Success Factors of Successful Succession in Family Businesses

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Success Factors of Successful Succession in Family Businesses

August 2011

Master Thesis

University of Groningen

Faculty of Economics and Business

Master of Science in Business Administration Specialization Small Business and Entrepreneurship

Author: J.F.J. Casemier Student number: 1256734

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Summary

This thesis is about the succession issue in family businesses. Nowadays a lot of family businesses have to pass the company through to the next generation. There is no specific handbook for a successful business transfer, so incumbents often do not know where to start. A lot of family business transfers fail because of a lack of planning or a lack of knowledge. In the end of this research the following main question will be answered:

What are the success factors of a successful succession process in family businesses? This

research indicates when family members should start planning, which knowledge and capabilities are necessary, in which phases of the process external help is advisable and what can be planned for the period after the actual succession moment. First a broad literature study is carried out in order to distinguish the success factors of successful succession according to the literature. This literature study leads to four sub questions that must be answered. In order to give an answer on these sub questions, two different questionnaires were prepared. First two accountants who have experience with the succession issue were interviewed and then three family businesses that already have experienced a succession were interviewed. The findings from the literature study in combination with the findings from the interviews will be used to give an answer on the main question. Main findings from this research are that family businesses should start planning the succession three to five years before the actual succession moment. It is also advisable to consult an accountant in the same period before the actual succession moment. In order to create a smooth business transfer, the successor must start working in the company before the actual succession moment. On the other side, an exit plan for the incumbent must be created. Open communication is of great importance during the succession process. Last but not least it is recommended to make a plan for the period after the actual succession moment. Hopefully the findings from this research can help family businesses who are faced with the succession process.

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Contents

1. Introduction ... 5

1.1 Introduction ... 5

1.2 Background of the problem ... 6

1.3 Problem statement ... 7 1.4 Planning ... 8 1.5 Summary... 9 2. Research Method ... 10 2.1 Introduction ... 10 2.2 Method of research ... 10 2.3 Population ... 12 2.4 Summary... 13 3. Literature study ... 14 3.1 Introduction ... 14

3.2 Definition of family business ... 14

3.3 Definition of succession ... 16

3.4 Succession planning in family businesses ... 18

3.5 Problems and barriers in case of family succession ... 22

2.6 Post transfer performance ... 25

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6.1 Introduction ... 43

6.2 Recommendations... 43

6.3 Implications for further research ... 44

6.4 Summary... 45 7. Discussion ... 46 7.1 Introduction ... 46 7.2 Discussion ... 46 7.3 Summary... 47 References ... 48

Appendix A: Interview questions for the accountants ... 50

Appendix B: Interview questions for the family businesses ... 52

Appendix C: findings from the accountants ... 54

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1. Introduction

1.1 Introduction

A lot of family-owned businesses face many challenges in passing the company through to the next generation. Most of these firms are not well prepared for such matter or they postpone the succession issue. For instance the family successor must be selected and if there are more candidates, prevention of family conflicts is a matter of great importance. Second, the owner must have a plan for exiting the business step by step. Besides these issues the plan must be funded. Lending money at the banks will be more difficult in the nearby future, so firms have to create a buy-selling plan. Also important is a well-considered tax-planning. Exit techniques are often designed to minimize, spread out or recharacterize taxes. A lot of different issues, but what is the ‘key’ to a successful succession procedure? The main purpose of this research will be to ‘increase knowledge’. A literature study must ultimately lead to research questions. Case studies will be used to test whether the outcomes of the literature study also hold in practice.

What are the trends in family business succession? In order to design a good planning it is good to take a look at how other family firms deal with the succession issue. Flören (1998) found out that 60 % of the firms plan the succession in less than a year. He also noted that 5% of the firms take a period longer than five years. Besides that only 29 % of the family businesses are planning the succession. However, on the other hand 60% of the firms are using the advice of a consultant. More than half of the firms in the Netherlands can be seen as a family business. So a lot of family firms are not making a detailed planning for the nearby future. In combination with the ‘aging issue’ that is why the ‘succession issue’ is currently a hot item to explore.

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1.2 Background of the problem

For my master thesis I want to conduct a research on the succession issue in family-owned businesses. The reason why I am interested in this subject is because I work in a family business that is going to pass the ownership forward to the next generation. Besides that my father owns a business in which the succession issue might play a role in the future. The number of family businesses has increased over the last years and a lot of family-owned businesses face many challenges in passing the company through to the next generation. Most of these firms are not well prepared or they postpone the succession issue. For instance the family successor must be selected and if there are more candidates, prevention of family conflicts is a matter of great importance. Second, the owner must have a plan for exiting the business step by step. Besides these issues the plan must be funded. Lending money at the banks will be more difficult in the nearby future, so firms have to create a buy-selling plan. Also important is a well-considered tax-planning. Exit techniques are often designed to minimize, spread out or recharacterize taxes. A successor has to deal with all these issues, but what is the best way to achieve successful executive succession? Many family businesses have to deal with the ‘succession issue’ in the next 10 years. Often they do not make a planning and they are also unaware of possible problems and barriers.

