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They are defined as having a determining influence on the progress of a company.

This type of company is characterised by this influence and not its size. Between 70% and 85% of all businesses can be categorised as family businesses, depending on the definition. With an estimated 3.38 million small and medium-sized businesses in Germany (as of 2003), this encompasses well over two million family businesses of that size.

This considerable number makes it clear that family businesses – in which either one member, several members of differing degrees of relationship or even several families collectively own a company – are in fact the much-vaunted backbone of the German economy.

This is very significant not only to the companies but also to the families. What actually constitutes a family business? There is no clear definition, which explains the fluctuating estimates. Some researchers approach it by defining quantifiable structures, such as assuming an ownership share of at least 50%. But a much more promising definition assumes that a company is owned by a family or a group of families that exercise a decisive influence on what happens to the business. They must be in a position to shape the crucial decisions of the business and to give the business its character, both internally and externally. This definition allows us to consider everything from the structures to the numerous, complex dynamics in family businesses. It guides our attention to the way we define roles, interaction processes, and the relational dialectics that families and businesses deal with and that make up ‘familyness’ – a particular set of resources and risks that the family and company have.

It is this peculiarity that is hard to get a handle on if we reduce family businesses to particular definitions of size, which is why this thesis comes before all the others. Family businesses of different sizes, from artisan businesses to multinationals, are the products of the often productive (yet sometimes destructive) synergy of business and family logic. The conflicting set of priorities this produces has two poles, which can be characterised as follows: In families, the focus is on the individual person with all their strengths and weaknesses. They are valued simply because they belong to the family. Fairness in this context is understood mainly in terms of equality of claims, rights, duties and expectations. Membership of a family is for life because you cannot hand in your notice on blood ties. Giving and taking are often asymmetrical (for example, between parents and children), and immediate or medium-term rewards are not expected for work done.

Indeed, the profit obtained from these relationships is more emotional and non-material than it is material. Communication is primarily verbal and less formalised. In a business, however, the primary focus is on the development, production and sale of products and/or services. People are only important in terms of objectively justifiable functions they fulfil for the organisation. In principle, they have to be replaceable in the roles they fill, which means they must be terminable. Their value is derived from the work they do, which is compensated directly and materially through wages and salaries. Fairness here is defined as a balance between performance and material reward. Communication is formalised and mostly fixed in writing – contracts are sealed by a signature on paper, not by a shake of the hand. These two very different sets of logical working principles belonging to the family and the company influence each other reciprocally, thus shaping the particular properties of a family business.

It is precisely this linking of different logics that leads to shareholder disputes and disruption in the business family, fuelling generational conflict, for instance. At the same time, this linkage can give a family business its special competitive edge over a company led by the principle of shareholder value, since the family that owns the business often imparts values that can give the business meaning beyond that of short-term financial profit expectations and promises. Family businesses don’t consider the market and values as alternatives. They refer to both. From this viewpoint, the aim is not to quickly and completely decouple the family and company, as is often demanded, but to promote that positive interaction between both systems in order to achieve the synergy effects and concomitant competitive advantages.

Because the family is the main resource serving the company, trust, commitment and loyalty give family businesses enormous competitive advantages. When in doubt, the company comes first.

Family businesses are more successful than non-family businesses in many respects. The co-evolution of the company and the family focuses on securing their mutual livelihoods for the long term and over generations. The proprietor family often views the business as a central, overarching life theme that, beyond securing a livelihood, represents the challenge of repeatedly reorganising themselves and finding a shared meaning – a ‘consensus’. This constantly requires the family to be actively or passively involved in the business. In turn, the business can make use of the family in many different ways.

The unique configuration of resources and capabilities linking business, family and ownership provides the ‘family factor’. Collectively, family factors are called ‘familyness’.11 Family factors can be found in a very wide range of resources, such as

Values:

Familial values like trust, commitment and loyalty can represent competitive advantages for the company, such as strong personal relationships with customers and suppliers, a solid orientation towards customers and high levels of motivation and commitment among the workforce.

Decisions:

Much shorter decision-making channels and decision-making structures, which are often verbal, enable decisions to be made flexibly and quickly, reducing transaction costs and, combined with the trust factor, agency costs as well.

