# Family Business Concept Card: [Your name, course or family enterprise, and date] > An elective-level concept card for family enterprise: the three-circle model of family, ownership and business, > how family firms change as ownership passes from a founder to siblings and then cousins, what the research says > about family control and performance, how management and ownership succession are planned, and which governance > bodies (family assembly, family council, family constitution, board of directors, shareholder agreement) keep the > family and the business healthy. It is for MBA students in a family business, entrepreneurship or governance > elective, next-generation family members, and advisers to family firms. Worked example A follows a third-generation > fictional manufacturer, Pellworth Tiles, through dividend pressure and the buy-out of one family branch; Worked > example B is a half-solved CEO selection; Exercise C changes the buy-out terms and asks for a governance design. > Source basis: Tagiuri and Davis (1996), Gersick, Davis, Hampton and Lansberg (1997), Chua, Chrisman and Sharma > (1999), Schulze, Lubatkin, Dino and Buchholtz (2001), Anderson and Reeb (2003), Villalonga and Amit (2006), > Perez-Gonzalez (2006), Bennedsen, Nielsen, Perez-Gonzalez and Wolfenzon (2007) and Gomez-Mejia et al. (2007), > written up in original words with fictional numbers. Replace every [bracketed] value and every row marked > *Example*. This is a learning aid, not legal, tax or financial advice; check the current official texts and a > qualified professional. ## Document control | Field | Value | |---|---| | Learner | [Your name] | | Course or family enterprise | [Family business elective, family firm name] | | Generation in control | [First, second, third, later] | | Classification | [Confidential to the family, course use only] | | Reviewed by | [Learning team member, teaching assistant, family adviser] | | Version | [0.1] | | Last updated | YYYY-MM-DD | ## Contents - [When to use it](#when-to-use-it) - [The idea in plain language](#the-idea-in-plain-language) - [Formulas and notation](#formulas-and-notation) - [Assumptions and limits](#assumptions-and-limits) - [Governance bodies and succession process](#governance-bodies-and-succession-process) - [Worked example A (fully solved): Pellworth Tiles in the third generation](#worked-example-a-fully-solved-pellworth-tiles-in-the-third-generation) - [Worked example B (half solved): choosing the next CEO](#worked-example-b-half-solved-choosing-the-next-ceo) - [Exercise C (unsolved): new buy-out terms and a governance design](#exercise-c-unsolved-new-buy-out-terms-and-a-governance-design) - [Connections to other cards](#connections-to-other-cards) - [Common mistakes and misconceptions](#common-mistakes-and-misconceptions) - [Self-test questions](#self-test-questions) - [My notes and next steps](#my-notes-and-next-steps) - [Sources and further reading](#sources-and-further-reading) - [Answer key](#answer-key) ## When to use it Use this card when: - you study or advise a firm in which one family controls ownership, management or both; - a founder or a generation is preparing to hand over leadership, ownership or both; - family owners disagree about dividends, reinvestment, family employment or a sale; - the number of family owners is about to grow (sibling partnership to cousin consortium) and informal rules no longer work; - a case asks whether family control helps or hurts performance, or why a family firm turns down a profitable but risky project; - you are a next-generation family member deciding whether and how to join the business. Do not use it to give tax or legal answers: succession and inheritance rules differ by country and change often. The card gives the questions to ask and the dated examples to check, not the answers. ## The idea in plain language Tagiuri and Davis (1996, first circulated as a Harvard Business School working paper in 1982) described the family firm as the overlap of three systems: the family, the ownership group and the business. Each person sits in one of seven positions: family only, owner only, employee only, family and owner, family and employee, owner and employee, or all three. A family member who works in the firm and owns no shares sees a dividend as money taken from the business; an owner who does not work there sees it as the only return on the family's wealth. Both are right from their position. The authors called the special attributes of family firms "bivalent": shared identity, lifelong relationships and private