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Stages of Growth in a Family Business

Provided by IFC Corporate Governance


Several models have been developed to describe and analyze the different stages that family businesses go through during their existence. In this Handbook, we will use the basic three-stage model that summarizes the family business lifecycle as: (i) the Founder(s) Stage; (ii) the Sibling Partnership Stage; and (iii) the Cousin Confederation Stage.[1] Although this model allows for a good analysis of the three basic steps of evolution of the family business, it does not mandate that all family-owned companies will necessarily go through all three stages of development. For example, some companies will disappear during the early stages of their lifecycle because of bankruptcy or getting acquired by another firm.

The evolution of ownership and management within most family businesses goes through the following stages:

Stage 1: The Founder(s) (Controlling Owner(s))

This is the initial step of the family business’ existence. The business is entirely owned and managed by the founder(s). Most founders might seek advice from a small number of outside advisors and/or business associates but they will make the majority of the key decisions themselves. This stage is usually characterized by a strong commitment of the founder(s) to the success of their company and a relatively simple governance structure. Overall, this stage contains limited corporate governance issues compared to the next two stages since both the control and ownership of the company are still in the hands of the same person(s): the founder(s). Perhaps the most important issue that will need to be addressed during the life of the founder(s) is succession planning. For the family business to survive into its next stage, the founder(s) should make the necessary efforts to plan for their succession and start grooming the next leader(s) of the company.

 Stage 2: The Sibling Partnership

This is the stage where management and ownership have been transferred to the children of the founder(s). As more family members are now involved in the company, governance issues tend to become relatively more complex than those observed during the initial stage of the business’ existence. Some of the common challenges of the sibling partnership stage are: maintaining siblings’ harmony, formalizing business processes and procedures, establishing efficient communication channels between family members, and ensuring succession planning for key management positions.

Stage 3: The Cousin Confederation (Cousin Consortium or Family Dynasty)

At this stage, the business’ governance becomes more complex as more family members are directly or indirectly involved in the business, including children of the siblings, cousins, and in-laws. Since many of these members belong to different generations and different branches of the family, they might have diverse ideas on how the company should be run and how the overall strategy should be set. In addition, any conflicts that existed among the siblings in the previous stage would most likely be carried to the cousin generation as well. As a consequence, this stage involves most family governance issues. Some of the most common issues that family businesses face at this stage are: family member employment; family shareholding rights; shareholding liquidity; dividend policy; family member role in the business; family conflict resolution; and family vision and mission.

Key Corporate Governance Issues – During the Development Cycle of Family Businesses

Ownership Stage

Dominant Shareholder Issues

 

Stage 1: The Founder(s)

- Leadership transition

- Succession

- Estate planning

 

Stage 2: The Sibling Partnership

- Maintaining teamwork and harmony

- Sustaining family ownership

- Succession

 

Stage 3: The Cousin Confederation

- Allocation of corporate capital: dividends, debt, and profit levels

- Shareholder liquidity

- Family conflict resolution

- Family participation and role

- Family vision and mission

- Family linkage with the business

 

Each stage presents different challenges and issues that if properly managed can ensure the continuity of the family business. Most family-owned companies are successful during their infancy stage thanks to the tremendous efforts made by the founder(s) as they are implicated in all aspects of the business. In the longer term though, it becomes necessary to set up the right governance structures and mechanisms that will allow for efficient communication channels and a clear definition of the roles and expectations of every person involved in the family business. 


[1] John Ward, Creating Effective Boards for Private Enterprises (Family Enterprise Publishers, 1991); Kelin E. Gersick, John A. Davis, Marion McCollom Hampton, Ivan Lansberg, Generation to Generation: Life Cycles of the Family Business (Harvard University Press, 1997).

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