Human capital:

The family can provide a pool of special knowledge and aptitudes exclusively available to the company.

Financial strategies:

A conservative monetary policy encourages long-term financial strategies. The yield expectations of family shareholders are generally well below what is usual in the shareholder value mindset, and family members are more willing to put up additional private assets in the event of a crisis.

Networks:

Families’ longevity and ability to inspire commitment are also revealed in the quality of the networks they develop, which are often cordial and therefore sustainable.

Branding:

The name of the company, which is the same as the family name, is often a powerful symbol of identification, both for the product and the workforce. Belonging is valued in itself.

If the far-reaching, complex linkage of business, family and ownership – and the problems and conflicts it entails – can be managed successfully, then family businesses have a decisive advantage over non-family ones. It is, therefore, unsurprising that the 30 largest family businesses achieved almost twice the turnover growth of the 30 DAX companies in the last financial year (+9.7% compared with +5.4%). Employment growth figures differ even more dramatically. Large family businesses took on 9.2% more people, compared with their DAX equivalents (1.6%). It is the family that provides the company with the beneficial familyness factor, which can manifest in such things as people’s ability (including non-family members) to identify strongly with the company. But achieving these qualities requires special forms of management, since every family business sets its own particular priorities when it comes to balancing family and interests. Not nearly enough use has been made of the opportunity to regulate these reciprocal interests by means of a family constitution, which defines things like the role of family members by marriage and other people joining the family, family conferences and de-escalation arrangements in the event of family conflicts as well as formulating ethical principles.

Family disputes, loss of trust, broken commitments and feelings of betrayed loyalty can dramatically disrupt the business, and the company can fall victim to tribal wars. Belonging to the family and the business at the same time can result in conflicting priorities that are fraught with contradictions and vulnerabilities.

‘How conflict is managed is one of the key determinants of effective families and family businesses.’ Family businesses may have potential competitive advantages, but they are also more at risk than other types of businesses.

Familyness can be an obstacle as well as a benefit. The linkage between business, family and ownership produces conflicting priorities that can be described as paradoxical. A correct decision in the logic of one system can be wrong in the logic of another. This can apply in relation to conceptual pairings, such as fair for the family–right for the business; tradition –innovation; person-related–issue-related; and owner–shareholder. Contradictions like these make people vulnerable in the event of a conflict. Family businesses have to deal not only with different arenas and extents of conflict but also with different types of disputes. Bonds between family members are generally very strong, which is why disputes within a family system can escalate with such severity. The people involved can experience intense emotions if they feel let down in their loyalty, trust, sense of justice and, ultimately, their relationships. If a family dispute spills over into the business, then the company can fall victim to the family dispute. This can be especially pronounced when conflicts between sibling lines that persist through generations are not constructively addressed and escalate into tribal warfare.

Another area in which the family/business configuration can be vulnerable is company succession. Whether in internal (by a family member) or external company succession, a shortage of people willing to succeed in the business remains a controversial point. The latest research reveals that 150,000 jobs are endangered by difficult business successions in around 43,000 businesses in Germany. Many family businesses continue to find it challenging to regulate business succession favourably, despite the wide range of support on offer (such as founder networks). In general, older generations want to place their businesses in the hands of their offspring and not in the hands of others, but this seems to be happening less and less. One of the reasons may be that those involved see themselves confronting multiple paradoxes. These are emotive situations in which there are no clear solutions, and you can ‘only do the wrong thing’. For instance, if a father says that his son should follow the career path of his choosing and seek his own way while at the same time telling him how important it is to him personally not to be disappointed and that he sees in his son as the ideal successor, this can be experienced as a predicament that can be summed up as ‘You are free to choose the solution I want!’ But the opposite can also be an aspect of obstructive familyness if the owner, at an advanced age, cannot find a way to let go of the business and hand it over appropriately, leaving the next generation in a wearing, demoralising holding pattern.

In critical situations, especially ones without governance rules, the family and company are often confronted with two options: family first or business first. Studies on the longevity of family businesses show that the latter strategy is more sustainable. It provides absolute priority to the interests of the business over all others, such as when family membership is not the sole criterion for employing, rewarding and promoting family members. This is by no means about neglecting the family or forcing it out of the business, which is why the strategy of family business first is often pursued. Its purpose is to clarify the interests of the business, negotiate priorities and seek mutual alignment in dialogue with the family. This approach is intelligent because it does not seek to play the interests of one side off against the others. Instead, it is about deferring family interests with the knowledge that they themselves will benefit from this way of thinking in the long term.

