Why 9 of 10 Family Businesses fail at succession: Learn what the 10 % make right. Best practices from the UK and Germany
©2014
Textbook
77 Pages
Summary
The harsh reality: 9 out of 10 of family businesses will never make it to the third generation. This book investigates which factors are critical for the success of a succession. The study of three family businesses in the third generation from Germany and the UK lead to four best practices. From the results, a new model for succession in family businesses was developed. The qualitative study is one of the first that investigates the performance of successions with an international perspective. This book is recommended for family business researchers, family business owners, advisors and students interested in family business studies.
Excerpt
Table Of Contents
3.5. Reliability, Validity And Limitations ... 40
3.6. Ethical Considerations ... 41
3.7. Summary ... 42
4. Presentation Of Case Studies ... 43
4.1. Introduction ... 43
4.2. Case Study Macsween: The Chieftain Of Scottish National Dish Haggis ... 43
4.3. Case Study Kammerer: From A Basement To International Success ... 45
4.4. Case Study Wiesbadener Wach- und Schließgesellschaft: In 100 Years
From Night Watchmen To Modern Security Solutions ... 47
4.5. Summary ... 48
5. Analysis Of Findings ... 49
5.1. Introduction ... 49
5.2. Background Information ... 49
5.3. Cross-Case Analysis ... 50
5.3.1. The Business How To Change Without Changing Too Much ... 50
5.3.2. Ownership How To Keep Control ... 53
5.3.3. The Family Trust And Support Or Source Of Conflict? ... 56
5.3.4. Time Horizon Inheriting The Past, Building The Future ... 58
5.3.5. Communication Connecting The Perspectives ... 59
5.4. Single-Case Analysis ... 60
5.4.1. Critical Success Factors For Macsween Of Edinburgh ... 60
5.4.2. Critical Success Factors For Kammerer Gewindetechnik ... 60
5.4.3. Critical Success Factors For Wiesbadener
Wach- und Schließgesellschaft ... 61
5.5. Summary ... 61
6. Conclusion And Recommendations ... 63
6.1. Introduction ... 63
6.2. Summary Of Findings And Conclusions ... 64
6.3. Recommendations And Best Practices ... 67
6.4. Limitations ... 69
6.5. Suggestions For Future Research ... 69
References ... 70
Bibliography ... 77
About the Author ... 78
List Of Tables And Figures
Figure 2.1.1: Visual representation of the literature review ... 16
Table 2.2.1: List of consulted journals ... 18
Figure 2.3.1.1: The Family Firm System ... 20
Table 5.2.1: Overview of company data ... 50
Figure 6.3.1: A new model for family business succession ... 67
10
List Of Abbreviations
CG:
Corporate
Governance
CSF:
Critical Success Factor
EC:
European
Commission
EU:
European
Union
FB:
Family
Business
FBs:
Family
Businesses
SME:
Small and Medium-Sized Enterprise
UK:
United
Kingdom
11
1. Introduction
1.1. Research Background
Only 1 out of 10 family businesses reaches the third generation. According to
major studies of different countries, 30 % make it to the second generation and 5
% to 15 % to the third generations (Cater & Justis, 2010; Le Breton-Miller, Miller,
Steier, 2004; Mandl, 2008; Molly, Laveren, Deloof, 2010; Ward, 2011). While not
all failed successions automatically result in the closure of the business (SBS,
2004), 30% of closures are related to transfer failures (Ip & Jacobs, 2006, p. 329).
Across Europe
1
, approximately 450 000 companies are transferred each year,
representing 2 million jobs (European Commission, 2011). While not all of these
businesses are family businesses, it can be argued that the majority of them are.
70% to 80% of all enterprises are family businesses in Europe
2
as a recent study
conducted by the European Commission revealed (Mandl, 2008). Worldwide, it is
estimated that family businesses even account for 90 % of all enterprises
(Gedajlovic, Carney, Chrisman, Kellermanns, 2012). Furthermore, family busi-
nesses account for about 40 % of private sector turnover and provide about half of
European employment (Mandl, 2008). But these numbers highly depend on the
used definition of family business and vary significantly from country to country
(Mandl, 2008).
The field of family business studies has developed rapidly in recent years and has
now reached the top-tier publications in management, finance, economics and
entrepreneurship (Gedajlovic, et al., 2012). However, family business studies is a
relatively new field and not all topics have been investigated thoroughly (Collins &
O'Regan, 2011b). One of these issues is which factors influence the success of
succession (Lussier & Sonfield, 2012). Recent studies investigated this topic but
no general agreement has been reached so far (Wassmus, Schäfer, Scheiner,
Voigt, 2010; Wang, Watkins, Harris, Spicer, 2004; Spelsberg, 2011). Furthermore,
only limited research has been undertaken to investigate the differences between
first-, second- and subsequent-generation family businesses. This question, first
1
Europe in this study was defined as the EU-27 (European Commission, 2011, p. 105)
2
Europe in this study was defined as the EU-27 plus Iceland, Norway, Liechtenstein, Turkey,
Croatia and the Former Yugoslav Republic of Macedonia (Mandl, 2008, p. 1)
12
raised by Morris, Williams, Allen and Avila (1997), has been researched the first
time by Sonfield & Lussier (2004) but according to Lussier & Sonfield (2010),
further research is needed. This dissertation therefore seeks to address which
factors are critical for the success of succession in family businesses.
