The three-circle family business model was introduced in 1978 by Renato Tagiuri and John Davis at Harvard Business School. The model represents three categories of individuals within a family business and the seven interest groups that result from all the combinations of these three. The diagram is a visual aid for representing the family business, and often explains why an individual feels a specific way about the family business and its operations.
A. The three categories. There are three different categories of individuals that comprise a family business:
B. How it works. An owner (partner or shareholder) sits within the top circle. Family members sit in the left circle, and employees of the family business sit in the right circle. However, an individual may have two roles, which will place them in the overlapping section, sitting within two circles at the same time. For example, a family member that works in the business (but has no ownership stake) is in the bottom-center sector. There is of course the option of occupying all three circles, in which the individual will sit in the direct center of the diagram.
C. The seven interest groups. The overlapping of the circles creates seven interest groups an individual may represent. They are:
- Family members who are owners but do not work in the business;
- Family members who are owners and who do work in the business;
- Family members who work in the business, but are not owners.
- Non-family members who are owners who do not work in the business;
- Non-family members who are owners who work in the business;
- Non-family members who work in the business;
The model serves as a neutral visual reminder that there are views of each group that are likely to be different in important ways, but are all legitimate. Each group needs to be respected, responded to and integrated in some way into the policies and decisions of the business. Additionally, the model has been found to help identify not only where in the business system issues are occurring, but also why they have occurred. This efficient identification can usually lead to improved problem solving. Instead of placing blame for an issue on personality differences, the model can indicate the different motivations of individuals from different circles. Finally, because the circles are interconnected, the model indicates that what happens in one circle influences the others. Tension or mismanagement in one circle can pull down the performance of the other circles and stall development of the business system and the business itself.
While the three-circle model has simplified family business organization, there is a limit to what the diagram can do. The model looks at the people within the family business system—not the enterprise as a whole. Assets and activities, such as philanthropic foundations, financial investments, and property, related to the family and family business are not accounted for within the model. The influence these additional factors have on the family business cannot be overlooked. The Venn diagram may not solve all your family business problems, but it can certainly change the way you approach them.
Drew Steen is a business transactions attorney at Davis Wright Tremaine LLP. He represents both buy-side and sell-side clients in mergers and acquisitions, venture capital investments, joint ventures, equity co-investments and restructurings. He also serves as regular corporate counsel for several closely held and family-owned companies. Drew can be reached via email at firstname.lastname@example.org or directly at 206.757.8081.