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1.3 Problem statement

In my attempt to find a so called ‘literature gap’, I have recognized that most studies in the past two decades failed to provide evidence on the usefulness of succession planning in the long run. Van Teeffelen states that turnover, dependency on (few) customers and owner-dependency of the firm, together with entrepreneurial flexibility, market awareness, years of ownership and familiarity with the successor are all good predictors of positive transfer outcomes. These indicators seem to be very important and the question is whether or whether not a detailed long term planning is a guarantee for successful succession. Or are the mentioned factors by van Teeffelen better indicators for the success of a company after a take-over? In order to give answers on these questions, Van Teeffelen recommends comparing perceived transfer performance and balance and profit sheets before and after the business transfer. For me the challenge is to identify the success factors of successful succession according to the literature and proof that they really work in practice. Planning seems to be a key factor in the succession process. The question is whether a family firm with a detailed planning is assured of a successful future. The planning could be made years to early and therefore become over aged. Macro-economic factors or family conflicts can cause new circumstances that influence the succession process. Because planning has got positive and negative consequences it is good to take a look at the performance of the firm before and after the business transfer. Through a literature study the success factors of successful succession according to the literature will be identified. Case studies will be executed in order to identify if these success factors are a guarantee for better business performance after the transfer process. The case studies will tell us how family firms have experienced a succession process. They can tell us which problems often occur and also what family firms can do to achieve a successful succession process. The main purpose of this research is to increase knowledge. Hopefully family firms can take advantage of the outcomes of this paper.

After the literature study and the case studies I will try to give an answer on the following main question:

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1.4 Planning

This paragraph contains a planning for the rest of the thesis. Chapter 2 is all about the literature study and starts with definitions of family businesses and succession. After that the different ways to plan succession will be distinguished. Also the problems and barriers during the transfer process will be discussed. Because it is important to see how the company operates after the business transfer, the post transfer performance will also be discussed in this chapter. Chapter 2 ends with the conclusion of the literature study. The results of the literature study will lead to research questions. Chapter 3 will deal with the research method. There will be a description for the form of the case study and the chosen sample. Also the data collection process will be described.

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1.5 Summary

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2. Research Method

This chapter describes how the data collection process will be carried out. Paragraph 2.2 describes the research method that will be used in order to obtain information from practical experiences. Paragraph 2.3 gives an overview of the population that will be used to gain the information. The data will mainly come from accountants and from family businesses that already experienced a business transfer. Paragraph 2.4 will give a summary of chapter three.

2.2 Method of research

A literature study will be carried out to identify the success factors of a successful succession process. Many different academic articles, journals and books about family business (succession) are investigated. Sources that were used include the library of the University of Groningen, Purple-search, Business Source Premier and many other academic materials. With the use of literature about family business succession is tried to give an overview from the ways to transfer a family business to the next generation. The literature study is used to gain insights into family business behavior. A case study will be carried out to test how family businesses deal with the succession issue. According to Yin (1984) a case study is an adequate technique to test if the findings from the literature study hold in practice. Ultimately the findings of the case study must lead to answers on the sub questions and finally on the main question. Cooper and Schindler (2003) define the case study as a methodology that combines individual and (sometimes) group interviews with record analysis and observation to understand events and processes. Verschuren and Doorewaard (1999) describe six characteristics of a case study:

1. a small quantity of research units 2. labor-intensive generation of data 3. more thorough than generalizable 4. strategic sample

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6. observation in the natural environment of the sample

A qualitative research will be applied in order to gain primary data. Qualitative research is designed to tell the researcher how (process) and why (meaning) things happen as they do (Cooper and Schindler 2003). Qualitative techniques are used at both the data collection and data analysis stages of the research object. At the data collection stage Cooper and Schindler (2003) distinguish the following techniques: focus groups, individual depth interviews, case studies, ethnography, grounded theory, action research and observation. The aim of this research is to achieve an in-depth understanding of the succession process. The interview is the primary data collection technique for gathering data in qualitative methodologies (Cooper & Schindler, 2003). This research will make use of individual depth interviews. The data will be obtained from two different sources: people and organizations or institutions. First accountants will be interviewed to gain insights in their observations. Afterwards a comparison between their observations and the collected data from family businesses can be made. Secondly interviews among family businesses that already experienced a succession process will be carried out. The firms must be at least a second generation family businesses. Firms were selected based on the following definition:

The family business must be family-owned and family managed in the first place (Chua et al., 1999). And besides that that the firm has to meet at least two of the three mentioned criteria (Flören, 1998):

1. More than 50% of the shares or certificates are owned by a single family. 2. A single family can exercise considerable influence.

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2.3 Population

Sample sizes for qualitative research vary by technique but are generally small (Cooper & Schindler 2003). For this research two accountants and three family businesses will be consulted. The businesses are all second/third generation family businesses that already passed the succession process. The accountants have got years of experience and they gave advice to many business transfers.

The first accountant (accountant A) is located at five different places in the north of the Netherlands. Currently there are working around the 50 employees for the company. For this research the owner of one of the locations (Eelde) will be interviewed. It is a solid organization that gives advice to the areas of accountancy, tax services and personnel issues. By good communication and intensive cooperation the company has helped to succeed a lot of family business transfers. And by investing in long-term relations the accountant receives mutual respect and trust. He therefore exactly knows what goes through the head of incumbents and successors. That is why interviewing this accountant can be very useful to get a better understanding of the succession process. The second accountant (accountant B) is located in the city of Groningen and has got 12 employees. The customer portfolio mainly consists of small businesses and service businesses. Short communication lines within the organization and between the organization and the customers are characteristic for this accountant. Personal involvement leads to good relations and successful business transfers. Because this accountant also experienced many different business transfers he can tell about common errors, improvement points and success stories.

Family business A is an independent real estate company located in the north of the Netherlands. Currently seven employees are working for the company. The company is active in the following real estate areas: investments, developments and special projects. The company started in the seventies and the current owner took over in 2000. In the years after the business transfer the company showed a major growth. The current owner participated in the whole process and he can tell what went wrong, what could be done better and what went right.

