Post on 05-Apr-2018
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Presentation on Family business
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Presented by group 2
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Succession in family business.
Pitfalls of the family business.
Strategies for improving the capability of
family business.
Improving performance of family business
Contents
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Family Business
A family business is a business in which one or more members
of one or more families have a significant ownership
interest and significant commitments toward the business
overall well-being.
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Succession In Family Business
How best to pass on your business to the next generation will
be one of the biggest challenges you face. There is need to make
the right decision for the family and business.
The succession plan should include:
Key goals for the succession process
A timetable of the transition stages, from identifying a
successor to the staged and then full transfer of responsibilities
Contingency plans in case the unforeseen happens
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First Succession Plan, Then Business
Succession Plan
The family succession plan must recognized and accommodate
(hold) the needs, goals and objectives of each member of the
family. The family s goals and objectives then become the
basic building blocks for the development of the business
succession plan .
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Family-first Business or Business-first Family
Another important issue that the needs to be determined prior to
beginning the family succession plan is a family-first business
or a business-first family, it will significantly affect the
succession planning process.
Consider the multitude of personal sacrifices the business
founder made in order to create a successful business. Sacrifice
that included in 70-80 hour work weeks, noweekends,misssedgames, school and social functionsa business-first family.
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Succession Management
Family business which uses the advisory board as part of their
succession management process tend to be businesses that are
still growing in size, and profitability.
As a part of the succession management process, the advisoryboard acts as a safety net for both the family and the business.
To be effective, the advisory board needs some infrastructure in
place including a formal business plan, a written succession
plan, buy/sell agreements.
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Business Valuation
Business valuation is a process that does not always result in a
formal written report.
The reasons for valuing a business are as follows.
Buying or selling shares to employees.
Retiring and selling to other family members.
Planning gifts to heirs(successor).
Proving adequate man key insurance coverage. etc
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Buy/Sell Agreement
One of the more popular device used to transfer share
ownership is the buy-sell agreement.
Over valuation or under valuation can lead to substantial tax
penalties. Proper documentation of facts and reasons is critical
to sustainability.
It is prepared for the sole purpose of estimating what an
informal buyer would pay an informed seller.
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Example For Succession Of Family Business Tata
Groups
The group was founded by Jamsetji Tata in the mid-nineteenth
century
Total 28 companies are publicly traded, the largest of which are
Tata Steel, Tata Consultancy Serives, Tata Motors and Tata Tea
Jamsetji Tata was succeeded by his sons Sir Dorab Tata and Sir
Ratan Tata, who were responsible for the creation of the Dorabji
Tata Trust and the Sir Ratan Tata Trust.
Realizing that succession would be a crucial issue in the life of
the Tata Group .
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Contd.
Tata Sons also formed a governance council to search for asuccessor to its present head Ratan Tata once he retires.
Tata Sons has a majority shareholding in most of the
companies under the Tata Group umbrella. The Chairman ofTata Sons acts as the chairman of the Tata Group.
The sons of the Tata family act first as administrators of the
trust, to secure wealth for the trust, which has the majorityholding in the group.
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Structure of the Tata group of companies
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Seven Pillars or Pitfalls of Family Business
When only 30% of family businesses survive to the
second generation and 10% to the third.
It begs the question: Why do family businesses die so
quickly? Since 92% of businesses are family-owned, they
employ a vast majority of the country's workers. The
success of family-owned business affects everyone.
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Reasons for Pitfalls
A difference in age & experience as is typical between father and son.
Differences in educational levels.
Sibling rivalries between cousins which usually end in a separation.
Difference of attitude towards employees.
Difference in way each would like to define the business or
restructure it.
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Cont
Difference in value system, which may affect ethical practices orcorporate governance.
Difficulty in keeping a professional distance among family members.
Different promoters are not equally gifted in all aspects of business.
A lack of focus and business strategy.
An inability to separate the familys interest from the interest of
business.
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Seven Pillars or Pitfalls of Family Business
1. Respect: Can family members treat each other with respect? Do
people value different perspectives? How are differences handled?
Are there established ground rules?
2. Roles: The roles clear, and are authority and responsibility
compensated with the roles? Is there confusion about who does
what? Are there job descriptions?
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Cont...
3. Rules: What assumptions do people make about the rules? Are there
written agreements about equity, compensation, time off?
