Selection Criteria for Successors in Small Family Businesses in the Netherlands

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Selection Criteria for Successors in

Small Family Businesses in the

Netherlands

Which selection criteria are used, are these formalized, and what is their influence on the successfulness of the succession?

Thesis

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Selection Criteria for Successors in Small Family Businesses in the

Netherlands

Which selection criteria are used, are these formalized, and what is their influence on the

successfulness of the succession?

November 2013 Master Thesis Written by: Elze Jonker Studentnumber: 1686550 Contact information: Noordwal 1B 8051 ES Hattem 06-47946257 elzejonker@hotmail.com

First supervisor: dr. M.J. Brand Second supervisor: dr. ir. H. Zhou

University of Groningen

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Abstract

Family businesses often have no official selection criteria for a successor, and the goal of this research is to find out what the underlying criteria are to select a successor for the family business. This is done by answering the following question: ‘What are the selection requirements used during the succession process in small Dutch family businesses and are these the right criteria?’. Therefore, the previous owner and current owner of four small Dutch family businesses have been interviewed. The results show that most of the previous and current owners of these businesses agree on the most important criteria: 1) interest in the business; 2) competence; 3) family harmony; 4) work experience outside the family firm; and 5) work experience inside the family firm. However, they do not formalize the criteria. It turned out that this was not an issue for the family businesses investigated in this research, because in the small sized businesses the insiders already know what the criteria for succession are. The incumbent and successor seem to know the point of view of the other quite well.

Key words: selection criteria, family business, succession, successor, requirements, successor profile

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Table of content

1. Introduction...5

2. Theoretical framework ...7

2.1 Distinctiveness of family businesses...7

2.1.1 Distinctiveness of small family businesses during the succession process ...9

2.1.2 Family business succession ...10

2.2 The factors that influence the succession process...10

2.2.1 Individual factors ...11 2.2.2 Relation factors ...13 2.2.3 Context factors ...15 2.2.4 Financial factors ...16 2.2.5 Process factors ...17 2.3 Selection criteria ...19

2.3.1 Formulation and formalization ...19

2.3.2 Used requirements and important requirements to use ...20

2.4 Successful succession ...23

3. Research model ...25

4. Research method ...26

5. Findings and results ...28

5.1 Case 1: The horticulture ...28

5.1.1 Requirements ...29

5.1.2 Differences between the requirements and the profile of the successor ...31

5.1.3 Successfulness ...31

5.1.4 Formalization of the requirements ...33

5.1.5 Analysis of the horticulture ...33

5.2 Case 2: The lamp shop ...33

5.2.5 Analysis of the lamp shop ...37

5.3 Case 3: The hairdresser ...37

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5.3.5 Analysis of the hairdresser ...41

5.4 Case 4: The hardware store ...41

5.4.5 Analysis of the hardware store ...45

5.5 Overview of the requirements ...45

6. Conclusion ...48

6.1 Requirements ...48

6.2 Differences between the requirements and the profiles ...48

6.3 Successfulness of successions in small Dutch family firms ...49

6.4 The effect of the differences between the requirements and the profiles on the successfulness of the succession ...49

6.5 The effect of formalization on the successfulness...49

6.6 What are the selection requirements used during the succession process in small Dutch family firms and are these the right criteria? ...50

7. Limitations and future research...52

References ...54

Appendix 1: Overview of the criteria derived from the factors that influence the succession process...57

Appendix 2: Interview questions ...60

Appendix 3: The interview with the incumbent ...68

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1. Introduction

The Dutch population is aging. This creates a challenge for many small firms, because the incumbent reaches the age he or she wants to retire. This means that there has to be thought about the future of the business (CBS, 2012). There are a couple of options: a successor can be chosen, the business can be sold or the business can be liquidated (Jansen, 2008). In family firms, succession is more complicated than in non-family firms because choosing a successor is not limited to selecting the person with the best track record and abilities, but there are complications added due to family membership and expectations (Tatoglu et al., 2008). In many family businesses, succession is a once in a lifetime event for employees because the incumbent is often in control of the organization for a long period of time, which instigates that the employees of family businesses have little experience with succession (Fox et al., 1996). This can cause problems because “succession is widely recognized as the most important issue that most family firms face” (Harveston et. al, 1997, p373). In Western cultures, it is often the eldest male that is selected as the successor (Karatko et al., 1993). But why? Is he really always the best option for the business? And is this still a valid statement in an era where women more and more join the labor market? (Van der Valk & Boelens, 2004) My opinion is that this research from 1993 is a bit outdated nowadays. For their research, Ernst & Young1_{(2010) interviewed Peter}

Wanner, from AZ Medien. He made the following remark about the subject: “It is fantastic when your children take over the business. But if the children don’t want to or can’t manage it, you need the guts to sell it” (EY, 2010, p12). I agree, but I wonder what the reality is. Most of the studies on this subject start at the point that the successor has already been chosen. Some studies, like Bron de Pontet et al. (2007) and Sharma et al. (2003) even mention successor selection as one of the first steps to take in the succession process in their model, but they do not mention it in the rest of their research. I find this interesting because selecting a good successor, who is able to run the business, seems to be a vital element of a successful succession. Clearly defined selection criteria might prevent that other people experience the selection process as unfair, and by using clear criteria legitimacy for the succession can be received by members in the family business. Also, clear defined selection criteria may prevent that a successor is chosen simply because the incumbent would like him to be the successor. Even if this person does not possess the necessary skills and characteristics to successfully run the business. However, family businesses often do not formalize their selection criteria for a successor (Tatoglu et al., 2008) and the goal of this research is to find out what the underlying criteria are for an incumbent to select a successor

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for his business. I will do this by answering the following question: ‘What are the selection criteria used during the succession process in small Dutch family firms and are these the right criteria?’

This research will provide insight in the underlying reasons of why a successor is chosen in a family business. From there on it might be possible to make some recommendations to improve the succession process. This can be a starting point for further research regarding this important event for family businesses.