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in 1963 in Drenthe. The company focuses on corporate social responsibility and tries to enthuse their employees for that philosophy. The family business can be seen as a reliable, inventive organization. Family business B is a typical family business and therefore extremely suitable for this research project.

Family Business C is a medium sized construction company located in the city of Assen. The company was founded in 1914 and currently 26 employees are working for the company. The family business focuses on new building, cultivation, maintenance, restoration and the production of building components in their own work place. Family business C is the oldest company of the three and therefore faced all the different facets of the succession process.

2.4 Summary

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3. Literature study

This chapter is contains a literature study that must identify the success factors for successful succession in family businesses according to the literature. In paragraph 3.2 a definition of a family business will be given. Paragraph 3.3 gives a definition of succession. Succession in family businesses can be planned at different levels and in different ways. Paragraph 3.4 gives an overview of the numerous ways of how to plan a business transfer according to the literature. Before, during and after the actual succession moment many things can go wrong. Therefore paragraph 3.5 enumerates the problems and barriers in case of family succession. Paragraph 3.6 is about the period after the succession: the post transfer performance. The last paragraph of this chapter will be the conclusion. The findings of the literature study are leading to research questions. This conclusion can be found in paragraph 3.7.

3.2 Definition of family business

Throughout the years a lot of definitions of family businesses are being used in research. There is no common known definition and besides that it is difficult to compare different countries (Astrachan 2002). A lot of definitions are made and Chua, Chrisman & Sharma (1999) reviewed over 250 papers in the family business literature. They have identified three possible combinations within a family business: (A) family-owned and family managed, (B) owned but not family managed, (C) family managed but not family-owned. In summary, there appears to be total agreement that a business owned and managed by nuclear family is a family business. Researchers in the field of family business agree that family involvement in the business makes it unique. This involvement has usually been categorized in terms of ownership and management. Chua, Chrisman & Sharma (1999) combined all other definitions into the following definition: ‘The family

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the Dutch economy. The definition he uses in this article states that an enterprise is a family business when it meets at least two of the following three criteria:

1. More than 50% of the shares or certificates are owned by a single family. 2. A single family can exercise considerable influence.

3. A significant proportion of the members of the board of directors are from one family.

In their paper Tagiuri and Davis (1982) developed a three-circle model in which they describe three important characteristics of family businesses. The purpose of their paper is to show that the family company has several unique, inherent attributes, and each of these key attributes is a source of benefits and disadvantages for owning families, nonfamily employees, and family employees. They have identified the three characteristics: family, ownership and business. A combination of these three characteristics decides in which segment an employee can be placed.

Three-circle model of family business (Tagiuri & Davis, 1982)

The figure displays an overlap. It shows, for example, that father and son are both members of the same family, are both members of the owning group, and are both members of the management group. The overlap of these membership groups generates the many distinguishing features of family companies (Tagiuri & Davis, 1982). One employee can represent three simultaneous roles: as relatives, as owners, and as managers. In their model they have distinguished the following segments:

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3. Just management/employees 4. Family – management/employee 5. Family – owner

6. Owner – management/employee

7. Family – owner – management/employee

Shanker and Astrachan (1996) are defining family businesses by the degree of family involvement. In their paper they have divided the criteria used to define family businesses into three groups: broad, middle and narrow definitions. The broadest and most inclusive definition requires that the family has some degree of effective control over strategic direction, and that the business is at least intended to remain in the family. The middle division would include all the criteria of the broadest group and would require that the founder or descendant runs the company. The narrowest family business definition would require that the business has multiple generations involved, direct family involvement in daily operations, and more than one family member having significant management responsibility.

In this study the combination between the definitions of Chua et al. (1999) and Flören (1998) will be used. The family business must be family-owned and family managed in the first place. Besides that that the firm has to meet at least two of the three mentioned criteria:

1. More than 50% of the shares or certificates are owned by a single family. 2. A single family can exercise considerable influence.

3. A significant proportion of the members of the board of directors are from one family

3.3 Definition of succession

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events, and organizational mechanisms by which leadership at the top of the firm and ownership, are transferred. Kansikas and Kuhmomnen (2008) describe succession as a transfer of tangible and non-tangible ownership and entrepreneurship from one generation to another. Most of the business successions occur between the founder generation and the second generation. And the more generations will pass, the more there are situations to break or reduce the family ownership. That is why the first succession process of a family business seems to be the most crucial and important one.

Besides the fact that succession is a transfer of ownership, it is also a transfer process of emotions, values and behavior. From financial perspective taxation planning is essential in managing the succession process. Succession should be based on responsible ownership and clear communication between the founder, successor and the other stakeholders (Lambrecht and Donckels 2006). Most important succession issue is to transfer expertise and ownership from the incumbent to the successor. But not in all the cases succession can be planned, managed and coordinated. Sometimes succession occurs at and unexpected moment in time. Steier (2001) divides family business succession into four different scenarios:

1. unplanned and sudden succession 2. rushed succession

3. natural immersion

4. planned succession with deliberate transfer of social capital

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3.4 Succession planning in family businesses

In order to ensure continuity the succession process needs to be planned (Lansberg, 1988). Lansberg (1998) advices to make an appropriate planning and he also advices to train the founder’s successor. Other authors also advice to make a detailed planning before the actual take-over takes place. But they do not agree on the fulfilment of such a succession plan. According to Lansberg the basic tasks involved in succession planning include:

1. Formulating and sharing a viable vision of the future in which the founder is no longer in charge of the family firm.

2. Selecting and training the founder's successor as well as the future top management team.

3. Designing a process through which power will be transferred from the current generation of management to the next.

4. Developing an estate plan that specifies how family assets and ownership of the enterprise will be allocated among the founder's heirs.