4.Responsibility:
Is there a sense of responsibility, duty, commitment, or a sense of
entitlement? What are the values and culture that are carry out about
obligations, loyalty, and excellence in the firm? Is there a sense of
servant leader?
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Cont
5.Relationship/Management:
How are relationships managed? Are conflict and communication
addressed? Are there standards of behavior that are reinforced or
discarded?
6. Results:
Is there accountability around performance, follow through, focus,
action plans?
Is this a commitment to provide training to increase results?
Are there consequences when results are not met? Are targets met?
Is there a board of directors? How is incompetence managed?
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Cont
7. Regeneration:
What is the company doing to create growth?Is there a strategic plan?
Is there a succession plan?
The vision, values, and mission of the company revised and
reviewed at transitions?
Is there evidence throughout the company what those are, or is there
alignment among corporate, department, and individual goals?
Is the company committed to growing the talent pool to contribute
to company regeneration?
How is innovation cultivated?
Has the business model or lines of business chance?
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Simple Tips to Avoid Conflicts in Family Business
Make time to understand the points of view of others-
the payoff can be huge.
Understand we make a difference.One conversation at
a time-dont try to out shout everyone else.
Seek more information and insights from those with
whom you disagree-ask for strengthening and
examples that will enable you to better understand
other points of view.
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Cont
Establish time limits on discussions and debates- when that time
limit is reached but closure is not attained, table the topic for
further research and put it on the agenda for discussion at a future
meeting.
St t i f i i th bilit f
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Strategies for improving the capability of
Family Business:
Family firms must be able to professionalize:
To professionalize means that the family must
make the mental leap and separate ownership and
management, and distinguish between the familys interest.
Most Indian companies are in transition today. They are
painfully coping with the problem of incompetent family
members at the top of many businesses.
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Cont..
Rahul Bajaj says, It is easy to get free of an
outside manager, but how do you get rid of a family
member? You must either do what is right for the businessor the family. Either way, you will end up with an
unhappy family or a weakcompany
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The termination of the joint family:
A more unique characteristics of Indian business, at least until recently, was that
it was managed as a joint family and derived a competitive advantage from this
fact.
A famous example as stated earlier, is of the Palanpuri Jains of Western India,
who have established commercial colonies in such diamond centres as Tel Aviv,
Antwerp, Mumbai, London and New york and who today account for roughly
50% of all purchase of rough diamonds in world.
Owing to the inherent trust in a joint family, the Jain diamond merchants rely on
interethnic ties to keep this highly scattered, specialised and intrinsically high risk
business together.
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The number of family businesses is increasing day byday. Almost all companies, all over the world, start off
as a family concern. In India, in 2003, the number of
companies registered in the private sector was
5,40,026 and collectively they had an authorized
capital of almost Rs.9,00,000 crore.
Replenishing entrepreneurship:
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Good management: In USA, over 65% of business-
and the more profitable sector of USA Income is
family business. This little fact is not much in the news
because most of these family run businesses areprivately held.
Ability to change: The issue is not family business.
How can Indian management improve? And how can
speed up the pace of improvement?
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If a family business does not have a sense of its future,
it cannot know the knowledge, skills and expertise that
will be required of the next generation of leaders. And
the next generation of leaders must work hard to
acquire their leadership skills,
Have a strategic plan:
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Improving performance of family business
David Sirmon and Michel Hitt examined the strategies behind
successful family. They tied directly to how well a company
manages the five unique resource every family business process
Human Capital
Social capital
Patient financial capital
Survivability capital
Lower cost of governance
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Human CapitalThe first resource is the family or human capital
inner circle when the skills sets of different
family members are coordinated as acomplementary cache of knowledge, with a clear
division of labor, the likelihood of success
improves significantly.
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Social capital
Family members bring valuable social capital to thebusiness in the form of networking and other external
relationships that complement the insiders skill sets.
Patient financial capitalThe family term 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 manager reduces the threat of liquidation.
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Survivability capital
The family company must manage its survivability capital family company must manage its survivability capital family
members willingness to provide free labor or emergency loans so
the venture doesnt fail.
Lower cost of governanceThe 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 reducetheft and monitor employees work habits.
The family firm can minimize or eliminate these costs because
employees and trust each other.
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Concept ofcore Business Values:The management of every family business requires that
decisions be made about myriad(many) issues. The totality
of these decisions becomes, in effect, the family core
business values of particular importance are the familys
core values regarding the training of the members of the
family entering the business, the future, finance and
accountability of these members.
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