language can be a source of advantage and a source of conflict at the same time. Lansberg (1983) showed how the overlap of institutions makes ordinary decisions, such as hiring or paying a family member, hard: family norms favour need and equality, business norms favour merit and contribution. Gersick, Davis, Hampton and Lansberg (1997) added time. Ownership moves through stages: a controlling owner, a sibling partnership and a cousin consortium. The family moves through its own life cycle (a young business family, entering the business, working together, passing the baton), and the business moves from start-up through expansion to maturity. Many crises happen when two of these dimensions shift at once, for example when ownership passes to cousins while the business needs heavy reinvestment. Researchers have long argued about what counts as a family business. Chua, Chrisman and Sharma (1999) proposed a definition based on behaviour: a business governed or managed with the intention of pursuing a vision held by a family across generations. Astrachan, Klein and Smyrnios (2002) offered a scale of family influence through power, experience and culture, rather than a yes or no label. Does family control help? The evidence is mixed and depends on the role of the family. Anderson and Reeb (2003) found that founding-family firms in the S&P 500 performed at least as well as non-family firms. Villalonga and Amit (2006) found that family ownership creates value mainly when the founder is still chief executive or chairman, and that descendant chief executives are associated with lower value. Perez-Gonzalez (2006) and Bennedsen, Nielsen, Perez-Gonzalez and Wolfenzon (2007) studied successions and found that handing the chief executive role to a family heir is, on average, followed by weaker performance than appointing an outsider. Schulze, Lubatkin, Dino and Buchholtz (2001) argued that family firms have their own agency costs, because parental altruism makes it hard to monitor or discipline family employees. Gomez-Mejia and co-authors (2007) introduced socioemotional wealth: families value control, identity and legacy as well as money, and may accept lower financial returns or take some risks to keep control while avoiding others that would dilute it. The managerial lesson is not that family firms are good or bad. It is that each family must decide deliberately which roles the family keeps (owner, board member, manager), by what rules, and with what governance, and that the decision must be revisited as the family grows. ## Formulas and notation Ownership per head when a stake $s$ passes equally to $k$ heirs: $$ s_{heir} = \frac{s}{k} $$ Dividend per owner with net income $NI$, payout ratio $d$ and $N$ owners of equal stakes: $$ \text{Div per owner} = \frac{d \, NI}{N} $$ Price of a minority stake $s$ in a buy-out with equity value $E$ and an agreed discount for lack of marketability $\delta$: $$ P = s \, E \, (1 - \delta) $$ Annual payment on a vendor note of principal $L$, rate $r$ and $n$ years (Excel `=PMT(r,n,-L)`): $$ PMT = L \, \frac{r}{1 - (1+r)^{-n}} $$ | Symbol | Meaning | Unit | |---|---|---| | $s$ | Ownership stake | share of equity | | $k$ | Number of heirs receiving a stake | count | | $NI$, $d$ | Net income and payout ratio | USD m, share | | $N$ | Number of owners | count | | $E$ | Equity value of the company | USD m | | $\delta$ | Discount for lack of marketability, as set in the shareholder agreement | share | | $L$, $r$, $n$ | Vendor note principal, interest rate, term | USD m, share, years | ## Assumptions and limits - **Equal splits within each branch.** Many families pass shares unequally, through trusts or holding companies, or with voting and non-voting classes. Replace the simple split with the actual register. - **Valuation by multiple.** Worked example A values the business at a multiple of EBITDA. A real buy-out uses an independent valuation and the method in the shareholder agreement; see mba/mba-dcf-valuation-card. - **The discount is contractual.** A discount for lack of marketability applied to a family branch is a negotiated term, not a law of nature; courts and tax authorities may treat it differently. - **No taxes on the transaction.** Buy-outs, gifts and inheritances can trigger income, capital gains, gift or inheritance taxes. Dated examples follow; none of them is advice. - **Dated tax examples (checked 2026-10-30).