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2. Theoretical framework

The theoretical framework developed in this chapter information will provide information about selection criteria and successful succession. The term ´selection criteria´ can have more than one definition. Therefore different terms for the different meanings of ‘criteria’ will be used in this research, which will be explained first. De Massis et al. (2008) identified five factors that have great influence on the successfulness of a succession. These ´factors´ are in fact the aspects that can influence the succession process and by that the successfulness of the outcome of the succession process. These five factors are “(1) individual factors, (2) relation factors, (3) context factors, (4) financial factors, and finally, (5) process factors.” (De Massis, 2008, p185). Based on these factors a list can be made of those ´criteria´ that might be important for choosing a successor. It is however the incumbent who eventually decides what he believes are the most important criteria for selecting a successor for his company. This list made by the incumbent are the requirements for the successor. However, not every successor meets all these requirements. Based on which requirements they do possess a successor profile can be made. These five factors of De Massis en al. (2008) therefore will be used as a guideline for this theoretical framework, and from there on the criteria, requirements and successor profile will be discussed. But first, the distinctiveness of family businesses will be discussed to show why succession within a family business is different from succession in a non-family business, and to introduce the definitions used further on in the research.

2.1 Distinctiveness of family businesses

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Together, it can lead to a competitive advantage that is only accessible to family businesses and not to other types of businesses. In other words, “the interactive web of relationships encompassing both the family and the firm provides family firms with an intangible resource base (i.e., “familiness”) that nonfamily firms cannot duplicate” (Pearson et al., 2008, p. 956).

There are many different definitions of a family business. Like the one of Chua et al. (1999): a family business is “a business governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families” (Chua, et al., 1999, p25). The definition used most in the Netherlands is that “a business can be classified as a family business when a firm possess at least one of the following three criteria, (1) more than 50% of the shares are owned by one family; (2) one family is capable to practice a significant amount of influence; and/or (3) an important amount of members in the top management is of a single family” (Flören & van Engelenburg, 2000, p2). However, this definition is difficult to use in this research because it does not define exactly what a family is or what is considered as an ‘important or significant amount’. For this research the family must have a great deal of influence over the succession decision in order to see what the influence of the family connections are to the decisions made. According to Chirico et al. (2011), the unique attributes of family firms exists most when both the ownership and the management are concentrated within the family. Therefore, a family business will be defined as a firm that is governed and managed by a single family. This means that this family should possess more than 50% of the shares of the firm to have power over the decisions, and that more than 50% of the top management is of that single family. Also, there should be the intention to run the firm in a way that the firm will be sustainable across generations of this family. For this research a family will be defined as the relatives from the incumbent and the incumbent’s partner till the third ‘level’ as defined by the Dutch government (Rijksoverheid, 2013). This means parents and children, grandparents and grandchildren and brothers and sisters of the incumbent and those of the partner of the incumbent. Small Dutch family firms will be defined using the European definition of a small firm, which is a firm with 10 till 50 employees which has a turnover of maximal 10 million euro (Recommendation 2003/361/EG of the Commission of May the 6th_).

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shows that family businesses have better talent control compared to non-family businesses by securing themselves of the long term commitment of talented managers from outside the family by having stronger relationships with their employees. Family firms also have stronger relationships with their customers. These differences might explain the fact that the figures show that family businesses survived the crisis better than non-family businesses (EY, 2010). According to this research of EY (2010), family businesses perform better than non-family businesses when important financial measures are compared, among which growth in added value, turnover, cash flows and job creation. This is important because Flören estimates in his study that family businesses account for 40% till 60% of the GDP (gross domestic product) in the Netherlands (Flören, 1998). Because of this, more than 40% of the employment in the Netherlands is provided for by family firms (Flören & van Engelenburg, 2000). This all shows that family businesses are important for the Dutch economy.

2.1.1 Distinctiveness of small family businesses during the succession process

“As the number of potential successors is limited largely to the number of family members, succession in family owned businesses carries a greater risk of failure” (Tatoglu et al., 2008, p156). This sentence shows one of the major issues in family business succession. In non-family businesses most of the time there are a couple of candidates where the successor is selected from, based on the perceived competences of those candidates. In family firms there are often less candidates and less people who are familiar with succession because it is often a once in a lifetime event for employees in family firms (Fox et al., 1996). This because in 29% of all family businesses the CEO is in place for more than 20 years against just 6% in non-family businesses (Flören, 1998), although it might be that there has occurred some changes in these figures during the last years. On the other hand, family firms can create a competitive advantage over non-family firms during succession because their successors are often already familiar with the culture and goals of the firms that have accumulated over time and generations (Bjuggren & Sund, 2001). Nevertheless, only 30% of the firms where the owners intended to pass on the business to the second generation this succession will really occur and even less, 15%, of the family firms goes on to the third generation (Davis & Harveston, 1998). Just like the articles of Flören (1998) and Fox et al. (1996) mentioned before, this article of Davis & Harveston (1998) is written 14 years ago, and the same might be true for both: the figures might be changed a bit; however, they do show that succession is an important event in a family business.

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however, there often is no agreement about the date of the succession and the board is often not capable to enforce it, even if there were a date. Besides that, small firms do often not even have a board. Secondly, in a smaller firm, there often is less knowledge about how to run a succession. Lastly, in small firms the number of possible successors is more limited (Fox et al, 1996).

2.1.2 Family business succession

Business succession can refer to two different processes: (1) the process of succession of a firm’s management, or (2) the process of succession of a firm’s ownership (Jansen, 2008). There are many differences in the precise definitions of succession used in the literature. Some of the most quoted definitions are the following. The definition given by Sharma et al. (2000, p233) is: succession process in family firms is “the explicit process by which the management control is transferred from one family member to another”. The definition used by Van Teeffelen (2012) is: succession is the transition of ownership of a firm to another person or legal person. De Massis et al. (2008, p184) used a definition of family business succession that is more directed at the process of succession for their research: “The succession process is defined as the actions, events, and developments that affect the transfer of managerial control from one family member to another”. For this research a family should have both management and ownership of the company, therefore, business succession will refer to the succession of the firm’s management and the firm’s ownership. This makes that the following definition will be used for business succession: the process by which management control and the firm’s ownership are transferred from one family member to another. The potential successor is “Any family member who could assume managerial control of a family business when the incumbent steps out”. And the incumbent is “the person who holds the top management position in a family business who must relinquish that position before another family member can take over” (De Massis et al., 2008, p184).