Family businesses find it easier than publicly owned corporations to liberate themselves from the logic of short-term profit orientation, which is often damaging to the business. They can also diversify widely, which is something for which publicly owned enterprises suffer share price cuts despite the fact that it increases their long-term prospects of survival.

A publicly owned large corporation can hardly escape the short-term profit mindset of its shareholders, whereas family businesses find it easier to free themselves from the logic of shareholder value.

This alone does not make the business more successful, but it does open it up to a certain number of strategic options, such as when negotiating the dimension of time. What a family’s success boils down to is whether it continues to exist over generations. This attitude often characterises family businesses. They expect less short-term profits and more long-term, continuous growth, so investments made are less risky and more promising of security. In a family that holds the majority of a company’s shares, the criteria by which the success of entrepreneurial decisions is evaluated are deferred.

Family entrepreneurs tend to ask how much a decision will contribute to their long-term existence. This is how family businesses (provided the financial basis exists) can hold on for decades even if they only produce meagre profits for long periods. When the industry revives again, holding on can prove highly profitable. Because their thinking goes beyond single economic cycles, expertise that exists in the business is looked after. Consequently, a crisis may well serve to build up their market position instead of leading to their demise.

This long-term strategy often goes together with a strategy of diversification. Family businesses often position themselves broadly in the market and spread their risks in a very particular way through diversification. Intentional investment in multiple non-synergetic areas of business allows businesses to survive slumps in the industry. In the long term, the areas that produce profits tend to change. In family businesses, this generally means a greater likelihood of survival, unlike publicly owned businesses. There is another aspect that needs considering in this context: a family that is focused on building long-lasting relationships will employ people based on different factors. Because they are interested in retaining their personnel for many years, family businesses can secure themselves against loss of knowledge.

This means that variable experience and pure technical knowledge can be passed on to subsequent, upcoming managers who are internally promoted, providing an answer to the scarcity of manpower. It also prevents valuable staff from migrating to rival companies (see also Theses 6 and 7). By establishing a long-term outlook for the shareholders, the business liberates itself from the owners’ exaggerated yield expectations, which places it in a position to intelligently implement the strategies mentioned.

Family businesses are more cautious when it comes to taking on outside capital, and they are keener on financial independence. If they do need outside capital, they find it more difficult to generate than large corporations. They are also affected by the inheritance taxes that successors have to pay.

Financing represents a key aspect of corporate management. This is especially important to family businesses because in almost every single matter of finance, a potential investor’s desire for information clashes with the company’s desire for confidentiality.

Equity ratio statistics show that the average German company has a much lower equity ratio than those in other European countries and the USA. The core problem of small and medium-sized enterprises that are especially affected by this is not merely their relatively low equity ratio but also the dependency that goes with it.

If growth cannot be financed by cash flow alone, then family businesses have to manage the contradiction between entrepreneurial autonomy and dependency on investors. This contradiction has been resolved in two ways in the past: either through a trusted bank that finances growth and innovation or by treating investors carefully and intentionally relinquishing strong growth.

The capital requirements of Basel II, proposed and already enacted by banking regulatory authorities, and the uncertain market situation in recent years have caused many large banks to shy away from financing SMEs (businesses with less than €50 million annual turnover and fewer than 500 employees).

This initial overreaction, which many banks have since reversed, has caused lasting distrust in banks among many family businesses. They have, initially out of need, turned to new forms of finance, such as private equity. There are many options available in equity (such as investments), outside capital (such as bond issues) and mixed forms (‘mezzanine capital’).20 As mentioned, there are both opportunities and risks in this sector. Public discussion of this has been heavily influenced by the critical opinions of financial investors whose concerns are purely fiscal, who buy up family businesses using borrowed money and then saddle the companies they have bought with the debts. There is also an increasing number of more long-term-oriented investment companies pursuing stable value creation and placing value on successful collaboration over decades.

