Family Businesses

By Entrepreneur Staff

Pencil

Family Businesses Definition:

A business actively owned and/or managed by more than one member of the same family

If you own a family business, you probably worry even more than the average entrepreneur about ensuring that your company not only survives, but also thrives to nurture the next generation. Several years ago, researchers David Sirmon and Michael Hitt examined the strategies behind successful family businesses. They found that success is tied directly to how well a company manages the five unique resources every family business possesses:

1. Human capital. The first resource is the family's human capital, or "inner circle." When the skill sets of different family members are coordinated as a complementary cache of knowledge, with a clear division of labor, the likelihood of success improves significantly.

2. Social capital. The family members bring valuable social capital to the business in the form of networking and other external relationships that complement the insiders' skill sets.

3. Patient financial capital. The family firm typically has patient financial capital in the form of both equity and debt financing from family members. The family relationship between the investors and the managers reduces the threat of liquidation.

4. Survivability capital. The family company must manage its survivability capital-family members' willingness to provide free labor or emergency loans so the venture doesn't fail.

5. Lower costs of governance. The family business must manage its ability to hold down the costs of governance. In nonfamily firms, these include costs for things such as special accounting systems, security systems, policy manuals, legal documents and other mechanisms to reduce theft and monitor employees' work habits. The family firm can minimize or eliminate these costs because employees and managers are related and trust each other.

Clearly delineating these unique family resources and leveraging them into a well-coordinated management strategy greatly improves your business's chances of success compared to nonfamily-owned companies.

More from Management

Family Businesses

A business actively owned and/or managed by more than one member of the same family

See full definition

Advisory Boards

A group of individuals who've been selected to help advise a business owner regarding any number of business issues, including marketing, sales, financing, expansion and so on; a body that advises the board of directors and management of a corporation but does not have authority to vote on corporate matters

See full definition

Corporate Culture

A blend of the values, beliefs, taboos, symbols, rituals and myths all companies develop over time

See full definition

Government Contracts

Agreements that outline business transactions between companies and government entities

See full definition

Latest Articles

Growing a Business

To Achieve Sustainable Success, You Need to Stop Focusing on Disruption. Here's Why — and What You Must Focus on Instead.

Instead of zeroing in solely on disruptive innovation, embrace a pragmatic approach to innovation, recognizing and leveraging the potential within ongoing industry shifts.

Business News

Mark Zuckerberg Says This CEO Is the 'Taylor Swift' of Tech

Meta's CEO posed with Nvidia CEO Jensen Huang on Instagram Wednesday.

Real Estate

3 Emerging Trends Shaping the Future of Real Estate

These three innovations are reshaping the real estate industry — discover tips for effectively covering these trends.