5. Designing and staffing the structures appropriate for managing the change, including a family council, a management task force, and a board of directors.

6. Educating the family to understand the rights and responsibilities that come with the various roles that they may assume in the future.

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occur until sometime in the future, it may be advisable to have the exit plan include flexibility features.

Chrisman, Chua, Sharma and Yoder (2009) made a step-by-step guide in order to lead family businesses through the succession process. The first step is to prepare the family for the upcoming succession issue. Of course there must be family members in the next generation who are willing and potentially able to take over. The next step is to get the family to agree upon its goals and the goals of the family business. Everyone must agree about the future direction that the business is going to take. Then there must be decided who is going to select the successor. The choice can be made by the incumbent or by an independent group of outsiders. Then the criteria for selecting a successor should be derived from the family’s goals. If these criteria are set, potential successors must be interested. Coercion is not the right way to achieve interest from the potentials successors. Ways to get children interested in the family business are: involving them at an early age, hiring them immediately after they finish their formal education and designing positions within the business that match their interests. After all these steps the incumbent must feel secure about the business and the family before letting it go. Incumbents often have problems with letting the business go, so it is important to define and communicate the retiring incumbent’s new role in order to avoid leadership conflicts. The timing of the succession is also an important issue. The best time for the succession is when a successor is ready and sure of his status in both the family business and the family. And of course the incumbent must be emotionally ready to let go.

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expected to be more exposed to innovations and to be more in favor of promoting a professional type of management. They conclude that for the process from successor selection to successor adaptation to the family business, more professional counseling will be required in every stage of the succession. According to the authors the new generation is perceived to be successful only when delegated with full authority. The predecessors should, therefore, ensure the creation of a suitable business environment for authority delegation.

Marshall, Sorenson, Brigham, Wieling, Reifman and Wampler (2006) investigated owner age in relationship to succession-related processes and plans. They have found a positive relationship between owner age and formal succession plans. The older a business owner gets, the more he is going to think about the succession issue. The authors also

found out that business owners create ‘formal’ plans without valuing and extensively

using either formal or informal succession planning processes or successor training. This means that incumbents create formal plans with minimal input from other family members. Sometimes not even the successor is involved in the succession planning. Business owners are most of the times aware of the succession issue, but they often refuse to cooperate with the successor and other family members.

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In the next table the different views on succession planning will be displayed:

Author Essential for succession planning according to the author

Lansberg (1988) Appropriate planning and train the founder’s successor. Designing and staffing the structures appropriate for managing the change.

Dyck (2002) Sequencing, timing, communication/teamwork and baton passing

technique (for example how to make the successor responsible). Parrish (2009) Exit plan for the owner and also time planning and flexibility is very

important. Chrisman et al.

(2009)

Prepare the family and incumbent for the upcoming succession issue. Incumbent must feel free to let the business go. Timing. Tatoglu et al.

(2008)

Successors must show willingness to demonstrate a long-term commitment to the business. The successor must have the ability to gain the necessary knowledge, skills, and competencies required to manage the business.

Marshall et al. (2006)

The older a business owner gets, the more he is going to think

about the succession issue. But often they refuse to cooperate with

the successor and other family members. Van Teeffelen

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Flexibility and social skills speed up the transfer process. Advisors

slow down the process. Skills, experience and competencies of

business owners are important.

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enterprise will be allocated among the founder's heirs. Dyck (2002) and Parrish (2009) argue that it is important to make an exit plan for the owner. According to Dyck (2002) successful succession also needs sequencing, timing and communication/teamwork. It seems obviously that the succession planning takes place in a logical order. With timing Dyck (2002) means starting the transfer process when the environment around the firm is serene. Chrisman et al. (2009) also writes about the importance of timing, but he means something else with it. He states that the perfect timing of a business transfer occurs when the successor and the incumbent are both ready for it. Tatoglu et al. (2008) adds to this that the successor must show willingness to demonstrate a long term commitment to the business. He also mentions that the successor must have the ability to gain the necessary knowledge, skills and competencies required to manage the business successfully. I think that not only the abilities of the successor are important, but also the abilities of the incumbent are from great importance. The incumbent decides how to plan the succession and finding a successor is just one of the steps during a transfer process. Van Teeffelen (2010) states that the skills, experience and competencies of the owner are crucial in the succession process. Marshall et al. (2006) concludes that the older a business owner gets, the more he is going to think about the succession issue. That seems to be a logical conclusion, because the actual succession moment comes closer. The only problem according to Marshall et al. (2006) is that the business owner refuses to cooperate with the successor and other family members. In my opinion a good and open communication between all the parties will lead to higher satisfaction after the business transfer. Parrish (2009) and Van Teeffelen (2010) also mention flexibility as a key issue for successful succession. Circumstances and situations can change and firms must be able to respond quickly on changes in the environment.

3.5 Problems and barriers in case of family succession

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letting go the business and when the successor has got problems in taking over the company. Obviously conflicts between the incumbent and the successor about goals, strategy and process reduces likelihood of effective succession. Parrish (2009) states that successful family-owned businesses fail simply because they had no plan for business continuation. According to Brockhaus (2004) the quality of the relationship between the incumbent and the successor is critical for a successful succession process. Dyck (2002) agrees on this fact and says that the greater the level of agreement between the incumbent and the successor on the mode of succession, the more likely it is that the succession will be successful. Sometimes there may be resistance to succession in family businesses. According to Kansikas and Kuhmomnen (2008) succession conflicts can be avoided by early preparations and open discussions. Lack of planning and resources are threats for the succession. And the inability to manage conflicts can cause failures when a family business needs to make decisions about succession. Another effect of family conflicts is that it can reduce family harmony and prevent sharing of the vision. Family conflict are most of the times not a smoothly base for successful succession. However, sometimes a turnaround strategy may help a family firm in the longer run. It may guarantee family business renewal and restoration of the competitive advantage (Kansikas & Kuhmomnen, 2008). In this case a conflict between generations can lead to new insights and also better performance of the family business in the future.