Moreover, family businesses are (still) affected by inheritance taxes, unlike non-family businesses. The 2007 inheritance tax reform is expected to yield considerable tax relief for family businesses. The accretion model announced in the coalition agreement, which envisages inheritance and capital transfer taxes on business assets being deferred over a period of ten years and reduced by a tenth for every year that the business continues to operate, aims especially to provide small and medium-sized family businesses with the opportunity to secure jobs and make new investments. The intention of this tax measure is to establish competitive equality between publicly owned and family businesses. The way this law is developed in its details will determine whether the gap will be successfully bridged.

They hold on (for longer) to their foundational myths, proven business principles, established customer and supplier relationships and, above all, their employees, which has a positive effect on the development of their stock of expertise and trust. However, this holding on can make it more difficult to respond flexibly to new demands.

Family businesses sometimes hold on to foundational myths and decision-making principles over several generations, which had been handed down and applied by the preceding generations. Business principles that have been passed down and proven are often inherited and successfully maintained by new generations. Existing customer and supplier relationships, for instance, may have grown in trust over many years.

This is a consequence of this type of company often being tied to one location for a long period. But because the ‘half-life of knowledge’ is constantly shrinking, family businesses, like others, are forced to deal with pressure from the market to innovate. Holding on to constant relationships is usually a competitive advantage in terms of developing and sustaining core entrepreneurial expertise, but it can be precisely that behaviour that becomes a problem in an increasingly dynamic business environment.

The key is to balance the charged relationship between continuity and reorientation. The long-term nature of a family business’s ties is also evident in its relationship with its workforce. They can trust in the foresight of family businesses to secure long-term jobs for them and are not subject to the constant fear of cost-cutting. Furthermore, the fact that in Germany, 70% of all employees and 80% of all trainees work at small and medium-sized businesses lends these considerations plenty of importance in society as a whole. However, there is a potential downside, as this behaviour can mean new employees are rarely brought into the company from outside, and fresh knowledge never finds its way into the family business.

If the family name is used as a brand, then it is recognisable and identifiable not only for people on the outside but also for the workforce. If the family conveys its values credibly through consistency of thought, speech and action and builds transparency towards everyone in the organisation, it receives a very special resource from its workforce in return – trust. Trust forms the foundation of a corporate culture. A long-term outlook is often linked to a close commitment to the region in which the family business is active, which, in turn, influences the corporate culture. ‘If you’re really rooted in that community, it’s going to have a big impact on the way you are.’ Regional commitment is demonstrated in the willingness to take responsibility for social and community affairs. People’s values prompt them to respond to acute social misfortunes and help to rectify them. They often demonstrate the same entrepreneurial energy that they do in their business: opportunities are recognised and taken. That is why family businesses have a particular kind of presence in the region they are from and where they are rooted.

Family entrepreneurs transfer familial relationship patterns to their management and workforce. The work they provide is more meaningful, and people identify more strongly with the company: ‘You’re part of the family!’ Such emotional dividends benefit the business and workforce alike.

A strong sense of loyalty, feelings of gratitude and love between family members can represent a vast resource for the business. Good family management is required to ensure that these values are used positively, established over generations and secured in the long term.

Part of this is recognising the difference a business can make to a family and organising the family as a business family. Close relations between family members in the nuclear family structure of a family business in its first or second generation are quite natural, but they become increasingly unlikely in the third generation and beyond. They have to be actively sustained and regularly revived, especially if the business is set up as a tribal organisation.

With every new generation, the ‘centrifugal force’ increases as each core family is newly founded. Commitment among a consortium of cousins is markedly less than ties between siblings. Care must be taken to ensure that despite this, even distant relatives develop a shared identity with the business family. It is especially important to ensure that a configuration does not emerge in which loyalty to the tribe is placed above loyalty to the business.

Successful multigeneration family businesses treat the extended family in a particular way by constantly reproducing new, small family structures and providing opportunities for contact and relationships at many different levels, thus preventing the deterioration of the sense of family. At the ownership level, this leads to a concentration of mutual interests rather than those of individual investors. Furthermore, intelligent governance rules prevent the blocking of decisions and the selling off of shareholder stakes. By maintaining a sense of family, the business produces new strength for innovation. Employees of family businesses who are not from the family often highly appreciate the sense of family and close commitment described above, but they can also negatively impact their career paths, especially if they prevent the employees’ advancement. This occurs when young family members and shareholders are shoehorned into leadership positions, regardless of competence. Appointing family members to the business has proven propitious only if they are at least as suitable as candidates from outside the family.

