The Best Business Model For Family Businesses

The success of a business heavily relies on the type of business model adopted at the initial stages. Failure to create a clear business model may be the ultimate recipe for future ownership disagreements that may be difficult to resolve.

Various studies indicate that family-owned businesses tend to be more successful than non-family owned businesses. The Boston consulting group proves that most family-owned firms have a more robust long-term financial performance than their counterparts.

On the contrary, a report published by Forbes indicates that family conflict during succession remains top on the list of factors contributing to family businesses' collapse. This is attributed to a proper management model leading to succession battles.

To avert potential crises related to ownership struggles, it is essential to provide a clear business model. The question then begs, what are the most suitable business models family-run businesses can adopt? This article will focus on a few basic ownership models, which are the best for any family business.

What Is a Business Model?

A business model is the structure of a company. It's primary purposes;

• Allows the business to figure out the business concept,
• Shows how the service or product will reach potential prospects,
• Breaks down how the company will have a competitive edge over the competition, and
• Highlights anticipated cost of operation.

In a nutshell, a business model shows how your business transfers value to the customer and is part of the business strategy.

Types of Business Models

Here are some business models that work well for a family run business.

Owner Operated

The owner-operator model is great for family businesses for many reasons. Under this context, the ownership of the company rests with either a couple or the founder. One person retains total control of a business entity for several years.

To ensure this type of business model succeeds, a family needs to decide on a family member who is likely to succeed the owner should anything happen. This provides a strong united basis under which business ownership is smoothly transferred from one generation to another.

Partnership

Partnerships work well in the family business set-up. Proceeds from the company are shared among partners. Regardless of the number of family members engaged in the partnership, they can put resources together to expand the business and share revenue based on their contributions.

A considerable number of successful limited companies are run through family partnerships. Under this context, siblings and other family members put their resources together to expand operations. Though the business model can be passed on from one generation to another, a clear transition plan is essential to avoid family battles that may come up during the process. In most cases, the number of shares contributed by every partner should be clear to prevent wrangles related to revenue sharing.

To address disagreements that may erupt among partners in the future, details regarding shareholding and profit-sharing should have legal backing.

Distributed Model

The distributed model is great when it comes to resolving conflicts related to inheritance during the transition. To avert disagreement, business ownership is distributed evenly among the family members regardless of whether they work in the company or not. The distribution model is a common trend in family-owned businesses.

Under the distributed model business ownership, all the assets are locked up under the same company. This model's unique aspect is that parents prefer sharing proceeds from a family company equally among their children. This model's main challenge is that family members managing the business will often disagree about resource distribution if not handled legally and professionally. The model, however, is effective in addressing transition-related challenges.

Nested Model

The nested model is another ideal family business ownership strategy. In this case, family members agree to own various assets jointly with an option of owning other assets separately. The business is nested since smaller family businesses are incorporated inside larger family enterprises.

The family runs the entire business and shares revenue with other branches in the form of dividends. This model is perfect since it reduces friction with the other entities under it. It is good for healthy competition and harnessing different strengths among the members of the family. The greatest challenge facing this business model is that it meets the risk of being underfunded, especially if the investments it is nesting are small.

The Public Model

The public model family business arrangement is where a family business operates as a public company while still being privately owned. In this model, the original owners have limited control of the business since it allows other professionals to manage and run the company.

Typically, the company allows the trading of outside shares. The model is ideal in salvaging a company that may be on the verge of financial collapse or insolvency. It works perfectly since the business will get more resources to scale up from the public sale of its shares.

There's no clear structure under which the business can move from one model to another. On the flip side, the transition to various ownership models requires considering several factors such as family relationships, legal provisions, and other governance policies.

Conclusion

Choosing the most suitable business ownership model helps avert ownership wrangles that may threaten a company's survival. Protracted legal battles, lack of a clear succession plan, and proper legal framework to guide ownership of family businesses have been attributed to most family businesses' failure.

Ideally, changing to other business ownership models may be challenging due to various legal implications and costs that may be incurred. Otherwise, identifying an appropriate business ownership model is ideal in unlocking ownership challenges that usually face family businesses.

In general, a company's profitability and sustainability across generations are determined by how existing owners and family members handle the transition. Therefore it is necessary to adopt the most appropriate business ownership model that serves all parties accordingly to avert a crisis.