This paragraph showed that succession can create unique difficulties for family firms due to the unique characteristics of family firms. The goal of this research is to discover what the effect is of the requirements on this unique process. To do that, a literature overview will be given in the next paragraphs of the succession process, the selection criteria and effective succession on which this research will be based.

2.2 The factors that influence the succession process

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categorization of factors made by De Massis et al. (2008) as mentioned in the introduction part of this theoretical framework. Based on these factors the criteria that might be important for the succession shall be determined.

2.2.1 Individual factors

Studies concerning the individual factors of a succession are divided into 2 categories, studies concerning the individual factors of the successor and studies concerning the individual factors of the incumbent.

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Factor source 1 Fulfillment of career interest, psychological needs, and life stage needs,

without better opportunities elsewhere.

Handler (1992);

Bachkaniwala et al. (2001)

2 Possibility for the successor to execute some personal influence in the business without members of the firm that make sure status quo remains preserved.

Handler (1992)

3 mutual respect and understanding with the incumbent Handler (1992)

4 Siblings work together instead of conflicting with each other. Handler (1992)

5 Commitment of the successor to the family values Handler (1992)

6 Good relationships between the successor and other individuals in the family business

Handler (1992)

7 Growth and development expectations of the successor for the family business

Bachkaniwala et al. (2001)

Table 1: factors influencing the motivation and perspective of the next generation towards the succession

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Categories Characteristics of the categories Elaboration of the characteristics

Individual factors of the successor

1. Ability of potential successors 1) flexibility, 2) empathetic and nice, 3) self-regulating, 4) passionate, 5) intuitive and inquisitive,

6) honest and ethical and credible,

7) energetic and persistent, 8) self-confident and modest, 9) emotional mature and self-aware

(Buoziute-Rafanaviciene et al., 2009, p70)

2. Motivation of potential successors See factors in table 1: factors influencing the perspective of the next generation towards the succession

Individual factors of the incumbent

3. Personal sense of attachment with the business

The owner is often not able to let go

4. Unexpected premature loss of the incumbent

Absent of the influence of the owner on the decision of selecting a successor

5. Incumbents divorce, remarriage, or new children

This will have a great influence on the inheritance, making the selection process more complex

Table 2: overview of the criteria based on the individual factors

2.2.2 Relation factors

Literature on this factor argues that good interpersonal relationships are important for a good succession process. One of the reasons is to make sure that everyone has the same expectations and perceptions about the succession process. That this communication is an important research area is shown by the results of Sharma et al. (2000) in their study on the perceptions about the extent of succession planning. Were often the incumbents had the idea that the business was to some extent actively working on succession planning, other family members did not agree.

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relationship among family members can become crucial to make a succession decision (De Massis, 2008; Kelly et al., 2000). The fourth factor concerns the trust in the successor by family members. This trust is necessary for the family members to accept the potential successor. One of the most important characteristics of a successor to gain this trust is integrity. The incumbent is a major player to make sure the successor earns this trust by acting as a mediator between the family members and the successor (De Massis, 2008; Cadieux, 2012). The fifth relationship factor concerns the commitment of the family members to the potential successor. A lack of this commitment will reduce the possibility of the successor to gain the confidence of the dominant coalition within the business and the successor will not get the opportunity to demonstrate his or her management abilities (De Massis et al., 2008; Kets de Vries, 1989).

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Categories Characteristics of the categories

Relationships within the family

1. parent-child relationship

2. relationships among family members 3. need of consensus within family businesses 4. trust in the successor by family members

5. commitment of the family members to the successor Relationships

with non-family members

6. relationships between de successor or incumbent and non-family members 7. trust in the successor by non-family members

8. commitment of non-family members to the successor

Table 3: overview of the criteria derived from the relationship factors

2.2.3 Context factors

The context a business operates in has a great influence on the distribution of power in the company. By that, these context factors can be of great influence on the decisions made in the succession process, both by the incumbent and by the successor. (De Massis et al., 2008)

The first context factor concerns the change in the business performance of the firm. A change in the business performance can alter the intentions that the incumbent or other employees has for the future of the business and by that change the plans for the succession. Also the willingness of the potential successor can be influenced by changes in the business performance. When the expectations for the family business deteriorate, job opportunities outside the family business are getting more interesting for the successor (De Massis et al., 2008; Bachkaniwala et al., 2001). The second factor concerns the business scale. There is found a positive match between the size of the business and the willingness of the potential successor to take over. The greater the scale of the business, the more willing the successor is to take over the business. This is a result of the fact that the perception of the successor about the rewards he will be able to receive from the family firm might change when the scale of the business changes (De Massis et al., 2008; Venter et al., 2005). The last context factor concerns the relationship between key customers and suppliers and the potential successor. Customers and suppliers are often used to the interaction with the owner and it can be quite hard for the successor to take over these contacts. The incumbent can play a mediating role and introduce the potential successor gradually and by that cause the relationship between the potential successor and key stakeholders to start of good (De Massis, 2008; Cadieux, 2012). An overview of the criteria derived from the context factors can be given in the following three points:

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3. The relationship between the key customers and suppliers and the potential successor.