Family businesses are characterised by creative drive, the desire to build something lasting, orientation towards customers and a willingness to take risks. The smaller the business is, the more its progress will depend on the leadership aptitude, innovative strength and entrepreneurial foresight of a single person, with all the benefits and drawbacks that entails, such as short decision-making channels but major upheavals in the succession process and in the event of the sudden absence of the formative leadership personality.

The smaller a family business is, the more leadership, responsibility and aptitude, innovative strength and entrepreneurial foresight are concentrated in a single person.

The owner is the heart and soul of the company as well as its driving force, which is why, in many family businesses, a corporate culture that reflects the image of the pioneer in the founding era can persist. The individuals actively involved in a family business often identify very strongly with it, which often means they are more willing to put in the work and expand the business. Per aspera ad astra (‘through hardship to the stars’) can describe the fundamental maxim of a family business.

There are limits to people’s commitments in non-family businesses, whereas family members (as well as employees) who work together in family businesses are more willing to go beyond them. In traditionally led family businesses, the position of the businessman’s wife reveals how she plays a prominent role in balancing the inward and outward tendencies of the family and the company, thus safeguarding the sense of collectiveness, even in critical situations. Most family businesses recognise that the divergent logics of family and company require special attention.

In Germany, women may generally play a lesser role in corporate leadership than men, but they are highly successful in leadership positions in family businesses. Flat hierarchies in such companies facilitate short decision-making channels and eliminate time-consuming holding patterns. Customers appreciate this, and so do suppliers and employees. Yet the strong entrepreneurial orientation associated with a strong personality has a downside. When crises arise, it can become critical. All of the aforementioned benefits can turn into their opposite if, for example, the businessman is suddenly absent, whether through illness, accident or death; if they experience payment difficulties or the threat of insolvency; or if a succession process fails, leaving the company ‘headless’. A person who has shaped a business for many years can often lose, towards the end of their professional life, that sense of the market which has so long defined them. A company’s fate can be decided by whether its entrepreneurial authority has been concentrated too much and for too long in one central personality and whether the principles of entrepreneurial action have been consciously passed on and institutionalised.

Families guard their boundaries. Just as they are unwilling to allow outsiders into their private sphere, they also assume that business-related issues can be solved within the company. This explains their success to a large extent, but it is an attitude with risks and side effects, especially if outside advice can open up new opportunities.

Families draw boundaries and protect their privacy against the public, and in so doing, families that own family businesses often try to solve the problems that arise in the company within the family itself (see also Thesis 3).

The family and company zones are intertwined because family members and employees can be one and the same. A strategy within the family for how business problems are dealt with appropriately and how external advice can be obtained is one of the templates of a successful family business. But the family’s internal drive to solve its conflicts does not always fulfil its function as a protective mechanism. It is not uncommon for corporate decisions that should be made rationally to be put at risk by fiercely emotional disputes that can push people to their limits.

Given the aforementioned conflicting priorities between family and company, escalating disputes of this kind are not uncommon. Conflicts can arise within the family between branches of the family, between successors and relinquishers, between major and minor shareholders and between owners and outside managers, and they can cause intense feelings and financial damage.

It is not for nothing that family disputes in family businesses have been referred to as the ‘biggest destroyer of value in the German economy’. Family businesses often procrastinate before seeking support, despite dramatic escalations and shareholder conflicts that can drag on for years. ‘It’s nobody else’s business what goes on among us.’ Management and banking advice is met with reserve. Weak signals are ignored, crises intensify and even dangerous shifts, such as a lack of liquidity, can be ignored, as an analysis of numerous family business insolvencies shows. Appearances are kept up on the outside, while the crisis becomes all-consuming within the family. Once a crisis has manifested, the balance between familial and business interests is lost. Old conflicts emerge, and accusations are levelled about who is responsible. Events can spiral and become difficult to stop internally. Shareholder conflicts hinder the progress of the business, and tense business circumstances also aggravate the family.