Massis, Chua and Chrisman (2008) wrote an article about the factors that prevent intra-family succession. They have identified three direct causes that prevent a previously intended succession from occurring:

1. All potential family successors decline the management leadership of the business. 2. The dominant coalition rejects all potential family successors.

3. The dominant coalition decides against family succession although acceptable and willing potential family successors exists.

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succession might be prevented by the unexpected loss of potential successor(s) or the unexpected loss of the incumbent. Another factor is the personal sense of attachment of the incumbent with the business. An incumbent’s inability to let go is the most cited barrier to effective succession. Also the birth of new children, or the remarriage or divorce of the incumbent during the succession process, may impede succession. According to Massis et al. (2008) the following relation factors are preventing successful succession: conflicts / rivalries or competition in parent-child relationship or among family members. Besides that the lack of trust in the potential successor and the lack of commitment to the potential successor by family members can lead to conflicts. Also financial factors may play a role in preventing succession. A lack of financial resources will prevent successor(s) to take over the business. Context factors include factors associated with changes in the economic environment in which the family business operates. A change in business performance, decreased business scale or the loss of key customers or suppliers will alter the willingness of the potential successor to take over. Process factors are related to aspects of the succession process that cause succession will not take place. They deal with preparing the successor, evaluating the successor and communicating with the family firm’s stakeholders. Examples are: not clearly defining the roles of the incumbent and the potential successor(s) and also bad communicating and sharing of decisions related to the succession process with family members and other stakeholders. A gap between the potential successor’s needs and abilities may also cause bad succession. These abilities can be improved by training of the potential successor. If the skills of the successor will not be up to date, the succession may not take place because the potential successor will be inadequately prepared to assume the top management position. Besides the capabilities of the successor it is important to formulate rational and objective criteria for selection (Massis, Chua & Chrisman, 2008). Better understanding of the mentioned factors will help families with transferring the family business successfully.

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situations may affect the succession process. For instance sudden unplanned tragedies such as a heart attack or a car accident may force the family to make decisions faster and without planning. According to Malinen (2001) generations conflicts about developing the company in the future, might cause problems between the incumbent and the successor. His research also showed that one of the biggest problems in business transfers is financing the succession. Problems that often occur during a succession process are showed in the next table.

Author Problems in case of family succession

Parrish (2009) No plan for business continuation.

Dyck (2002) Conflicts between the incumbent and the successor about

goals, strategy and process reduces likelihood of effective succession.

Brockhaus (2004) Difference between skill sets and managerial styles of

incumbent and successor.

Kansikas (2008) Succession conflicts can be avoided by early preparations and open discussions. Lack of planning and inability to manage conflicts.

Massis et al. (2008) Relation factors are preventing successful succession: conflicts / rivalries or competition in parent-child relationship or among family members. Also lack of trust in the successor and financial factors prevent succession.

Marshall et al. (2005) Older business owners find it difficult letting the business go.

Malinen (2001) Lack of openness within the immediate family. Lack of planning

and unexpected situations may affect the succession process. Generation’s conflict and financing may also cause problems.

2.6 Post transfer performance

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of an ownership change, succession planning does not contribute to objective transfer performance but does improve satisfaction on the part of the entrepreneur who is selling. Succession planning seems to be a method to give the selling party some confidence for the future. Although van Teeffelen (2010) mentioned one exception for the usefulness of succession planning and that is concerned with tax planning; firm owners may greatly profit from early tax advice. In order to determine the success factors of a successful succession process, he mentions that it is useful to identify the underlying factors of the process by means of further research.

Van Teeffelen (2010) does not only look to the actual transfer process, but he also looks to the period after the post-transfer performance. He concludes that renewal after succession pays off. This means that renewal by successors in general seems to benefit and revitalize small firms. He argues that reorganization and renewal after the succession is at least so important as a detailed succession planning. Where other authors mainly focus on the pre-transfer period, van Teeffelen shows us the importance of a good planning after the succession. The question is whether or whether not a detailed succession planning is the ‘key’ to a successful operating business? Or are other factors of greater importance for the success after the succession process.

3.7 Conclusion

A lot of definitions for family businesses came along, but for this paper the following definition will be used. The family business must be family-owned and family managed in the first place (Chua, Chrisman & Sharma, 1999). And besides that that the firm has to meet at least two of the three mentioned criteria (Flören, 1998):

1. More than 50% of the shares or certificates are owned by a single family. 2. A single family can exercise considerable influence.

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immersion. The last form is the planned succession with deliberate transfer of social capital.

This conclusion will give a summary of the most important succession issues:

1. Planning

The actual succession planning process can be approached in different ways. Preparing the family and the incumbent for the upcoming succession is important. Not every successions process is carried out without problems. No plan for business continuation is an often identified problem. Besides the lack of planning, also unexpected situations may affect the succession process. The inability to manage conflicts may also affect the succession process. Conflicts between the incumbent and the successor often deal about goals, strategy and process of the succession. These conflicts can be avoided by early preparations and open discussions. Often a lack of communication and inability to manage conflicts will lead to problems. Defining an appropriate planning (including a time planning plan) is also an advisable step in the succession process.