Purpose of the study
The purpose of this study is to help family business owners, managers, advisors
and family business researchers to understand better what influences the success
of succession and what practical implications can be drawn from that knowledge.
The author of this dissertation has developed an interest for family business
studies and succession through personal experiences and academic studies. A
future career in small and medium-sized family businesses or family business
consulting with an international perspective is aspired. The fact that 90 % of family
businesses do not last until the third generation is worrying and it is the wish of the
author to gain knowledge about this matter. The author is German and writes his
dissertation as part of the double degree programme of Edinburgh Napier Univer-
sity and the University of Applied Sciences Stuttgart. The comparison of the two
countries, the UK and Germany are therefore of special interest to him.
1.2. Aim And Objectives
The aim of this study is to investigate the critical success factors for family busi-
nesses in the process of a business succession and to develop recommendations
for best practices by comparing small and medium-sized family businesses from
two countries. The comparison of businesses from two countries increases the
significance of this work while ensuring practicality.
13
The underlying research questions are:
x Why do only 5 % 15 % of the family businesses succeed in transferring
their business to the third generation?
x How do family businesses change as they are passed on from generation
to generation?
x What are the critical success factors in business succession?
x Are there general critical success factors for succession or do they differ by
company and country?
Re-phrasing these questions, the specific objectives for this work are:
x To critically evaluate the relevant literature in the field of family business
studies and related fields
x To formulate hypotheses for critical success factors for business succes-
sion
x To test the formulated hypotheses by studying three family businesses, one
from the UK, two from Germany
x To make recommendations for succession in family businesses
Delimitations
As defined later, this study does not cover family businesses with more than 250
employees; the findings of this study should only be generalizable for small and
medium-sized family businesses within the EU, excluding micro businesses with
less than ten employees. Furthermore, it is not the intention of this dissertation to
present findings that are statistically representative for family businesses. This
study does not investigate which effect the underlying legal framework (e.g.
inheritance law, tax law) has on a succession but concentrates on the manage-
ment perspective. The findings should only be generalizable on a theoretical basis,
as typical for a case study design. Finally, this study does not research the per-
formance of family businesses in general nor other challenges within family
businesses outside the succession process.
14
1.3. Overview of Research Methodology
Based on a positivistic and objectivistic philosophy, the research was carried out
by using a multiple-case study design. Three small and medium-sized family
business were investigated, one from the United Kingdom and two from Germany.
The findings were largely generated from semi-structured interviews with the
managing directors. The questions were based on hypotheses that were generat-
ed from the consulted literature. Using the method of triangulation, reliability and
validity could be achieved for the domain of European small and medium-sized
family businesses. The findings are limited to theoretical generalizations since it is
not the purpose of a case study design to generate statistical generalizations.
1.4. Structure Of The Dissertation
Following this introduction, the key terms and related fields are defined and
described in the literature review. Additionally, the hypotheses for critical success
factors in succession are generated from the literature. Chapter 3 describes the
multiple-case study design that was used to investigate the aim of this dissertation.
In the next chapter 4, the case studies are presented which forms the basis for the
following analysis of findings in chapter 5. The final chapter of the dissertation
presents the conclusions and recommendations. This last chapter contains the
critical success factors that have been identified. Furthermore, it contains a newly
developed model for family business succession and best practices for succession
in family businesses. Lastly, the limitations of the dissertation and recommenda-
tions for future research are drawn.
1.5. Summary
This chapter described the background and laid out the reason for the study of
critical success factors in family businesses. Afterwards, the aim and objectives as
well as the delimitations were defined. The chapter concluded with a description of
the used research methodology and the structure of the dissertation.
15
2. Literature Review
2.1. Introduction
This chapter reviews the relevant literature that has been published in the subject
of family business succession, the critical success factors for it, and related fields.
The key themes and current issues will be explained and discussed. From these,
the hypotheses will be generated. The structure of the literature review is based on
the three-circle model (Lansberg, 1988) as explained in chapter 2.3.1.
The structure of the literature review is complemented by a visual representation
based on an extension of the three-circle model of Lansberg (1988). This is shown
on the next page. It shows the three perspectives of a family business, the owner-
ship, business and the family. The family business sits in the middle where all
three perspectives overlap. Succession is seen as a process within the family
business. Family business studies are framed by entrepreneurship and SME
studies.