In the worst case, both the business and the family can go under. If the situation becomes fraught, an insolvency crisis can sometimes be averted by recourse to networks of friends and by the family’s willingness to sacrifice – in which case, familyness can prove to be a lifeline. Despite this, many family businesses still tend to draw too firm a boundary around themselves and the business and to seek support too late. This is a fundamental aspect of this form of business. Notwithstanding all the criticism of their resistance to advice, though, many family businesses have become successful precisely because they have not allowed themselves to be advised and because they have not followed the recommendations of consultants and stubbornly pursued their own line instead. This strengthens their historical resolve to adopt a critical attitude towards external advisors.

Family businesses are more competitive and durable. They are models of success, provided they remain in a position to manage the paradoxes that come from the linkage of family and company. It is essential to find a balance so that the interests of neither the family nor the business are served unilaterally. If this balance is successfully struck, then the unique resources of this form of business are brought to bear fully.

The success of family businesses and their longevity seem at first to contradict all the expectations of traditional business management theory, which proposes that a family’s involvement in business interests can only cause confusion and therefore threatens business activities.

Yet this unorthodox approach is one that precisely characterises family businesses and determines their success or failure. Family businesses are successful if they succeed in managing particular contradictions. We have already mentioned the term ‘paradox’ as a particular form of contradiction. Paradoxes are contradictory behavioural expectations that arise because members of a family business are always members of the family and the business at the same time. These two systems are not always clearly distinct; on the contrary, it is often unclear to whom somebody is speaking as and who one happens to be at any given time: father or businessman, daughter or successor. Simultaneous membership in the family and the company gives rise to certain contradictions, since ‘as social systems, family and businesses could hardly be more different’. One contradiction lies in the principle of equality, known as the ‘equitability paradox’. In the logic of a family, all family members should be treated as equally and fairly as possible, even though everyone knows it will never be entirely possible. While equality is the guiding theme of fairness in a family, the logic of a business paints an entirely different picture.

The focus here is not on equality but on expertise, performance and responsibility. According to family logic, it is only fair for every family member to be given a position in the business, whereas in business logic, leadership succession is all about selecting the best candidate according to their performance, thus securing the continuity of the company. This is where the importance of careful paradox management becomes clear – the conflict between these two logics must be recognised and endured, and a solution that is compatible with business and family alike should be found. The paradoxes cannot be eliminated, but they can be defused through understanding. Benefits to the business and the family can be gained through active family management, seeking a method of diffusing paradoxes, identifying taboos and confronting conflicts and by the entrepreneur analysing their own anxieties, wishes and aims. Multigeneration family businesses that survive the critical third generation by transferring certain decision-making patterns and behavioural rituals to subsequent generations have demonstrated this successfully. They show that it is possible to constructively steer the conflicting priorities of family and company, thus transforming this distinctive form of business into a fundamental source of strength for many generations to come. Predicting whether a family business will succeed in the long term is approximate at best, but there are certain indicators of the route to success. For example, family businesses have to subsume their own family and owner interests beneath the company’s need to survive. The principle of family business first applies.

Furthermore, professional ownership should be practised, which means the proprietor family needs to be very consciously managed, as does the organisation itself. A high level of identification with the company can be achieved if all the family members and shareholders are provided with the experience of being accepted members of the proprietor family. One way of achieving this is to create frequent opportunities for the family to gather. Achieving lasting success requires leadership that subscribes by its authority to a written and unwritten code of conduct. Ownership disputes and the associated legal conflicts need to be prevented by using established conflict solution mechanisms accepted by everyone.

Family businesses are neither out of date nor guaranteed success models. They have a Janus-faced character expressed in familyness, which can help but also hinder. Because these businesses are so widespread and because they perform so differently from publicly owned companies, the academic establishment, including the Witten Institute for Family Business (WIFU), must embrace the challenge of continuing to closely investigate the particular characteristics of this form of business and living. Special attention should be paid to the business family and its relationship with the business (and vice versa). A key premise is to consider the family as a potential resource for the business, not a burden to be jettisoned as soon as possible. The question, then, is how to organise such resources – familyness as a collective expression of family factors – so that they are a continuous reserve for the company. This requires a carefully planned and executed family strategy to sustain the family business across generations as a business and familial form of organisation.

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