Family Businesses

If you own a family business, you probably worry even more thanthe average entrepreneur about ensuring that your company not onlysurvives, but also thrives to nurture the next generation. Severalyears ago, researchers David Sirmon and Michael Hitt examined thestrategies behind successful family businesses. They found thatsuccess is tied directly to how well a company manages the fiveunique resources every family business possesses:

1. Human capital. The first resource is the family’shuman capital, or “inner circle.” When the skill sets of differentfamily members are coordinated as a complementary cache ofknowledge, with a clear division of labor, the likelihood ofsuccess improves significantly.

2. Social capital. The family members bring valuablesocial capital to the business in the form of networking and otherexternal relationships that complement the insiders’ skillsets.

3. Patient financial capital. The family firm typicallyhas patient financial capital in the form of both equity and debtfinancing from family members. The family relationship between theinvestors and the managers reduces the threat of liquidation.

4. Survivability capital. The family company must manageits survivability capital-family members’ willingness to providefree labor or emergency loans so the venture doesn’t fail.

5. Lower costs of governance. The family business mustmanage its ability to hold down the costs of governance. Innonfamily firms, these include costs for things such as specialaccounting systems, security systems, policy manuals, legaldocuments and other mechanisms to reduce theft and monitoremployees’ work habits. The family firm can minimize or eliminatethese costs because employees and managers are related and trusteach other.

Clearly delineating these unique family resources and leveragingthem into a well-coordinated management strategy greatly improvesyour business’s chances of success compared to nonfamily-ownedcompanies.