided policies and lack of liquidity.
 Business Succession
According to Sharma (2001), succession is the actions and events that lead to the
transition of leadership from one family member to another, as in the context of
family business.
► Shepherd and Zacharakis (2000), described succession as the process of
transferring managerial control from one leader or one generation of leaders to
the next.
► Sharma et al (2001), Entrepreneurial succession is the process by which ownership
and control of the production or commercial infrastructure accumulated by one
generation of a nuclear or extended family is transferred to the next.
► In this study, entrepreneurial succession entails the transfer of a commercial
investment of any type from the owner-founder to his prospective survivors.
These could be members of a nuclear family in a monogamous household such
as a wife and children, or
member of a compound family in a polygamous household, namely wives and
children.
Survivors could also be members of the extended family such as uncles, aunts,
nephews, nieces, cousins etc.
 Business Succession ………… Cont’d
Succession, being the generational transition from a founder to a successor, is a
challenging issue faced by all family leaders at some point in time.
► Most business owners find succession difficult because of its complexity.
► It involves personal, family and business issues as well as legal, financial and taxation
issues.
Four Common Factors That Supports Successful Succession:
1. A founder of the company needs to be ready and enthusiastic about passing on the
business.
2. A successor is instilled with positive attitudes toward business challenges by a
mentor, is educated for the task and is able to handle responsibility.
3. Trust between founder and successor
4. Commitment to cooperation with the family, for instance, sharing decisions with them.
Problems in succession process may come up if founders expect their children to take over
the business in the future even if successors are not willing to do it.
► It must be kept in mind that that there is need for a good fit between the abilities and
interests of these family members.
► Furthermore, problems will arise if a family and a firm do not share same values and
beliefs.
 Common Mistakes of Succession in Family Business
Mistake 1: failure to understand the differences between ownership, governance
and management;
Failing to understand that these roles differ in content, that they require specific
structures and professional skills, and that they are transmitted according to
different rules, can make generational transitions more complicated.
Mistake 2: Considering succession as an obligation to the past and not as an
opportunity for the future; it is just natural that a parent who has built up a
successful company wishes to pass it on to the next generation.
► It is, though absolutely wrong for a parent to force children to embark on studies or
experiences aimed at facilitating their entry into the family business against their
will, only for the purpose of perpetuating the past family history.
Mistake 3: Considering succession as an event and not as a process;
Generational transition of family leadership starts with children’s training,
it goes on with them (possibly) being introduced into the family business,
► it continues with parents and children working together over a set period of time, and
► it ends with children taking over.
 Common Mistakes ………….. Cont’d
Mistake 4: Failure to transmit entrepreneurial orientation;
Family businesses requires entrepreneurial tradition of the family.
► In other words, each successive generation must produced at least one person with the attitudes of an
entrepreneur, who is future-oriented, able to assume the risk of difficult decisions, able to involve other
people in a long-term strategic plan, with the necessary strength to start again after a partial failure.
Mistake 5: Lack of a sound dialectic between parents and children;
The lack of a sound dialectic can thus mean that this dialectic either does not exist or has fallen into
conflicts. Without a dialectic, the children do not develop their own personality and do not become leading
actors within the business;
Mistake 6: Considering patrimony of values as the solution;
► A family able to transmit positive values such as sobriety, humility, tendency to family unity, spirit of
sacrifice, meritocracy and entrepreneurship has undoubtedly more chances of successfully coping
with succession.
► Every generation has to recognize and interiorize the values of the past, and should also re-interpret them
to allow their use in the new context.
Mistake 7: Choosing the wrong “third actor‟;
► First, the role of third parties is to bridge any gap of knowledge or resources to the benefit of the
entrepreneur and/or the key decision-making team.
► Secondly, their role is to reduce the area of emotion, which is typically quite vast in the case of family
businesses, as well as to enlarge the area of technical-economic evaluations.
 Avoiding Mistakes of Succession in Family Business
1. A proper concept of the ownership; The first recommendation to the owning family is to
develop and pass on to the next generations a concept of ownership that considers the
business as a valuable asset which, must be managed with a deep sense of responsibility.
2. Adopt the culture of merit. Companies must be managed by competent people and if the
children are not, it is fair to look for alternatives, both for them and for the company itself.
► It is possible to learn a culture of merit when people are fairly young
► Without a culture of merit, nepotism takes place; incompetent or unsuited people
reach the highest offices in the business and are unable to fulfil their tasks,
3. The education of the young; the third recommendation relates to the need to worry
about the education of the upcoming generation.
► Education is essentially the transfer of values, as human and intellectual capital is the most
important capital that needs to be transferred
4. Choice of the entrepreneurial development model; family business represents a highly
important reality in developing and spreading an extremely scarce and crucial productive
factor for the development of a country and this is the “entrepreneurial factor”. This role of
being a reservoir of entrepreneurship is covered by family business in different ways.
 Mentoring
► Cox (1997) defined mentoring as a management process, styles and techniques which
aim at entrenching organizational culture and philosophy.
► Mentoring is a learning process where helpful, personal, and reciprocal relationships are
built while focusing on achievement; emotional support is a key element.
► The process of mentoring may be viewed under three models – the apprentice,
competency and reflective models.
► In the apprentice model, the mentee observes the mentor and learns.
► In the competency model, the mentor gives the mentee systematic feedback about
performance and progress.
► In the reflective model, the mentor helps the mentee become a reflective practitioner.