** United States: the Internal Revenue Service states that the federal estate tax basic exclusion amount is USD 15,000,000 for 2026, set by Public Law 119-21 signed on 4 July 2025, and that the annual gift exclusion for 2026 is USD 19,000 per recipient (irs.gov, "What's new, estate and gift tax", page reviewed 23 July 2026). United Kingdom: from 6 April 2026, HM Revenue and Customs gives 100% agricultural or business property relief only on the first GBP 2.5 million of combined qualifying property in an estate, with 50% relief above it, and any unused part of the allowance can be transferred to a surviving spouse or civil partner (gov.uk, "Changes to agricultural property relief and business property relief", first published 26 November 2025, updated 3 March 2026; the allowance was raised from the GBP 1 million first announced in October 2024). European Union: there is no EU-wide inheritance tax; each member state sets its own rules and reliefs for family businesses. Check the current official text and a qualified adviser. ## Governance bodies and succession process | Body or document | Circle it serves | Typical members | Main decisions | |---|---|---|---| | Family assembly | Family | All adult family members, sometimes spouses | Shared values, education, communication, electing the family council | | Family council | Family | Elected representatives of branches or generations | Family policies, employment rules, conflict handling, next-generation development | | Family constitution (charter) | Family and ownership | Approved by the assembly | Mission, values, roles, rules for joining, leaving, owning and governing | | Shareholder agreement | Ownership | All shareholders | Transfer restrictions, pre-emption, valuation method, buy-sell terms, dividend policy | | Board of directors | Business, on behalf of owners | Family and independent directors | Strategy, chief executive appointment and pay, risk, audit | | Management | Business | Family and non-family executives | Running the company within board-approved strategy | | Family office (optional) | Ownership and family | Staff serving the family | Wealth outside the business, administration, philanthropy | The flowchart shows a succession process that separates the management question (who leads) from the ownership question (who owns), which families often merge to their cost. ```mermaid flowchart TD A["Family council agrees principles in the constitution"] --> B["Board defines CEO role, criteria and timeline"] B --> C["Development of internal family and non-family candidates"] B --> D["External search in parallel"] C --> E["Board evaluates candidates on agreed criteria"] D --> E E --> F["Board appoints CEO and transition plan"] A --> G["Owners agree ownership transfer plan with advisers"] G --> H["Shareholder agreement updated: transfers, valuation, buy-sell"] F --> I["Outgoing leader moves to chair, board or family role, or steps out"] H --> I I --> J["Review after 12 and 24 months"] ``` ## Worked example A (fully solved): Pellworth Tiles in the third generation *Example* inputs: Pellworth Tiles makes ceramic floor and wall tiles. The founder, Arthur Pellworth, left the company in equal thirds to his three children: Helen, who was chief executive for 20 years and is retiring; David, who runs the export business; and Margaret, who has never worked in the firm. EBITDA is USD 12m, net income USD 6m, net debt USD 14m; comparable private manufacturers change hands at about 7.0x EBITDA. The board pays out 40% of net income as dividends. Shares pass equally within each branch: Helen has 2 children, David 3, Margaret 4. The family expects 22 owners in the fourth generation. ### Step 1: ownership and dividends per owner | Generation and branch | Owners | Stake per owner | Dividend per owner (USD) | |---|---|---|---| | Second generation (each sibling) | 3 | 33.33% | 800,000 | | Third generation, Helen's branch | 2 | 16.67% | 400,000 | | Third generation, David's branch | 3 | 11.11% | 266,667 | | Third generation, Margaret's branch | 4 | 8.33% | 200,000 | | Third generation average | 9 | 11.11% | 266,667 | | Fourth generation average (projected) | 22 | 4.55% | 109,091 | Total dividend: 40% x 6.0m = USD 2.4m (`=0.4*6`). With the same profit, the average owner's dividend falls by two thirds from the second to the third generation and by almost 60% again in the fourth. This is the arithmetic behind the classic cousin-consortium tension: more owners, each with a smaller stake, fewer of them working in the business, and stronger demands for either higher payouts or a way out. ### Step 2: value of a branch and the buy-out offer Margaret's four children want liquidity. The shareholder agreement gives the company a right to