2. Knowledge, capabilities and skills

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3. External advice

The assistance of external advisors is sometimes useful, but often it slows down the succession process. An exception can be made in case of tax advising: firm owners may greatly profit from early tax advice.

4. Period after the succession

Also a good planning after the succession is very important. Renewal after succession pays off. This means that renewal by successors in general seems to benefit and revitalize small firms. Reorganization and renewal after the succession is at least so important as a detailed succession planning.

In order to give an answer on the main question, sub questions will be derived out of the literature study. Previously the four most important succession issues from the literature study are given. For each succession issue a sub question is designed. The main question that will be answered at the end of this research is:

What are the success factors of a successful succession process in family businesses?

Sub questions:

1. Which planning steps are crucial for the success of a business transfer?

2. Which steps must be made in order to gain the right knowledge, capabilities and skills for the incumbent and the successor?

3. In which phases of the succession process it is relevant to use external advisors?

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4. Findings

This chapter will display the findings from the different interviews. Based on the outcomes of the literature study two questionnaires are made. The first questionnaire (Appendix A) concerns questions for the accountants and the second questionnaire (Appendix B) contains questions for family members who already experienced a business transfer. The questions are divided in the following four subjects: planning, knowledge, capabilities and skills, external advice and the period after the succession. The paragraphs 4.2 and 4.3 describe the findings from the interviews with accountant A and accountant B. The findings from the interviews with family business A, family business B and family business C is displayed in the paragraphs 4.4, 4.5 and 4.6. Paragraph 4.7 will give a summary of chapter four.

4.2 Accountant A

Planning

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the incumbent has got one child, it is also important to determine the value of the company. In general making the company salable is something that is often not good planned. Ways to make the company salable are: going over to another structure or taking property out of the firm and rent it back. What also can be planned better is the employee planning. When a successor does not want to take over all the personal because of malfunctioning, this has to be planned in an early phase. In general family businesses do not plan the composition of the staff after the succession.

Knowledge, capabilities and skills

The accountant states that business owners often think that they have the skills, experience and competencies to lead the succession process. In practice they often do not have the right capabilities. The advice of an accountant or another advisor is therefore recommended, but in the end the incumbent must make the decision. They accountant rarely speaks successors who are not ready to lead the business. But when he recognizes a shortcoming, he will definitely indicate that. Sometimes the successor has got the know-how, but not the capabilities to lead the company. The successor sometimes follows a management course, but another way to solve his shortcomings is placing a manager next to the successor. Business transfers often do not fail because of a lack of knowledge. On the other hand a lack of market awareness can lead to failure. It is certainly advisable that the successor starts working in the company in an early phase. The current customers must get trust in the new owner, because sometimes they leave the company after the business transfer.

External advice

The accountant advises to approach external advice as fast as possible. In practice family businesses can make use of advisors earlier in the process. The accountant is an expert who stays with the company for a longer period. Before, during and after the actual succession moment the accountant is consulted. Other external advisors helping the company only during the succession moment. In general the help of external advisors does not slow down the succession process. Family businesses should consult advisors who have got market awareness. An accountant can help with the financial aspects, but he often has not got a good view on particular market developments.

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Changes after the succession are good, but major changes often do not happen after the succession moment. The successor has got different ideas than the incumbent and that can lead to disagreements. Therefore it is advisable that the successor starts working before the succession moment. There are no special things that companies should definitely change after the succession moment. But the process after the succession is of great importance and should be planned. The family business must have a well formulated vision, mission and strategy.

4.3 Accountant B

Planning

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leaves the company directly after the succession moment. Often when the incumbent and the successor have not got the same expectations and opinions conflicts arise. The psychological aspect is often an underexposed subject. Notaries, tax planners and accountants are generally often consulted. The accountant therefore suggests the use of a psychologist during the succession process. A psychologist may prevent family conflicts and he can keep everybody satisfied. In general family businesses have got an adequate financial planning. Organizational aspects and passing the responsibilities can be better organized. The accountant emphasized the importance of a good communication between the family members. Goals must be clearly defined and expectations must be achievable.

Business owners often have the skills and experience to lead the succession process. Most of the times they hire external advice for the financial aspects. When the family members visit an accountant they have already recognized that the successor has got the capabilities to lead the company in the future. Sporadically it happens that a successor does not seem to be capable to take over the company. It is the role of the accountant to talk about this issue with the family. Sometimes the father puts his child under pressure and forces the child to take over the business. When a family comes to an accountant, it is generally a well thought decision. Only a few businesses fail because of a lack of knowledge.

External advice

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succession moment it is hard to see for the accountant whether the company is planning and organizing well. Only the annual obligations are an indicator for the performance of the firm. Often business owners say that there are no problems and everything goes well. A reason can be the sober attitude of people from the northern part of the Netherlands.

Period after the succession

According to the accountant there not often occur major changes after the business transfer. The ideal scenario is that changes take place by slow stages before and after the actual succession moment. It is not recommended to transfer the whole leadership at one moment in time. A natural process where the incumbent is advising at the background will be ideal. The process after the succession is important, but changes after the process must be planned in the period before the transfer. There are no general things that companies plan, but action planning usually takes place before the actual take over. When companies do not plan the period after the succession, often things will go wrong in the nearby future. Changing things can be good, but it is recommended to do this in cooperation with the present employees. Sometimes new impetus and seizing opportunities can result in a major growth. So there is no fixed pattern for the period after the succession, but when successors want to change things they have to plan these innovations carefully.