2.2.4 Financial factors

Banks are the most important providers of financial means to small and medium sized businesses and by that play an important role in the succession process. If banks refuse to fund the succession, it often means that the succession cannot proceed. This because, according to the Dutch law it is obligated to sell the business for a ‘zakelijke overdrachtsprijs’, which means that a fair transfer amount has to be paid for the value of the business. Also when it is a succession within the family. So in order to finance the succession a solid succession plan might be of critical importance to persuade the bank. (Van Teeffelen, 2012; Kamer van Koophandel, 2011)

The first financial factor concerns the ability to sustain the taxes related to succession. The family has to be able to pay the tax burdens, and when they are not, the costs of borrowing the money should not be too high; otherwise, the dominant coalition might decide it is better to sell or liquidate the business (De Massis, 2008). From the three different financial factors, the incumbent finds the ability to sustain the taxes related to the succession the most important one. This financial factor is strongly related to the succession of the ownership of the business. The succession of the actual management of the firm, and by that the actual control of the firm is often more difficult for the incumbent as discussed with the individual factors of the incumbent (Giarmarco, 2012). The second financial factor is the financial ability to liquidate the possible exit of heir(s). This is a problem that occurs mainly after the death of the incumbent, when more than one of the heirs of the incumbent inherit a share of the company. This might be a problem when there are heirs who do not want to be involved in the business and want to sell their share of the business. To overcome this problem, often an outside financier has to be found. Therefore, it is very important to come with a good succession plan to convince a bank to invest in the succession process (De Massis, 2008; Van Teeffelen, 2012). The last financial factor is the possibility of the business to hire professional managers. When the potential successor is not yet qualified for the job, a professional manager should be hired to support the successor. The business should have the financial possibility to do so when they want to continue with this successor (De Massis et al., 2008). An overview of the criteria derived from the financial factors can be given with the following three points:

1. The ability to sustain the succession taxes;

2. The financial ability to liquidate the possible exit of heir(s);

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2.2.5 Process factors

According to De Massis et al. (2008) process factors are the different aspects of the succession process, concerning preparing and evaluating the successor, and the communication with the stakeholders of the family business. The process factors can be subdivided into three phases: preparing the successor, developing the successor and selecting a successor. However, these three phases do not give an overview of the complete process, they do not cover the step of the actual succession and the stages after that. The succession process itself can be divided into six steps, during the first three steps, the process factors of De Massis (2008) take place. First, awareness has to be created that a succession process has to take place. Second, an overview has to be given of the actions that should take place. Third, these actions have to be prepared during the preparation phase. Fourth, the transfer itself should take place. This step is divided into three main issues: (1) the succession of the actual management and control of the business. (2) The succession of ownership: this issue contains three elements. The first is how to treat all the children equally. The best way to accomplish that is by selling the business for a fair price to those children that are interested in taking over the business instead of consider the succession as a gift to the interested children. The second element concerns the actual date of the succession, and the third element concerns how to guarantee enough retirement income for the incumbent. The last issue of the transfer itself are (3) the transfer taxes. After the transfer itself, the fifth step is that the transfer has to be completed in the completion phase, and the last ‘phase’ is the new future of the company (Thomassen, 2012; Giarmarco, 2012). This process can be managed in four different ways: (1) it is the founder who controls the entire succession process, (2) the founder selects a couple of family members to consult, (3) the founder chooses to consult professional advisors, or (4) the founder chooses for family involvement. In addition to this, there is found that the closer someone is related to the owner/manager and the higher the position they have in the business, the more influence they will have in the succession process. (Tatoglu et al., 2008; Davis and Harveston, 1998) In this paragraph, the three phases of De Massis et al. (2008) will be discussed because these handle the different aspects of preparing a successor. In paragraph 2.3 the selection of a successor will be discussed more thorough, and in paragraph 2.4 the last step of Thomassen (2012), the new future, will be discussed.

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of motivation of the successor to take over the business. As stated above, especially because the incumbent often finds it difficult to let go of his leadership position (De Massis, 2008; Giarmarco, 2012; Handler, 1994; Bocatto et al., 2010). The second component handles the communication and sharing of the decisions related to the succession process with family members and other stakeholders. This is important because it creates a shared vision which prevents conflicts from occurring (De Massis, 2008).

The second phase, developing the successor, can be divided into four steps. The first step is evaluating the gap between the needs and abilities of the successor. When these are assessed, it is possible to determine the best trainings plan for the successor (De Massis, 2008). The second step is the training itself of the successor, to make sure he or she is adequately prepared for his or her new function. This training can be given both inside and outside the company. The training inside the company is often given by the incumbent. This includes teaching the very specific knowledge the potential successor should know. Also trial and error is a training method often used by the incumbent to teach the potential successor the consequences of the decisions he made (De Massis, 2008; Cadieux, 2012). The third step includes the exposure of the successor to the business. It is important for a successor to be introduced into the business to “establish relationships with key suppliers, customers, and lenders; to build credibility within the company; and to understand the culture and intricacies of the firm” (De Massis, 2008, p191). This exposure of the successor should not be done too late in order for the successor to reach these important goals of exposing. It often is a task of the incumbent and to introduce the successor to the network of the business. The incumbents do this by becoming the direct superior of their successors, like a supervisor (De Massis, 2008; Cadieux, 2012). The fourth and last step of developing the successor is giving feedback to the successor about the succession process. This feedback is necessary to keep the successor updated on the changes in goals, strategy and expectations of the succession (De Massis, 2008; Cadieux, 2012).

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Table 4: overview of the criteria derived from the process factors

The last point in the table, select a successor, will be elaborated on in the following

paragraph. An overview of all the criteria derived from the five factors discussed above can be found in appendix 1.

2.3 Selection criteria

2.3.1 Formulation and formalization

Most of the studies start at the point that the successor has already been chosen. However, as stated before, clear selection requirements can help attain legitimacy for the succession because the incumbent of the family business will be able to clarify his decisions and convince others of his choice. One way to make sure that the requirements are clear to all people involved is by formalizing them by writing them down in an formal business document. However, usually these requirements are not formalized (Tatoglu et al., 2008). “Not formalizing the requirements for successor selection may cause other family members or non-family managers to perceive that the process is unfair. This may give rise to conflicts.” (De Massis, 2008, p191). A research on Canadian firms showed that of all types of firms, family businesses are the one paying the least attention to develop clear selection requirements for choosing their successor (Tatoglu et al., 2008). Besides preventing family conflicts from occuring; Van Teeffelen (2012) states that banks refusing to fund the succession is an important reason for failure of the succession. The chance a bank is willing to fund the succession is much larger when the reasons for the made decisions are clear.

