How to manage your family business better and more efficiently?
This article highlights the specific characteristics, challenges and opportunities that family businesses face in business practice and identifies the issues that are relevant to their business and development.
Family businesses are the dominant economic entities in all European jurisdictions.1 They are established in all sectors of the economy, are among the most important exporters and drivers of technological and economic progress, contribute to innovation and create jobs, many of which are high value-added jobs. It is therefore not surprising that they are seen as one of the drivers and building blocks of economies.2
In Slovenia too. Among family businesses, there are many already successful and well-established international companies with medium or large company status, perhaps even an international corporation, which includes in its group companies established in various European countries and elsewhere in the world. Recent research shows that family businesses account for as much as 83% of all businesses in Slovenia (2015).3 Because of their economic and social importance, family businesses therefore deserve special attention and professional support.
The purpose of this article is to highlight the specific characteristics, challenges and opportunities that family businesses face in business practice and to identify issues that are relevant to their business and development.
What is a business?
The term “enterprise” denotes a sociological phenomenon, which is defined by sociological theory as an organisation, which means “a social association, relatively rounded and defined by its members, who cooperate with each other in the existence of mutual reciprocal relations”.4 An enterprise as an organisation is aimed at a certain goal, towards the achievement of which the activities of the members of the organisation are directed, and the goal is to be achieved rationally, according to a predetermined plan and by the division of tasks among the members of the organisation. The enterprise as an organisation is characterised by three aspects: functionally organised assets, organised operations and organised association of people.5 The concept of the enterprise is defined by various economic and legal theories that have developed over the last two centuries and are relevant for the legal assessment of external and internal corporate relationships and for understanding the rights of shareholders or members and the obligations of the management and supervisory bodies. These theories also contribute to understanding and defining the company’s interest and potential conflicts of interest, and to defining the duty of loyalty to the company.6 Theories of the firm help to understand this social phenomenon from an economic, social and legal perspective and are the basis for its regulation. Family businesses are thus not only the subject of legal scholars, but also of university researchers, economists, psychologists, sociologists and, last but not least, communication scholars.
A business may be organised in various forms, for example as a company, sole proprietorship, institution or cooperative. These are different legal forms designed to carry out economic activities, each with its own statutory characteristics and limitations. Each of these legal forms is subject to specific rules (specific laws) and usually to different tax treatment. A company may also be organised as a group of companies (a de facto or contractual concern or a concern with a relationship of equality), for which special rules are laid down by the Companies Act (ZGD-1).
Regardless of the formal organisation of the family business, it is useful to know the advantages, disadvantages and potentials of the different legal forms in which the family business may be carried on, as legal entities may be reorganised without having to be wound up and thus benefit from the tax, commercial and legal advantages of other legal forms during the lifetime of the family business.
What is a family business?
There is no single accepted definition of a family business, either in the world or in Slovenia. Family businesses are generally those which are jointly established and run by family members and in which they have employees. The concept of a family business is therefore not linked to a particular legal form, but to other factors that determine its specific characteristics. A family business is characterised, inter alia, by:
- a significant proportion of the capital is owned by family members,
- family members are employed and belong to different generations,
- the perception of non-family members that they work in the family business,
- control of the business is exercised by family members; and
- a significant degree of expectation about the future involvement of family members in the business.7
In Slovenia, the established definition of a family business is that “a family business is one that is family-run, family-owned and there is the possibility and desire to pass the business on to the next generation”.8
Family businesses usually also employ non-family members as workers and managers, thus creating special psychological and professional relationships that require special attention and treatment. It is generally accepted that family businesses have the same stakeholders as non-family businesses. The key stakeholders of family businesses include shareholders, customers, suppliers, distributors, employees, creditors, business partners and the local community, but also trade unions, NGOs, activists, competitors, the state and regulators, academics, and previous and future generations.9 With the aim of long-term survival and viability, family businesses should consider and satisfy the interests of as wide a range of stakeholders as possible in their operations and management, not only family members.
Among the weaknesses of family businesses, authors often mention the rigidity and obsolescence of management methods, emotional influences (the interaction of family and business systems based on different values), shared leadership between older and newer generations of family members, and the unclear demarcation of decision-making responsibilities, nepotism, conflicts between siblings, reluctance to finance with foreign funding sources, intertwining of business and family interests, unregulated succession and the change in the culture of the organisation as ownership changes from one generation to the next. 10 Particular attention should therefore be paid to the legal and business management of these risks with a view to mitigating and managing them.
Are family businesses different from other businesses?
The common denominator of family businesses is the involvement of family members in the management and operation of the business, but these specificities raise issues that touch on legal areas not normally associated with the business of companies: property relations between spouses and their descendants, inheritance issues, or the impact of creditors’ rights on the assets of spouses and family members who are not actively involved in the family business or who are minors. Skills in conflict prevention and resolution, through appropriate internal communication, organisation of business processes and legal remedies, are also important.
As entrepreneurship in Slovenia has only started to develop rapidly with new forms of economic entities since independence, for many family businesses it is now time to decide on succession and transfer of the business or to expand the business. Such business watershed moments require consideration of transfers of business stakes or shares, the financing and use of family assets as collateral, status transformations or more complex forms of governance and management of family businesses that will allow for the continued growth and development of the family business. It may also be time to look for strategic partners outside the family circle. In all these cases, it is useful to be familiar with internationally established practices and standards in M&A procedures and, of course, with local legislation.
In what respects are family businesses no different and must follow the general rules?