4.4 Firm A

Planning

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active in the background. There was no precise time planning plan made and soon after the business transfer conflicts occurred. On anniversaries and other parties the family members only had discussions about their business. Relations deteriorated and there were a lot of disagreements. Finally they split up the company and the three brothers went their own way with their own company. When one of the successors looks back at this period, he would do things different in exactly the same situation. He mentions open and honest communication and talking about shortcomings of potential successors. When these things were discussed before the succession, thing maybe did not escalate after the succession moment.

When the successor looks back, maybe the incumbent was not the right person to lead the succession process. He was not a good communicator and he did not clarify his motives. At that moment the successor had his doubts about the expertise of his father, but he was not in the position to argue about that. The successor states that an incumbent must initiate the process and he is also responsible for hiring external advice. Because the successors were not in the position to overrule the incumbent, they started the succession process with the incumbent in the lead. At that moment the successors did not have any experience and they trusted the incumbent. The family did not look at the knowledge, skills and competencies of the successors. It was the wish of the father that the three brothers would run the business together. When looking back, we can conclude that two brothers did not have the capabilities for leading the company. One of them followed a master’s degree, but was not capable of leading the business in practice. Concluded can be that the incumbent and the successors were not capable of leading the succession process by themselves.

External advice

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successors are satisfied. The advisor was indispensable during this process. When looking back, the successor should have hired external advice as soon as possible. He now thinks that three years before the actual succession moment is a good period to start consulting external advice.

Major changes did not occur after the succession moment. For the three successors it was a continuation of the same work. The only difference was that they were now in charge and responsible for the family business. The successors became more dependent from each other and that led to disagreements. When one successor gained bad financial results, it was not good for all the successors. There was totally no planning for the period after the succession moment. Because of all the conflicts the decision to split up was an easy one. The successors are all good in their field, but they simply cannot work together. When the successor looks back, he is skeptic to allow his own children in the family business. Now he has got the necessary knowledge and he can possibly help family businesses who are dealing with the succession issue.

4.5 Firm B

Planning

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looks back at the succession process he argues that a potential successor must work for a couple of years in the company to gain some experience.

Due to the fact that in family business B the successors were already working for the company, they gained a lot of experience and knowhow. The successors worked hard, were driven and ambitious. In these years they have gained the necessary knowledge, skills and competencies to lead the business. The former shareholders gave the successors the time and space to develop their skills. In the end they decided if the potential successor is qualified to become a member of the management board. The shareholders recognize if a potential successor is not suitable for the family business. Important is that incumbents make well thought-out decisions and the successor must prove in practice that he can handle the job.

External advice

The company thought about advisors and used an accountant to plan the succession. The take-over by the external party was guided by an accountant. Because the take-over took place in less than six months, earlier help from the accountant was not possible. For the nearby future the family business wrote major decisions down on paper. For instance the value of the family business and the way a shareholder can leave the company are clearly specified. An accountant advised the company to follow the current structure. The successor is satisfied with the help of external advisors and he thinks that the family business went through the succession process in a good way.

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4.6 Firm C

Planning

Family Business C planned some crucial moments in relation to the upcoming succession. The actual succession moment took place when the incumbent became 65 years old. Five years before this moment the successor became shareholder of the company. The successor already worked a couple of years for the company and he gained some experience. The plan was to transfer the company to the successor when the incumbent became 65 years old. Plans for unforeseen situations were not made. The only thing that was documented was the shareholder ship of the successor. All the other decisions were made in the last year before the actual succession moment. Because the successor was already working in the company, it was easy for the incumbent to leave the company. Before the business transfer, the incumbent started working one day less. After the succession he advices and helps the successor whenever the successor wants. The other children of the incumbent already had another job and the successor was the only one who wanted to take over the company. The incumbent thought that his son was suitable for the job. The family always communicated about the succession issue and there occurred no rivalries or conflict between family members. There was no exact time planning plan, but some future actions were set. The successor looks back at a smooth succession process and is happy with the way they did it.

The business owner thought that he had the skills and experience to lead the succession process. The successor convinced him to use external advice, because he thought that it was going to be a difficult process. The incumbent already worked with the successor and therefore he knew that the successor was suitable for the job. In the years before the succession moment, the successor gained the necessary knowledge, skills and competencies to lead the business. The successor also obtained the necessary certificates to lead the company.

External advice

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all the major decisions were made in order to pass the business successfully to the successor. Also the selling price was set in that last year. The external advisors that they used were: a bank, an accountants and a notary. According to the successor, the external advisors did not slowed down the succession process. The successor thinks it was good to make use of external advice five years before the actual succession moment. Also one year before the actual succession, external advice was indispensable.

After the succession the company changed the business structure. Besides that no major changes, reorganizations or renewals took place. The successor kept doing the same work and some extra work was added to his responsibilities. Employees already knew the successor and it was not necessary to naturalize the successor in the company. The biggest change was that the successor became more responsible and he had to take the major decisions on his own. The daily work routine did not change and the successor is happy with the period after the actual succession moment.

4.7 Summary

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5. Conclusion

This chapter will give an answer on the following main question:

What are the success factors of a successful succession process in family businesses?

First a comparison will be made between the results from the literature study and the findings from the accountants and the three family businesses. Paragraph 5.2 will give an answer to sub question 1, paragraph 5.3 will give an answer to sub question 2, paragraph 5.4 will give an answer to sub questions 3 and paragraph 5.5 will give an answer to sub question 4. Finally in paragraph 5.6 the result from these comparisons will be used in order to give an answer to the main question. Paragraph 5.7 will give a summary of chapter five.

5.2 Sub question 1

Which planning steps are crucial for the success of a business transfer?

