Family Business Ownership Models

Many are unaware that Family Business Ownership requires a set of ownership choices and the failure to understand them may cripple the business, sometimes even resulting in buyouts or sales which nobody
really wants.

One must understand that there are different ways of owning a family business. Although there are hybrids most Family Business adopt one of the five models of ownership: Owner / Operator, Partnership, Distributed, Nested and Public. One of the most important decisions is to decide on the model that suits your family business and adopt it flawlessly.

It is also essential to note that a particular model, however much it may suit you now, may require a revamp especially during the time of transition. Holding onto the model that worked beautifully in the previous generation may threaten or even kill the business in the next generation by stalling growth and opportunities.

A period of tremendous conflict in the family business can be effectively remedied by adopting an ownership model differing from what is being presently followed.

  • Owner / Operator Model keeps the ownership control in one person and it is the simplest model that replicates the role of a founder. Families need to find a means for deciding who gets to be the
    owner-successor that is perceived to be fair and holds good across many generations.
  • In the Partnership Model, only leaders in the business can be owners and benefit financially from it. This will work well only when all are contributing more or less equally to the success of the business.
  • In the case of Distributed Model ownership is passed down to most or all descendants whether or not they work in the business. This is the default model followed by most family businesses where parents usually want their children to inherit equally.
  • Nested Model is where various family branches agree to own some assets jointly and some others privately. This model will work well when family runs the core business as a profit- making operation and distributes relatively large dividends to the various branches which then use the funds to create their own business portfolios.
  • The last option is the Public Model where at least a portion of the shares are publicly traded or where a family behaves like a public company even though it is privately held. This model works well when there are too many owners, dispersed or disinterested to be actively engaged in decision making.

Owners can move from one model to another and there is no natural progression from Owner / Operator model to the Public model. However moving from one model and adopting another requires lot of changes in governance, legal structure and family relationships. Even though it is not an easy process it is better to adopt a model that suits the family's requirements to save the business from getting stuck.

 

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