Deciding On The Type Of Business Ownership

Family businesses are often lumped together as if they were all the same. But four fundamentally different types of family businesses exist, distinguished by who can be an owner and how owners share control. If you want your family business to last for generations, you need to understand the characteristics of your type and the strengths and challenges associated with it. The choice of ownership type is not a mere legal formality; it can define or restrict various members’ involvement and may loom as an unrecognized source of conflict.

Sole owner.
One of the more common known on the local sphere is the sole owner. One family member owns the company and is responsible for all decisions. This works best when the business requires decisive leadership and creates enough liquidity to satisfy.

Partnership.
Ownership is restricted to family members actively working in the family business. This allows for multiple perspectives and requires clear rules governing how people can join or leave the ownership group and what benefits accrue to nonowners. The German-Dutch Brenninkmeijer family, sixth-generation owners of the clothing chain C&A, have chosen this type. Children of current owners are admitted to the partnership on a competitive basis, after a rigorous evaluation and an apprenticeship. Like sole ownerships, partnerships keep family owners highly engaged but can be vulnerable to the loss of capital and talent. They are typically more resilient because they don’t rely on just one leader, but they may face conflict over who is admitted to ownership.

Distributed ownership.
Any family business member may be an owner and participate in decision-making. This works well when most of the family wealth resides in the company, when it is mandated by law, or when it is expected by family culture. With no need to buy out nonowner members, distributed ownership can keep family capital tied to the business. But owners may vary in engagement; aligning their interests and defining decision-making norms can be challenging, and resentment about “free riders” may arise if some are operating the business while others are “only” investors. Big problems may crop up if some members of the family want to cash out; having a clearly defined exit ramp reduces that risk.

Concentrated ownership.
Any family member may be an owner, but a subset controls decision-making. This works well when decisive action is required despite a multiplicity of owners, and it mitigates some of the challenges of distributed ownership. But the question of who will exercise control becomes more complicated with each new generation. Vitamix, the 100-year-old manufacturer of high-performance blenders, operates this way. Shares are passed down to descendants, but in each generation the CEO must own or control a majority of voting shares. Although the owners aim for consensus on big decisions, the CEO makes the final call. One of the chief risks is conflict over who will lead. Another is the possibility that those not in power will lose interest and sell their shares.

 

. ( All factual and statistical information presented in this blog has been obtained from an extract of an article from the harvardbusinessreview.com ) Follow us on our Facebook page and Family Business Office website at www.familybusiness.org.mt

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