Accountants agree with on the statement that the actual succession moment must be planned in an early phase. They recommend starting planning approximately three to five years before the actual succession moment. It is also important to make plans in case of unforeseen situations and communicate about possible death or illness. The accountants agree on the fact that the successors must be prepared for leading the business. It would be ideal that the successor first gains some experience in another company. After that period the successor must start working in the company 3-5 years before the actual succession moment. A lack of communication and the inability to manage conflicts often leads to problems, it is therefore recommended to communicate open and define goals and expectations. Financial planning is also of great importance: the successor must be able to finance the business transfer. A construction to pass the ownership and determine the value of the company also must be planned. Often family businesses do not think about the composition of the staff after the succession moment. The accountants advise to write down major issues.

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contribute to a smooth business transfer. Five years before this moment the successor already became shareholder in de family business. The successors argue that a period of three to six years is necessary to plan the succession and naturalize the successor in the company. They all agree that it is advisable that the successor must work in the company for a couple of years. In general the family businesses do not make plans for unforeseen situations. None of the businesses made an exact time planning plan. The firms agree that an exit plan for the incumbent is advisable. In family business A this was not the case and the incumbent stayed active at the background. All the major decisions were made in the last year before the actual succession moment. In that last year the contacts with the accountants were frequent. The family businesses determined the value of the firm in the latest phase of the succession process. Only family business B wrote down future decisions on paper.

5.3 Sub questions 2

Which steps must be made in order to gain the right knowledge, capabilities and skills for the incumbent and the successor?

One accountant argues that business owners often think that they have the capabilities to lead the succession process. The other accountant disagrees with that. It happens sporadically that a successor does not seem to be capable of leading the company. Business transfers generally do not fail because of a lack of knowledge. On the other side a lack of market awareness can lead to business failure. Open and honest communication about shortcomings of potential successors is advisable. In all the family businesses the incumbent decided that the successors were suitable for the job. The incumbents often think that they are suitable for leading the succession process, but in practice this is not the case and family businesses should make use of external help. When the successor already works in the company, he gains the necessary experience and knowhow.

In which phases of the succession process it is relevant to use external advisors?

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accountant suggests that the use of a psychologist can help to prevent family conflicts and create unity. Often family businesses consult an accountant too late in the process. Approximately five years before the succession moment would be recommended and the help of external advisors does not slow down the process.

Which changes in the business after the succession often occur?

Major changes after the succession moment are not advisable. There are no special things that companies should change after the succession. But when they do want to change, a natural process were the successor becomes responsible in phases is advisable. It is recommended to make a plan for the period after the succession before the actual succession takes place. The vision, mission and strategy of the successor must be well formulated. The family firms did not plan the period after the actual succession moment. Only family business B changed the daily structure and routine. All the successors agree that it was easy to naturalize in the company, because they already worked in the company.

5.6 Main question

A comparison between these results will lead to the following success factors of successful succession:

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family conflicts and create unity. There are no general things that a successor should definitely change after the succession. But it is advisable to make a plan for the period after the actual succession moment. The vision, mission and strategy of the successor must be well formulated.

5.7 Summary

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6. Recommendations

For family businesses it would be good to turn the outcomes of this research into some recommendations. Family businesses that will experience the succession process in the nearby future can benefit from the results of this research. Recommendations will show when which actions must be taken in which phase of the process. Paragraph 6.2 will give an overview of the recommendations for the family businesses. In paragraph 6.3 some implications for further research will be given. Paragraph 6.4 will summarize chapter six.

6.2 Recommendations

In general it is recommended to start planning the succession moment in an early phase. This is in order to avoid surprises and create time for preparing the succession process. A period of 3-6 years before the actual succession moment is the right moment to start planning. Family firms should determine the value of the firm and think about a construction to pass the business to the next generation. Some constructions need to be planned a couple of years before the actual succession moment. Also the moment that the incumbent will leave the firm must be planned. This is in order to prevent problems because the incumbent is still active at the work-floor. It is also advisable that the successor starts working in the company a couple of years before the succession. This is the best way to naturalize the successor in the company en let the employees get used to the new business owner.

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planning for the succession process can be made. Just as the process before the actual succession moment, the period after the succession must be planned as well. There are no common things that must be planned, but the family business must have an time planning for the upcoming years. Usually firms take action when problems or conflicts occur. Good planning before and after the succession moment can prevent these problems.

Concrete recommendations for family businesses:

1. Start planning in an early phase (3-6 years before the actual succession). 2. Determine the value of the firm.

3. Create an exit-plan for the incumbent.

4. The successor must start working in the company before the succession moment. 5. Open communication between family members is of great importance.

6. Make use of external advice in an early phase.

7. Make an action plan for the period after the actual succession moment.

6.3 Implications for further research

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6.4 Summary

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7. Discussion

This chapter will discuss the outcomes of this research and the course of this study. In paragraph 7.2 the interviews with the accountants and family businesses are evaluated. Besides that a comparison between the outcomes of the literature study and the outcomes from the interviews is made. Other important findings are also mentioned in this paragraph. Paragraph 7.3 will give a summary of chapter seven.

7.2 Discussion

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the family businesses. It can be concluded that the outcomes of the literature study and the advice of the accountants agree with each other. Only the family businesses do not act according to this advice and the outcomes of the literature study. Family Businesses must be more aware of the importance of good succession planning. After this research we can say that family businesses must get more advice in an early stadium. The literature tells us which factors are crucial for a successful succession process. In practice family businesses do not act according to these factors. Banks, accountants or other foundations can play an important advising role. In the future it must be normal to make a succession planning and talk about the actual succession moment with family members in an early phase.

7.3 Summary

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