Mentoring relationships can be formal or informal.

► Formal mentor relationships are usually organized in the workplace where an
organization matches mentors to mentees for developing careers.
► Informal mentor relationships usually occur spontaneously and are largely
psychosocial; they help to enhance the mentee’s self-esteem and confidence by providing
emotional support and discovery of common interests.
 Mentoring ………… Cont’d
In family Business, Mentoring is
i. An intentional process: embarked upon to achieve a specific goal of developing succession
capacity.
ii. Mentoring is a nurturing process that fosters the development of the protégé towards his
full potential.
iii. Mentoring is an insightful process in which the wisdom of the mentor is acquired and
applied by the beneficiary.

Mentoring as Key Principles in Succession Planning:

The under listed principles, according Byham and Nelson (1999) will enhance mentoring and
succession planning
1. Top management commitment:
2. Workforce planning
3. Futuristic orientation
4. Development of successful culture
5. Focus on potential candidates for leadership roles
6. Simplicity and flexibility
7. Openness
8. Capability template
 Mentoring For Inter-Generational Succession
1. Identify Interested Successor: One or more of your children may already have shown
some interest in the family business and asked about its operations.
Encourage that interest;
Talk about the company’s history and your vision for its future.
Share the excitement you experience as a business owner.
Over time, teach an interested child more about the business’s operations.
Putting the child to work doing various tasks around the business on weekends and over
school holidays.

2. Education Is Key:
If the child (or children) continues to express an interest in working for the family
business, you might want to bring up future education plans.
You can suggest that the child should consider obtaining a degree that would be beneficial
in running all or part of the family business.
For example, a degree in engineering could be a huge asset if the family business is involved in
property development, construction, or design/build. A degree in accounting or finance can be
helpful for businesses of all types.
In addition, a degree in a related field would give your family member credibility when it
comes to interacting with clients, bankers, and employees.
 Mentoring For Inter-Generational ……Cont’d
3. Insist on Outside Experience: Promoting a family member to a leadership position within
the family business when that person has little experience can be a recipe for trouble.
Working in a different company in a similar industry to yours can give your family member
a level of experience, confidence, and credibility that would not be obtainable by simply
transitioning to the family firm.
The skill set established through working elsewhere may help propel your family business
in a new, more growth-oriented direction.

4. When Multiple Children Are Involved: What happens when more than one family
member is interested in becoming part of the business?
Encourage them to follow the areas of the business that interest them most. With the
appropriate education and experience working for other firms, they may be ready to
run their own areas of the business when they rejoin the family firm.

5. Engage Experts: The input of external professionals who are skilled in different business
areas, such as operations, finance, manufacturing, logistics, or marketing can be invaluable to
the upcoming generation of family members joining the business.
Mentors can guide and serve as a sounding board for the ideas of the child or children
working for the family business.
24C TRIMESTER

FINAL TEST