buy a departing branch's shares at an independent valuation less a 20% discount for lack of marketability. | Item | Computation | USD m | |---|---|---| | Enterprise value | 7.0 x 12.0 | 84.00 | | Equity value | 84.00 - 14.00 | 70.00 | | Margaret's branch, pro rata | 70.00 / 3 | 23.33 | | Price after 20% discount | 23.33 x 0.80 | 18.67 | | Paid in cash at closing | 18.67 - 14.00 | 4.67 | | Vendor note (5 years, 6%, level payments) | | 14.00 | | Annual note payment | `=PMT(6%,5,-14)` | 3.32 | ### Step 3: the note schedule (USD m) | Year | Interest | Principal | Closing balance | |---|---|---|---| | 1 | 0.84 | 2.48 | 11.52 | | 2 | 0.69 | 2.63 | 8.88 | | 3 | 0.53 | 2.79 | 6.09 | | 4 | 0.37 | 2.96 | 3.14 | | 5 | 0.19 | 3.14 | 0.00 | ### Step 4: effects on the company and the remaining owners | Effect | Computation | Result | |---|---|---| | Net debt including the note after closing | 14.00 + 4.67 + 14.00 | USD 32.67m, 2.72x EBITDA | | Equity value after the buy-out | 70.00 - 18.67 | USD 51.33m | | Value per remaining branch (50% each) | 51.33 / 2 | USD 25.67m | | Gain per remaining branch | 25.67 - 23.33 | USD 2.33m | | Year 1 net income after note interest (25% tax) | 6.00 - 0.84 x 0.75 | USD 5.37m | | Year 1 dividend at 40%, per branch | 0.40 x 5.37 / 2 | USD 1.07m | The remaining branches gain USD 2.33m each in value: the discount transfers value from the leaving branch to those who stay. That is why the discount must be agreed in advance, when nobody knows which branch will leave; set at the moment of exit it looks like expropriation. Leverage rises from 1.17x to 2.72x EBITDA, which constrains reinvestment for five years. The judgement to state: the buy-out keeps the firm in family hands and gives Margaret's branch a fair exit under rules it signed, but the company must be able to carry the note in a downturn; the board, not the family council, should test that. ```vega-lite { "$schema": "https://vega.github.io/schema/vega-lite/v5.json", "description": "Pellworth Tiles: average dividend per owner (USD thousand) by generation at a constant 2.4m payout", "width": 360, "height": 220, "data": { "values": [ {"generation": "G2 (3 owners)", "dividend": 800.0}, {"generation": "G3 (9 owners)", "dividend": 266.7}, {"generation": "G4 (22 owners)", "dividend": 109.1} ] }, "mark": "bar", "encoding": { "x": {"field": "generation", "type": "nominal", "title": "Generation", "sort": null}, "y": {"field": "dividend", "type": "quantitative", "title": "Average dividend per owner (USD thousand)"} } } ``` ## Worked example B (half solved): choosing the next CEO The board of Pellworth Tiles agreed the criteria and weights before seeing any candidate. Scores run from 1 (weak) to 5 (strong), based on interviews, references and a case exercise. | Criterion | Weight | Nadia (third generation, Helen's branch) | Lucas (third generation, David's branch) | External candidate | |---|---|---|---|---| | Strategic judgement | 30% | 4 | 3 | 4 | | Operating track record | 25% | 3 | 4 | 5 | | Trust of family and employees | 20% | 5 | 3 | 2 | | External credibility (lenders, customers) | 15% | 3 | 2 | 5 | | Values fit | 10% | 5 | 4 | 3 | | Weighted score | 100% | 3.90 (`=SUMPRODUCT(weights,scores)`) | [ ] | [ ] | Questions: which candidates are tied, and what would break the tie? [ ] How would you design the transition if the board chose the external candidate, given the evidence in Villalonga and Amit (2006) and Bennedsen et al. (2007)? [ ] What role could Nadia take? [ ] ## Exercise C (unsolved): new buy-out terms and a governance design 1. **Different terms.** Margaret's branch negotiates the buy-out down to a 30% discount but asks for a 7% rate on the note; the cash at closing stays at USD 4.67m. Compute the price, the note, the annual payment, the value per remaining branch and how much the leaving branch gives up against pro rata value. 2. **Governance design.** Propose the governance bodies Pellworth Tiles needs for the cousin consortium: who sits on each, how often it meets, and which three policies the family constitution must contain first. 3. **Family employment.