2
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17
2.2. Sources
For the literature review, a total of 58 sources were selected. 67 % of those
sources are written in English while the other 33 % are German literature. Aca-
demic journals comprised 53 % of all sources. To show the quality of the consulted
journal articles, they are displayed in the table on the next page. The table is
sorted after the ABS ranking, published by the Association of Business Schools
(2010). The ranking is complemented by the VHB-JOURQUAL ranking of the
German Academic Association for Business Research (Schrader & Henning-
Thurau, 2009).
31 % of the cited articles were from journals regarded as top (Grade 4) within their
field by ABS, 3 % as highly regarded (Grade 3) and 28 % as acceptable standard
(Grade 2). 38 % of the cited journal articles were not ranked in the ABS Journal
Quality Guide (2010).
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19
2.3. Overview of Family Business Studies
2.3.1. Introducing The Family Business
"One hundred years ago, ``business'' meant ``family business,'' and thus the
adjective ``family'' was redundant."
(Aldrich & Cliff, 2003, p. 575)
This quote by Aldrich & Cliff (2003) shows how the beginnings of family business
studies occurred. Separating owners and managers was a new approach in the
20
th
century as mentioned by Berle and Means (1932) (cited in: Morris, et al.,
1997).
The history of family business studies has been researched and reviewed in many
papers in recent years (e.g. Colli, 2012; Collins & O'Regan, 2011a; Mandl, 2008;
Sharma, 2004). Also, the definition of the term `family business' has been debated
extensively in the literature (Chrisman, Chua, Sharma, 1999; Collins & O'Regan,
2011b; Haag, 2012). Nevertheless, no common definition for `Family Business'
has been established (Collins & O'Regan, 2011b). One reason for this is the large
heterogeneity of family businesses (Mandl, 2008; Sharma, 2004). Another reason
is that family businesses are defined by many different areas such as family
business research, policy makers, legal regulations, or the public (Mandl, 2008, p.
13).
Definition of family business
As Spelsberg (2011, p. 6) notes, a common basis for most definitions is that a
family business (FB) is family-controlled. The key influence of the family is men-
tioned in several definitions (e.g. Chrisman, et al., 1999, p. 25; Sharma, 2004, p. 3;
Sonfield & Lussier, 2004, p. 190) and is seen as the key point for the definition of
the term `family business'. A well-established model (Achleitner, Kaserer, Günther,
Volk, 2011; Chua, Chrisman, Steier, 2003; Sharma, 2004, p. 4) to understand
family business and its definition is the three-circle model as formulated by Lans-
berg (1988), among others.
20
Figure 2.3.1.1: The Family Firm System (Lansberg, 1988, p. 122)
The three circle model describes the different stakeholders and possible perspec-
tives on a family business. The definition of FB includes all three roles: a business
is seen as a FB when the family controls the ownership, manages the company
and when it perceives the business as a FB (Chrisman, et al., 1999, p. 25;
Sonfield & Lussier, 2004, p. 190).
There is consensus in the literature that control of ownership and management by
the family is what distinguishes a family business from a non-family business
(Collins & O'Regan, 2011b; Mandl, 2008; Sharma, 2004). One weakness of many
definitions is that the term `family' is often not defined more specifically (Collins &
O'Regan, 2011b). However, it is assumed that this issue should not affect this
research work since family models in the UK and Germany are comparable. As
suggested by Spelsberg (2011), control of ownership is defined after IAS 27 as
"the power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities" (European Commission, 2009, p. 1).
Definition of third generation family businesses
Based on the previous definition of FB, a third generation family business is seen
as an FB in which the third generation takes part in the management and owner-
ship of the firm (Lussier & Sonfield, 2010).
Ownership
Family Business
The Environment
21
2.3.2. Current Status Of Family Business Studies
Over the years, many scholars have published an overview of the literature to
review and categorize the current status of family business studies. While Sharma
in 2004 still saw family business studies as a developing field, Gedajlovic et al.
(2012) describe the field as more adolescent in their recent notable paper. Collins
and O'Regan (2011b) provided an interesting overview in the first editorial of the
newly launched Journal of Family Business Management. Although there are more
and more publications in top-tier articles, the study of family businesses has not
reached the "mainstream conversation" yet (Gedajlovic, et al., 2012, p. 1011).
In the past, the most researched topics in family business studies were relation-
ship issues in the family, succession, business performance, consulting of family
businesses, gender and ethnicity, as well as legal and financial issues (Sonfield &
Lussier, 2004). The performance of family businesses after a succession has
received more and more attention in recent years (e.g. Le Breton-Miller, et al. ,
2004; Morris, et al., 1997; Spelsberg, 2011; Wang, et al., 2004). However,
knowledge is still limited to what factors are critical in order for a succession to be
seen as successful (Spelsberg, 2011). The area of international family business
studies is still relatively unresearched. Only a few studies did international compar-
isons of family businesses and the succession process (Lussier & Sonfield, 2010;
2012).