Categories Characteristics of the categories

Preparing the successor

1. defining the roles of the successor

2. communication and sharing of the decisions related to the succession process with family members and other stakeholders

Developing the successor

3. evaluating the gap between the needs and abilities of the successor 4. training the successor

5. exposure of the successor to the business

6. give feedback to the successor about the succession process Select a successor 7. the formulation of rational and objective requirements

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2.3.2 Used requirements and important requirements to use

Cultural differences play an important role in how a succession is handled. In the western culture the eldest male is often chosen as the successor in a family firm (Karatko et al., 1993). However, this study might be a bit outdated because nowadays not only sons, also daughters are selected as successor. Already in 1997, Harveston et al. found that there is a “rising number of female-owned businesses” (p373). In South Asia the nomination of a successor in family businesses is most of the time based on more objective factors than in the western culture. Leadership skills, intelligence and hard work are very important in South Asia when selecting a successor. Also the successor is chosen out of a much broader part of the family, not only the children of the owner qualify for succession within the company (Bachkaniwala et al., 2001; Karatko et al., 1993). The South Asia way of selecting a successor seems more logic because it selects the best person for the job instead of the male lucky enough to be born first. According to Tatoglu et al. (2008) in Turkey the most influential successor requirements are (1) competency, (2) interest in the business, (3) education, (4) family harmony, (5) lack of any other alternative, and (6) level of respect the successor receives from other family members and non-family members in the business (Tatoglu et al., 2008, p166). Based on this, it seems that in Turkey the selection process is more based on South Asia methods than on the way the successor is chosen in the western culture, however their final results show that although these requirements might be thought of as the most important by the incumbents, in reality the decision is often not purely based on objective motives but are also effected by the aspirations of the incumbent (Tatoglu, 2008). The list of selection requirements of Tatoglu et al. (2008) seems rather complete, however, nowadays financial ability to take over should be considered too. This because, like Van Teeffelen (2012) mentions, banks are not always willing to fund the succession.

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Criteria to select a successor source

1 Competency Tatoglu et al. (2008); Chrisman (2009); Van Teeffelen (2012)

2 Interest in the business Tatoglu et al. (2008); Venter et al. (2012)

3 Education Tatoglu et al. (2008); Handler (1991); Brown and Coverly

(1999); Van Teeffelen (2012)

4 Work experience in the family firm Brown and Coverly (1991); Chrisman (2009)

5 Work experience outside the family firm Handler (1991); Brown and Coverly (1999); Venter et al. (2005)

6 Financial possibility to take over Van Teeffelen (2012)

7 Family harmony Tatoglu et al. (2008); Venter et al. (2012)

8 Lack of any other alternative Tatoglu et al. (2008)

9 Level of respect for the successor by family and non-family members in the business

Tatoglu et al. (2008)

Table 5: criteria important for the selection of a successful successor

The theories of Handler (1991), Brown and Coverly (1999), Venter et al. (2005), Chrisman et al. (2009) and Tatoglu et al. (2008), mentioned in table 5, replenish each other, there is some overlap between them however. The first group mentions the importance of having experience outside the family business and the importance of experience in general (Handler, 1991; Brown and Coverly, 1999; Venter et al., 2009; Van Teeffelen, 2012). Also experience in the family firm itself is explicitly mentioned (Brown and Coverly, 1999). Another often mentioned point is the importance that the successor received education or training in the field of running a business and/or in the specific field the business is working in (Chrisman et al, 2009; Handler, 1991; Brown and Coverly, 1999; Van Teeffelen, 2012), however, it seems more important for Handler (1991), for Brown and Coverly (1999) it is an ‘optional requirement. When these studies are combined, the set of factors of successful requirements can be divided in two groups. The first group concern the requirements the successor should possess: (1) The work experience the successor has, both inside and outside the family business, (2) the degree of training and education the successor has had, (3) The successor has to be willing to take over, (4) the degree of responsibility that the successor possess, and (5) the right set of personal characteristics of the successor to run the company. The second group of factors concern the execution of the succession process: (6) communication and planning of the succession process, and (7) a good relationship between the incumbent and the successor. Together with the requirements of Tatoglu et al. (2008) a list can be made of possible requirements a successor should meet. These are listed above in table 5.

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important that the successor possesses strong marketing skills, apparently to achieve business growth. Larger firms (with three or more family members employed in the firm), on the other hand, find a harmonious and positive relationship between the family members and the successor more important. The ways the succession can be managed does not differ significantly between large and small firms. The incumbent can control the entire process; a couple of family members can be chosen to be consulted by the incumbent; the incumbent can chose to consult professional advisors; and lastly, the incumbent can decide to involve the family in all the entire succession process (Tatoglu et al., 2008)

In paragraph 2.2.5 the selection process has been divided into two elements. The first element was ‘the formulation of rational and objective criteria’ and the second was ‘to compile a team that will be in charge of the assessment of the successor based on the selected criteria’. The information given in this paragraph can be divided into those two categories. In table 6, the results of that division is shown.

Category Characteristics of the category

Elaboration of the characteristics

Select a successor

1. the formulation of rational and objective criteria

1) Identifying the potential candidates

2) making clear why one is preferred over others 1. Competency

2. Interest in the business 3. Education

4. Work experience in the family firm 5. Work experience outside the family firm 6. Financial possibility to take over 7. Family harmony

8. Lack of any other alternative 9. Level of respect

(see table 5) 2. compile a team that will be in

charge of the assessment of the successor based on the selected criteria

Dependent on the way of managing the succession process. Family businesses can use four different scenarios to manage their succession:

(1) it is the founder who controls the entire succession process, (2) the founder selects a couple of family members to consult, (3) the founder chooses to consult professional advisors, (4) the founder chooses for family involvement

(Tatoglu et al., 2008)

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2.4 Successful succession

The last stream of literature to be discussed is about the indicators of why and when a succession is successful or not. These studies identify when succession can be called successful (Handler, 1994; Bocatto et al., 2010).

