The Family Business System

Overview: All businesses face complex challenges and owners must make decisions that are in the best interests of the enterprise. Family businesses are no exception – with one additional twist, the interaction between business and family means that some business decisions will have a direct impact on the family and some family relationships will impact decisions that are made within the business. The overlap of family, business management, and ownership is what makes family businesses unique.

Decision making within a family business must strike a good balance between the best interests and commercial needs of the business and the well-being and emotional needs of the family. This can often cause a dilemma as there may not be one clear right way to address a concern. Family businesses need to be aware of the unique dynamics created when family and business are interconnected as it is often these dilemmas that stand in the way of effective decision making and moving forward with business transition planning.

Understanding the unique roles and perspectives of individuals who are a part of, and affected by, the family business provides a stronger understanding of people’s motivations, as well as opens the door for better communication and better decision making. A tool that is often used to illustrate the interaction of business and family is the “Three-Circle Model” which views the family business as a system comprised of three components (or domains): the Family, the Business, and the Ownership. Business and Ownership circles are common to all businesses, whereas the inclusion of the Family circle makes family businesses unique.

Every member of the family business occupies a space in the model. Graphically, these domains are illustrated as overlapping circles to highlight the interaction of the components. In many family businesses, family members play a role in more than one domain.

Each of these three domains has its own distinct culture and characteristics. Where each individual resides within the system influences his or her role(s) and gives insight into his or her behavior, unique wants, needs, viewpoints, motivations, and values. Plotting the individuals within the three-circle model highlights groups who likely share similar viewpoints (as they share a similar space). Allegiances and points of tension can be anticipated and provided for in the decision making processes by creating opportunities for open communications.

Dilemma: Family versus Business

Individuals who play a role in more than one domain can cause dilemmas, not only with other individuals but within themselves as they balance competing needs. To illustrate this, consider an owner/manager father who employs his daughter in the business. He plays multiple roles - on one hand, he is a father, an emotion based relationship, on the other hand, he is an employer, a commercial (objective) based relationship. If the daughter is underperforming in her work - does her father keep her employed to preserve family harmony or does he dismiss her and hire a competent and contributing employee to maximize value to the business?

Dilemma: Family versus Ownership

Often times, parents wish to transition a family business equally to their children to maintain family harmony. However, where only one of the children is working in the business, this strategy may create more tension and disagreement. For example, consider a sister who is an owner of a business whereas her brother is both an owner and management. The two may have very different motivations yet they have equal decision-making authority. The sister may want dividend payments to fund lifestyle or other investment opportunities whereas the brother may want to retain those profits in the business to fund growth strategies and maximize the value of the business in the long term. The challenge posed in these types of scenarios is to come up with a solution that is mutually agreeable and considers the needs and priorities of all parties.

Conclusion:Complex dilemmas are a natural consequence of the different perspectives and attitudes towards issues that family members will have depending on the role they play in the family business system. The Three-Circle Model is a tool to help reveal these differences so that they can be identified and managed.

It allows family members to gain an appreciation that they are part of a larger and more complex system with many competing and conflicting needs and priorities. It highlights how important the family component is in the overall success of the family business. Understanding their role(s) and the role(s) of others gives insight into balancing needs and aligning priorities.

Creating a Three-Circle Model for your family business helps to better understand the viewpoints and priorities of the owners, the managers, and the family members. It is also an effective tool for strategic and succession planning as it can be used as a starting point for open dialogue and decision making.

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