** Write a family employment policy in five rules that would let both Nadia and a cousin with no business experience understand their options. ## Connections to other cards | Card or template | Connection | |---|---| | mba/mba-corporate-governance-card | Board composition, independent directors and the role of controlling shareholders | | mba/mba-dcf-valuation-card, mba/mba-capital-structure-card | Valuing a branch's stake and the debt a buy-out adds | | mba/mba-deal-structuring-card | Vendor notes, earn-outs and rollover equity in family transactions | | mba/mba-negotiation-planner | Preparing a branch buy-out or a succession discussion | | mba/mba-leadership-guide, mba/mba-change-management-card | Leading a transition between generations | | mba/mba-team-dynamics-card | Conflict in sibling and cousin teams | | mba/mba-entrepreneurship-guide, mba/mba-search-fund-card | Buying a family firm with no successor | | mba/mba-compensation-design-card | Paying family and non-family executives fairly | | mba/mba-ethics-guide | Fairness to minority owners and employees | | business/decision-log, business/raci | Recording who decides what across the three circles | ## Common mistakes and misconceptions 1. **Treating "family business" as one category.** A founder-led firm, a sibling partnership and a cousin consortium face different problems. 2. **Merging management and ownership succession.** The best next owner and the best next chief executive are often different people. 3. **Equal treatment as fairness.** Equal shares for working and non-working heirs can be fair or unfair depending on pay, dividends and roles; decide the principle explicitly. 4. **Setting buy-out terms at the moment of exit.** Agree valuation methods and discounts in advance, when nobody knows who will leave. 5. **Ignoring dilution of dividends.** Owner numbers grow faster than profits in most families. 6. **Boards without independent directors.** Family-only boards struggle to evaluate family executives. 7. **Reading the research as a verdict.** Studies report averages; the effect of a family heir as chief executive depends on preparation, selection and governance. 8. **Treating socioemotional wealth as irrational.** It is a real preference; make it explicit so that trade-offs with financial returns can be discussed. 9. **Giving tax answers from a course card.** Rules differ by country and change; take qualified advice. 10. **Waiting for a crisis.** Death, illness or divorce force succession on the worst terms; plan while relations are good. ## Self-test questions 1. Name the seven positions in the three-circle model and give one typical concern for two of them. 2. What does "bivalent" mean in Tagiuri and Davis (1996)? 3. Name the three ownership stages in Gersick et al. (1997). 4. With the same USD 2.4m dividend, what is the average dividend per owner with 9 owners and with 22? 5. In Worked example A, why do the remaining branches gain value when Margaret's branch is bought out? 6. What did Villalonga and Amit (2006) find about founders and descendants as chief executives? 7. What is socioemotional wealth, and how might it change a family firm's response to an acquisition offer? 8. Why should the family council not appoint the chief executive? 9. Give two items every shareholder agreement in a family firm should contain. 10. Compute the annual payment on a USD 10m vendor note at 5% over 4 years. ## My notes and next steps | Date | Topic | Insight | Next step | |---|---|---|---| | *Example:* YYYY-MM-DD | Three circles | Our disagreement on dividends is a positional difference | Propose a written dividend policy to the council | | [YYYY-MM-DD] | [ ] | [ ] | [ ] | ## Sources and further reading Primary works: - Tagiuri, R. and Davis, J. A. (1996). Bivalent attributes of the family firm. *Family Business Review*, 9(2), 199-208. - Lansberg, I. S. (1983). Managing human resources in family firms: the problem of institutional overlap. *Organizational Dynamics*, 12(1), 39-46. - Chua, J. H., Chrisman, J. J. and Sharma, P. (1999). Defining the family business by behavior. *Entrepreneurship Theory and Practice*, 23(4), 19-39. - Schulze, W. S., Lubatkin, M. H., Dino, R. N. and Buchholtz, A. K. (2001). Agency relationships in family firms: theory and evidence. *Organization Science*, 12(2), 99-116. - Astrachan, J. H., Klein, S. B. and Smyrnios, K. X. (2002). The F-PEC scale of family influence: a proposal for solving the family business definition problem. *Family Business Review*, 15(1), 45-58. - Anderson, R. C. and Reeb, D. M. (2003). Founding-family ownership and firm performance: evidence from the S&P 500. *The Journal of Finance*, 58(3), 1301-1328. - Villalonga, B. and Amit, R. (2006). How do family ownership, control and management affect firm value? *Journal of Financial Economics*, 80(2), 385-417. - Perez-Gonzalez, F. (2006). Inherited control and firm performance. *American Economic Review*, 96(5), 1559-1588. - Bennedsen, M., Nielsen, K. M., Perez-Gonzalez, F. and Wolfenzon, D. (2007). Inside the family