One of the oldest studies on this topic is the research of Barach et al. (1988) in whch they made the following model of how to achieve successful succession (Figure 2).

The model of Barach et al. (1988) shows that for a successor to become successful it is important to achieve legitimacy. This means that the successor, the incumbent, but also other family members, employees and significant others should feel that the successor earns his or her new position. To achieve this legitimacy, the successor should obtain the acceptance and earn the credibility of the incumbent, other family members, employees, stakeholders and significant others. These significant others are not only people inside the company, the successor also has to earn legitimacy by external stakeholders (Barach et al., 1988; Fox et al., 1996; De Massis et al., 2008).

In her study, Handler (1994) mentions four indicators of a successful succession. The first concerns the fact whether or not the successor has been able to handle the complexities of his or her new position and really got the control that should be present with the leader of a business. In other words, is the successor able to handle his or her new position? The second indicator is the reputation of the firm. The third indicator is the financial performance of the business, and the last indicator is the turnover of the business. For these last three indicators it can be stated that the succession was successful when they remain the same as before the succession or have even increased (Handler, 1994). However, this might be extended with a comparison among other businesses in the same sector. If the results of these three indicators declined for the other companies in the sector due to market, a succession might also be perceived as successful when the decline of the business does not exceed the average decline of the businesses in the same sector. Venter et al. (2005) add the perceived success of the succession process to this list. Le Breton-Miller et al. (2004)

1. obtains acceptance

Perceived to believe and behave according to culture.

2. Earns credibility

Perceived to have ability and intension to deliver valued results. 3. Achieves legitimacy Achieves a position of power by gaining the confidence of self and others to make significant

contributions.

4. Becomes successful successor

Performs strategic tasks and assumes leadership, replacing older

generation.

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make a general definition of the success of succession. In this definition they capture quite well the two different perspectives on a successful succession, the success of the business and the success according to those people involved. They define successful succession as (1) “The subsequent positive performance of the firm and ultimate viability of the business” and (2) “the satisfaction of stakeholders with the succession process” (Le Breton-Miller et al., 2004, p306).. Together, these studies show the indicators of a successful succession, they are brought together in table 7.

Indicator of successful succession source

1 The performance and viability of the business

- Financial performance of the business

- Turnover of the business

Le Breton-Miller et al. (2004); Handler (1994)

2 Reputation of the business Handler (1994)

3 Ability of the successor to handle his or her new function Handler (1994)

4 Perceived success of the succession by:

- incumbent

- successor

- other family members

- other internal stakeholders

- external stakeholders

Venter et al. (2005); Le Breton-Miller et al. (2004); De Massis et al. (2008)

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3. Research model

Based on the theoretical framework a research model has been developed that will be used during this research. Based on the factors discussed in the literature a list of criteria has been made (see table 1). Not all these criteria are considered important by the incumbent in the selection process. The criteria that are important for this selection are called requirements in this study. The goal of this study is to determine which criteria are used (what are the requirements), and whether or not these are the right ones by examining their influence on the successfulness of the succession. However, not only the requirements are important, because the successor might not possess all the requirements that are considered important according to the incumbent. Therefore, the gap between the requirements and the profile of the successor will be examined as well as the influence of this gap on the successfulness of the succession. The last point mentioned in the literature that might influence the successfulness of the succession, is the formalization of the requirements. The research model below displays the relationship between the requirements of the successor and the profile of the successor, and their relationship to successful succession. The influence of formalization will also be investigated in this research. The research model is shown in figure 3.

Based on this research model, the following sub-questions can be formulated which will help to answer the main question of this research:

1. What are the requirements that are used to select a successor in small Dutch family firms during the succession process?

2. What are the differences between the requirements for a successor and the profile of the successor in small Dutch family firms?

3. What are the effects of the requirements on the successfulness of the succession? 4. What are the effects of the differences between the requirements and the profile of a

successor on the successfulness of the succession?

5. What is the effect of formalization on the successfulness of the succession? Requirements Profile successor Successfulness of the succession Formalization

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4. Research method

As stated in the theoretical framework, family businesses often do not formalize their selection criteria for a successor. The goal of this research is to find out what the underlying requirements are that are used in small Dutch family firms to select a successor. Therefore, this study tries to answer the following question: ‘What are the selection criteria used during the succession process in small Dutch family firms and are these the right criteria?’. The sub-questions used to answer this question have been mentioned in the previous chapter.

This research will be conducted by performing a qualitative study based on interviews with family firms that have finished their succession process in the last 15 years. The reason that firms that completed their succession process are used in this research, is because the successfulness of the process can then be determined. A timeframe of 15 years has been chosen so that the four businesses will have a quite similar economic environment: in 2000 the first crisis started and the last one is still not over. A business can be classified as a family business when the family has the actual control of the firm and more than 50% of the shares are owned by one family. The family businesses selected all meet this definition. In this research a difference will be made between succession in the first line of family (parents to their child) and family in the second line and further away from the incumbent. Small family firms will be defined as firm with 10 - 50 employees with a turnover up to € 10 million, as stated in the theoretical framework.

Four small Dutch family firms have been interviewed. Initially, potential firms are found by ‘snow-balling’: asking friends and family to send my request to their friends and families. Secondly, some local firms have been selected by using a book about family businesses in the area of Zwolle. These firms have been contacted and asked if they meet the criteria mentioned before. The third way to find suitable family businesses, is by searching the internet and to contact them.