Family businesses are therefore special in terms of their ownership structure and the intertwining of business and family systems, but in all other respects they are the same as other businesses whose stakeholders are not (only) family members. In these matters, they have to comply with the rules or legislation applicable to each form of economic entity, most commonly tax law issues, financing, status issues, labour and other employee-related issues, various aspects of sustainability, etc. In order to improve access to finance and to increase market share, family businesses also need to pay more attention to corporate governance, as orderly and transparent corporate governance increases the confidence of business partners, in particular credit institutions, as well as of potential investors and customers of services or products.
Which topics are important?
The most frequently mentioned issues in relation to family businesses are succession and the transfer of the family business to descendants and other family members. Due to their specific ownership and business structure, partners and shareholders of family businesses face issues related to property relations between spouses and cohabiting partners and with descendants, bearing in mind that some of them are also minors. The specific legal regime regarding pre-nuptial investments and the rights of spouses in the event of divorce must be taken into account. Relevant are the issues of inheritance and transfer of assets during the lifetime of the founder of the family business. The tax regime must also be taken into account when transferring business shares and the company to descendants. Although the principle is to avoid litigation, family businesses should also pay attention to the various forms and options for resolving legal disputes, as they simply cannot avoid them. Given the close social relationships involved, more attention should be paid to preventing disputes from arising or to reducing the risk of disputes arising through the means offered by the law in the form of prenuptial agreements and other forms of agreements. Many disputes can be resolved by taking a precautionary approach and by knowing the possibilities offered by the law and case-law. Some successful family businesses remain so, owned and managed mainly by family members, even over several generations, or family members may decide to sell and exit the business. In this case, family members are faced with the issues of designing an exit strategy and maximising the wealth on leaving the family business and safely reinvesting the sale proceeds, as well as the challenges of an efficient sale process.
As already mentioned, in addition to the specific topics of governance and management of family businesses, other topics concerning economic entities, in particular companies, are also relevant. These topics include, inter alia, the areas of status regulation, taxation, employment relations, protection and management of confidential and personal data, civil and criminal liability of members of the management and supervisory bodies and creditor protection.
As family businesses are an important factor in economic development, it is important that their operations are stable, transparent and secure, and that they have access to sources of finance to innovate, develop and grow their business. This series of contributions aims to support family businesses in regulating their operations and harnessing the potential of the capital and labour markets.
In cooperation with Uradni list RS, we are organising expert contributions, lectures and workshops on topical issues related to the management and governance of family businesses, including complex and less complex legal issues related to the financing of family businesses, the regulation of family relationships, tax aspects, the regulation of relationships with employees and investors, and corporate governance.
Some of the topics will also be of interest to other business entities, as all business entities in Slovenia, regardless of their legal organisation and shareholder structure, are confronted with them. The current business and regulatory environment offers many opportunities and challenges both in legal and other areas relevant to the operation of economic entities.
→ Find out more at the free seminar “How to better manage family businesses” on 20 October 2022.
1 Report on Family Businesses in Europe (2015), Brussel, Committee on Industry, Research and Energy; https://www.europarl.europa.eu/doceo/document/TA-8-2015-0290_EN.pdf; Mandl, Irene (2008). Overview of Family Business Relevant Issues, Final Report, Austrian Institute for SME Research, Vienna: https://ec.europa.eu/docsroom/documents/10389/attachments/1/translations/en/renditions/native; Duh, Mojca, and Belak, Jernej (2010). Creating Conditions for the Establishment, Development and Succession of Family Businesses, Faculty of Economics and Business, University of Maribor.
2 Ibid.
3 Antončič, Boštjan, Auer Antončič, Jasna, and Juričič, Denis (2015). Family entrepreneurship: characteristics in Slovenia, Ernst & Young: https://assets.ey.com/content/dam/ey-sites/ey-com/sl_si/topics/assurance/family-business-survey/ey-family-business-characteristics-in-slovenia-si-20200103.pdf.
4 Thus, the company as a sociological phenomenon is defined by Ivanjko in Ivanjko, Šime, Kocbek, Marijan, and Prelič, Saša (2009). Korporacijsko pravo, GV Založba.
5 Ibid.
6 Economic theories of the firm emphasise that part of the firm are special opportunities and chances for business success, which the manager should not appropriate and exploit for personal gain. The interests of the company are also not identical to those of the majority shareholder, but include the interests of various stakeholders: employees, customers, managers, creditors, etc.
7 Neubauer, Fred, and Lank, Alden (1998). The Family Business: It’s governance for Sustainability, London, Macmillan.
8 Mandl, Irene (2008). Kunstič, Karmen (2009). Family Businesses – Advantage or Disadvantage?, Faculty of Management, Koper; Duh, Mojca (2008). Development Characteristics of Slovenian Family Businesses and Support for their Development Efforts, Faculty of Economics and Business, University of Maribor.
9 Freeman, Edward R. (1984). Strategic management: A Stakeholder Approach, Boston, Pitman; Freeman, Edward R., and Reed, David L. (1983). Stockholders and Stakeholders: A new Perspective on Corporate Governance, California Management Review 9(1): 95-97; Donaldson, Thomas, in Preston, Lee E. (1995). The Stakeholder Theory of Corporation: Concepts, Evidence, and Implications, Academy of Management Review 20(1): 65-91; Friedman, Andrew L., in Miles, Samantha (2009). Stakeholders. Theory and Practice, Oxford, Oxford University Press.
10 Mandl, Irene (2008).