firm: the role of families in succession decisions and performance. *The Quarterly Journal of Economics*, 122(2), 647-691. - Gomez-Mejia, L. R., Haynes, K. T., Nunez-Nickel, M., Jacobson, K. J. L. and Moyano-Fuentes, J. (2007). Socioemotional wealth and business risks in family-controlled firms: evidence from Spanish olive oil mills. *Administrative Science Quarterly*, 52(1), 106-137. Official pages for dated facts (checked 2026-10-30): - Internal Revenue Service, What's new, estate and gift tax, https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax. - HM Revenue and Customs, Changes to agricultural property relief and business property relief, https://www.gov.uk/government/publications/changes-to-agricultural-property-relief-and-business-property-relief. Books (further reading, by name only): Gersick, Davis, Hampton and Lansberg, *Generation to Generation: Life Cycles of the Family Business* (Harvard Business School Press, 1997); Lansberg, *Succeeding Generations*. ## Answer key Worked example B: Lucas 3.20, external candidate 3.90, so Nadia and the external candidate tie at 3.90. A tie breaker should come from criteria agreed in advance, for example the board's view of the next five years: if the priority is operations and lender confidence, the external candidate; if it is keeping trust through a generational change, Nadia. One defensible design: appoint the external candidate for a defined term with Nadia as chief operating officer and a development plan, reviewed by the board at 24 months; the research on heir successions argues for an open process, not against family candidates as such. Exercise C: - C1: price USD 16.33m (`=70/3*0.7`), note USD 11.67m, annual payment USD 2.85m (`=PMT(7%,5,-11.67)`), equity after USD 53.67m, value per remaining branch USD 26.83m (gain USD 3.50m), and the leaving branch gives up USD 7.00m against pro rata value. - C2: one version: a family assembly once a year; a family council of one member per branch plus one fourth-generation observer, meeting quarterly; a board with three family directors and three independent directors, chaired by an independent; first policies in the constitution: family employment, dividends, and share transfers and exits. - C3: one version: outside experience of at least three years before joining; entry only to an open role at market pay; reporting to a non-family manager at first; the same performance reviews as everyone else; internships open to all family members under 25 without a job promise. Self-test: 1. Family only, owner only, employee only, family and owner, family and employee, owner and employee, all three. For example, a family owner outside the firm cares about dividends; a family employee without shares cares about career and reinvestment. 2. The same attribute of family firms can be both a strength and a weakness. 3. Controlling owner, sibling partnership, cousin consortium. 4. USD 266,667 and USD 109,091. 5. The shares are bought at a 20% discount to pro rata value, so value moves from the leaving branch to the remaining owners. 6. Family ownership creates value mainly when the founder is chief executive or chairman; descendant chief executives are associated with lower value. 7. Non-financial value of control, identity and legacy; the family may reject a high offer to keep control. 8. Appointing the chief executive is a business decision for the board, which can apply business criteria and include independent judgement; the council represents family interests. 9. Transfer restrictions with pre-emption rights, and a valuation method with buy-sell terms; also a dividend policy. 10. `=PMT(5%,4,-10)` = USD 2.82m. ## Revision history | Version | Date | Author | Change summary | |---|---|---|---| | 0.1 | YYYY-MM-DD | [Your name] | First build of Worked example A | | 0.2 | YYYY-MM-DD | [Your name] | *Example:* Added governance design for my family | ## Standard and licence note Based on the family business research listed above, with dated tax facts taken from the official pages named in the sources and checked on 2026-10-30. The text, the case, the numbers and the exercises are original; no textbook, course material or published case is copied or paraphrased, and Pellworth Tiles, the Pellworth family and every number in this card are fictional. The template is independent and not affiliated with or endorsed by any business school, publisher, adviser or tax authority. It is not legal, tax or financial advice; check the current official texts and a qualified professional before you rely on them. Template licence: MIT.