During the selection process, it turned out it was quite hard to find businesses that met the definition used for family businesses. I searched for family businesses in different sectors, because the research is not aimed at one sector. I found four family businesses that met the criteria. These businesses are all located near the city of Zwolle and therefore have to deal with similar environmental conditions. This is important for the research because (big) differences in these environmental conditions can influence business performances.

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questions that are used to answer the sub-questions and main question of this research. The table is based on factors and criteria derived from the literature. General information about the companies, selection criteria derived from the literature and effectiveness of the succession have been added to the table. Information about these subjects is needed to answer the sub-questions and main question. Therefore, the interview questions are based on these subjects. The questions related to the criteria are whether or not the previous owner considered these criteria as important at the time of the succession, and whether or not the current owner thought the incumbent perceived the criteria as important at that moment. Part of the questions is about the profile of the successor. The interview contains different types of questions: open questions, questions using field coding and questions using a Likert scale from one to five. Which method will be used for which question, can be found in appendix 2. The entire questionnaires can be found in appendices 3 and 4.

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5. Findings and results

In this chapter, the results derived from the interviews will be discussed. This will be done in the same order as the research model. But first, the family businesses will be introduced. In this paper the terms incumbent and successor are used to define the different roles in the business. However, the businesses that are interviewed have already completed the succession process and therefore, the person who first was the successor has now become the incumbent. The person who was the incumbent during the process will be called the previous owner, and the person who took over the business, the successor during the process, will be called the current owner if the present or future will be discussed. When the period before or during the succession process is discussed, the term successor and incumbent will be used, just like in the theoretical framework. After the introduction of every case a table is presented with the requirements and the successor profile. These tables are based on the different criteria that are found in the literature. However, there are quite some criteria that are not present in any of the businesses. The tables only contain those criteria that are present in at least one of the cases. The process factors are not included in the tables because they consist of the story how the succession process has been executed. How the succession process is executed can be found in the text about the case. One issue of the process factors however does consist of criteria, the part: ‘formulation of rational and objective selection criteria’. An overview of these are given in table 17. In the tables in this chapter the abbreviations PO and CO will be used for the Previous Owner and the Current Owner.

5.1 Case 1: The horticulture

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the ‘maatschap’. The succession process was managed by the incumbent and successor together, only for the financial part of the process they consulted a professional advisor, their accountant.

Factor Criteria Requirement Successor profile

Satisfied? Reason for satisfaction or dissatisfaction PO CO PO CO

Individual factors

1. Ability of potential successors X X X X Yes, both

the Previous and the current owner are satisfied

- all people involved seem satisfied - the business

performances are good - the family harmony remained good because of the accurate financial agreements

- the factors that influence the motivation and perspective of the next generation after the succession process that are mentioned in table 1 turned out very well for the horticulture

2. Motivation of potential successors X X X X

3. Personal sense of attachment with the business X X X X Relation-ship factors 1. parent-child relationship X X X X

2. relationships among family members

X X X

5. commitment of the family members to the successor 6. relationships between de successor or incumbent and non-family members

X X X X

8. commitment of non-family members to the successor Context

factors

X X X X

Financial factors

1. The ability to sustain the succession taxes

X X X X

Table 9: used criteria in the horticulture

5.1.1 Requirements

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when they are asked how important these were in selecting the successor they do not show great differences in their answers either. The results of this list can be found in table 17 below.

The relationships within the family did never have a great influence on the succession. His brother had never any interest in the business so the previous owner and the current owner were free to organize the process as they wanted. At the moment the current owner makes the decisions on his own, but during the succession they were made together with his father. His mother gave some advice now and then. The other employees did not have the ability to influence the decisions. However, because the current owner was working for the firm for quite a while, the succession did not mean that there was changing a lot for the employees.

The expectations of the performances of the business were that they would increase steady just as they had done before the succession. It is not a business that is very sensitive to the economic changes. For the horticulture the weather is of much bigger influence for the business performances. The scale of the business did increase by investments and changes the current owner accomplished after the succession, during the succession this was something he did hope to achieve after the succession. The current owner explains that for him the motivation did not come from the turnover or the scale on which the business operated and the expectations for these numbers to change. “Motivation is something you need to bring to the job. You need to be able to motivate yourself regardless of the prospects”. The relationship between the successor and the key suppliers and customers on the other hand was a quite important issue for the previous owner. However, these relationships were built already when the succession took place.

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5.1.2 Differences between the requirements and the profile of the successor

For the incumbent of the horticulture the possession of the right knowledge, enough involvement and dedication, and ambition were of great importance, even ‘deal-breakers’. These requirements were all present in the profile of the successor. Also the other requirements that are mentioned in 5.1.1 by the previous and/or current owner seemed to be all present in the profile of the successor. The financial possibility to take over, which was very important for a good family harmony was handled very carefully during the succession. This means that in this business there were no big differences between the requirements and the profile of the successor.

5.1.3 Successfulness

In the horticulture, the financial performance of the business increased since the succession. These results are accomplished due to investments made by the current owner that makes it possible to work more efficient and faster. Besides that, the current owner focuses more on large businesses as clients, instead of just selling to individuals. The reason for this change is that they make more profit by selling to business than to individuals.

The reputation of the business has not changed. The business has always had a good reputation and it still has. There has been made some changes, like improving the website, to ensure the customer satisfaction remains as good as it is. The previous owner has the same feeling, which is that reputation has not changed.

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Experience succession as

successful?

According to the current owner According to the previous owner

Grade (1-10)

Motivation of the grade Grade

(1-10)

Motivation of the grade The

successor/ current owner

7/8 “I’ve got a company I can work with”.

Financially it has been organized very well which gives me the possibility to invest and develop. “I feel that I do everything in my power to make this business succeed”

8 He is doing a good job, he

made some good investment decisions.

The previous owner

7/8 He came out of the process very well and

he is happy to see that the business still stands today.