Generational issue
Despite the increasing amount of research in the area of family business studies,
the question of how family businesses in different generations vary from each
other has received only limited attention to date. Lussier & Sonfield (2010) criticize
this shortcoming of previous research in their study, which is the first to combine a
generational perspective with an international comparison.
Further, although there has been research done that has investigated generational
issues including the third generation, this was usually not the primary focus of
these papers. Differences between first, second and subsequent generations have
been addressed by some studies but the results are inconclusive (Kellermanns &
Eddleston, 2006; Lussier & Sonfield, 2010; Molly, et al., 2010).
22
2.3.3. Succession
As described earlier, the focus of this dissertation is the success of family business
successions or also family business transfers. The terms succession and transfer
will be used synonymously in this work.
The key literature defines succession as a process in which the business is
transferred from one generation to the next (Mitchell, Hart, Valcea, Townsend,
2009, p. 1202; Morris, et al., 1997, p. 387). Le Breton-Miller et al. (2004, p. 305)
and Sharma (2004) add that succession also often includes the transfer of owner-
ship. The different stages in the process can be divided into a pre-entry stage, a
second integration-stage and a third stage where the next generation is included in
the management of the FB (Kary & Dittmers, 2010; Wang, et al., 2004). However,
it is important to note that only the internal transfer within the family is seen as
succession in contrast to an external transfer (Wassmus, et al., 2010).
External business transfers are not investigated in this dissertation. Even though
they are sometimes covered under the topic `Unternehmensnachfolge' (German
for succession; PONS, 2013) in German publications (e.g. Gottschalk, 2011; Kary
& Dittmers, 2010; Schmeisser, Lesener, Tscharntke, 2007). The failure of transfer-
ring the business internally does not automatically mean the business has failed
as such, which puts the failure rate of succession in perspective (SBS, 2004).
2.3.4. Success In Succession
Before the success of a succession can be evaluated, it has to be defined what
success in this context actually is, since many different definitions exist (Colli,
2012). Success in succession can be defined very generally as survival of the FB
(Ip & Jacobs, 2006; Wassmus, et al., 2010). Other definitions are more specific. A
widely accepted concept for the definition of FB has been developed by Handler
(1990) (in Le Breton-Miller, et al., 2004; Morris, et al., 1997; Wang, et al., 2004).
Handler suggests using the two categories of "quality" and "effectiveness" to
evaluate the success of a succession (Vozikis, Liguori, Gibson, Weaver, 2012).
The succession is therefore successful if the stakeholders are satisfied with the
process ("quality") and the post-transition performance is positive ("effectiveness")
(Le Breton-Miller, et al., 2004, p. 306).
23
Following the three-circle model, a succession can therefore be seen as success-
ful if the family and the owners are satisfied with it and the business performance
is positive. This means that both financial and non-financial goals are pursued by a
FB. Astrachan and Zellweger (2008) argue that a family business therefore can
prefer non-financial over financial goals if it satisfies the family more. If there are
synergies between financial and non-financial goals it is advisable for the family
business to pursue both. However, the definition of success can be highly individ-
ual for each family business and can also vary from generation to generation
(Colli, 2012, p. 243).
Critical success factors
One way to influence the success of a company is through the use of critical
success factors (CSF) (Spelsberg, 2011). A much-cited definition (Spelsberg,
2011) for critical success factors was developed by Rockart (1979, p. 85): [CSF
are] "the limited number of areas in which results, if they are satisfactory, will
ensure successful competitive performance for the organization." CSF can be
divided into internal and external factors. External factors are out of the influence
of the FB, internal factors are the ones that can be influenced by the company
(Schmeisser, et al., 2007).
For this research work, a CSF for succession is seen as a performance measure-
ment that increases the satisfaction with the succession process, if fulfilled. This
dissertation focuses on internal CSFs because they can be actively influenced by
the management and the family. External CSFs are not discussed here because
the management of a family business usually has little influence on external
conditions such as market trends. Bigliardi and Domino (2009) argue that a better
understanding of the performance of succession is desired. Spelsberg (2011)
supports this view, and points out that to date there is no consent about critical
success factors for succession in the literature.
Details
- Pages
- Type of Edition
- Erstausgabe
- Publication Year
- 2014
- ISBN (eBook)
- 9783954897544
- ISBN (Softcover)
- 9783954892549
- File size
- 803 KB
- Language
- English
- Publication date
- 2014 (April)
- Keywords
- Sucession Third generation Business Management Critical Success Factors Family Business Studies