8 I came out the process very

well Other family members in the business - inapplicable - inapplicable Other family members outside the business

‘fine’ His brother agreed with the process and

decision and gave no further comments later on

7 They have never really said

anything, it is more that they are happy for my son that the business is doing well. Non-family

members in the business

‘fine’ 7/8

He never heard any complained. There has not changed a lot for the other employees because the current owner was working in the business for quite a while before he became the new owner.

8 For the other employees it all

went quite smooth. There have not been major changes for them. External

stakeholders

8 These contacts have been made when the

current owner still worked in the

‘maatschap’ and they are still good. There are, deliberate, few changes

8 He maintained the

relationships we had built.

Table 10, how people involved in the succession experience the succession of business 1

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5.1.4 Formalization of the requirements

Although they both know what the requirements were for the successor, these were never written down. Despite the fact that they both had a clear answer of which requirements a successor should possess to run the business, they mention that during the succession process, there were no requirements used to determine whether or not the successor would be suitable for the job.

5.1.5 Analysis of the horticulture

Although the requirements for the selection of the successor were never written down or have been formalized in any other way, the incumbent and the successor know quite well which requirements the incumbent found important for the successor. There were almost no differences on their answers. There also was no gap between the needed requirements for the successor according to the incumbent and the profile of the successor. It seem to have been the right requirements to use, and the fact that they have not been formalized does not appear to be a problem, because the succession turned out to be successful.

5.2 Case 2: The lamp shop

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Factor Criteria Requirement Successor profile

Satisfied? Reason for satisfaction or dissatisfaction PO CO PO CO

Individual factors

1. Ability of potential successors X X X X Current

owner: yes

Previous owner: moderate

- The financial situation have been better due to the economic crisis - the customer are still very satisfied with the service

- the previous owner would more dedication to the store from his son - the son would like the opportunity to run the business without his father’s interference

2. Motivation of potential successors X X X

3. Personal sense of attachment with the business X X X X Relation-ship factors 1. parent-child relationship 2. relationships among family members

5. commitment of the family members to the successor 6. relationships between de successor or incumbent and non-family members

8. commitment of non-family members to the successor Context

factors

X X X X

Financial factors

1. The ability to sustain the succession taxes

Table 11: used criteria in the lamp shop

5.2.1 Requirements

The current owner did had a quite accurate idea about the requirements that were the most important for his father (the previous owner) for the selection of the successor for the company. They both mention that if the successor would not had these requirements, the previous owner would have sold the business. For the previous owner it was especially important that the successor would have “hart voor de zaak”, which means as much as that the successor would have great dedication to the business. Besides that, the previous owner mentions the skills to accomplish a good purchase and selling policy as being a very important requirement. Also, the successor should be able to have a good staff policy and he needed the necessary technical skills for the branch they worked in. The current owner mentioned that his father was very critical on all the points mentioned above, but that he also should be able to work independently and have an understanding of the customer flows.

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point less than his father. The son however found the work experience outside the business as being one point more important than his father did.

The relationships within the family did never have a great influence on the succession, his sisters had no interest in the business. At the moment the current owner makes the decisions on his own, but during the succession they were made by his father.

For the previous owner, the purchase and selling skills of the successor were of critical importance. This means that a good relationship between the successor and the key suppliers and customers was important.

For the lamp shop, the economic expectations were optimistic, both the turnover and the scale of the businesses increased steady. However, this did not have a great influence on the current owner to be more motivated to take over the business. For bussiness 2, not all factors of table 1 are as positive as for business 1, it is for the current owner harder to execute personal influence because his father not always agrees and his growth and development expectations are decreasing due to the financial crisis. Lamps are a product for which people tend to look for the lowest prices nowadays, and it is difficult for this store to compete with these prices.

Both the current and the previous owner tell that the taxes and other financial aspects of the business barely played a role in the process. There is paid an amount for the inventory and the goodwill of the company, but it did not play a significant role in the succession decision.

5.2.2 Differences between the requirements and the profile of the successor

The most important abilities of the successor were his purchase and selling skills, his technological skills, his ability to handle his employees, and his ability to dedicate himself to the business. These abilities were of critical importance in the decision whether or not the business was going to be owned by the successor or sold. These abilities are even (partially) documented on forehand. The successor had all the necessary requirements that the incumbent found important for a successor of his company. However, the previous owner is disappointed in the dedication that the current owner has to the business nowadays.

5.2.3 Successfulness

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remained loyal to the firm. This is also what the previous owner notices, he is satisfied with the way his son treats the customers. However there is also a group customers with whom the relationship became more superficial.

The current owner believes he executes his job quite well, the business is doing well and the customers are content. However, he did feel the need to step back a little and work less, he has qualified personnel that can step in. The previous owner did not agree with this change. He does think his son does a good job, but he would like him to be more involved. Also the fact that the current owner and his personnel are a bit less formal (they do not longer wear suits for instance) is not how the previous owner would prefer it. The previous owner finds it hard to let go of his business. When he comes by the store he often starts helping customers, just because he still likes the business. However, he can also be quite irritated if things are not done as he would like to see it. He really tries to interfere with the business.

Also in the lamp shop there are more people involved in the succession. For the opinions about the successfulness of the succession, see table 12 below.

Experience succession as

successful?

According to the current owner According to the previous owner

Grade (1-10)

Motivation of the grade Grade

(1-10)

Motivation of the grade The

successor/ current owner

9 “The business turns out the way I

hoped, just the crisis is a problem right now”

8 Believe he is happy with the

business as it is. The previous

owner

7 His father would want the current

owner to be more dedicated to the business

6 It are difficult times so right now he

should be more dedicated than ever, however he decided to work less Other family members in the business - inapplicable - Inapplicable Other family members outside the business

? He never speaks to his sisters

about the business, but he never had any critique

7 My daughters have always been fine

with the fact that their brother was taking over the business. My wife sometimes misses the allure the business used to have.

Non-family members in the business

8 The employees who also worked

for my father have always been positive about the succession

8 The employees seems satisfied.

External stakeholders

- inapplicable - inapplicable

Table 12, how people involved in the succession experience the succession of business 2