Family business succession: emphasis on the family not the business.

Vozikis, George S. ; Weaver, K. Mark ; Gibson, Brian 等

Abstract

This paper advocates a Family Strategic Plan for Family Business Succession (FFBS) model dealing with satisfaction and effectiveness of a family firm's succession process and its overriding importance compared to the traditional Business Strategic Plan of Family Business succession concept (BFBS) which only emphasizes tax and legal issues, can help family firms resolve some critical succession issues in a timely and efficient manner so that their family firm may flourish for generations to come. The goal of this paper is to advocate a "family strategic succession plan model," and emphasize family solutions instead of merely business solutions to the family business succession in the form of a road map to follow to help family firms get through very time consuming and trying obstacles.

I. INTRODUCTION

Family businesses are a very prominent player in the world economy and regional economic development and are constantly gaining significant importance regarding their contribution in creating new jobs, incubating new business, and promoting entrepreneurial activities and economic development in local communities (e.g., Astrachan, Zahra & Sharma, 2003; Heck & Stafford, 2001). They are considered as one of the engines of the post-industrial growth process since they are so important for intergeneration development and transfer of entrepreneurial talent, business success, long-term strategic commitment, and entrepreneurial independence (Poutziouris, 2001).

The succession process in family firms has by far been determined to be the most critical phase in the family business life-cycle (e.g. Morris et al., 1997; Wang et al., 2000) and characterized as the period in which most family firm fatalities occur mainly because of conflicts within the family (Handler & Kram, 1988). Conflict during succession planning can arise when no written plan exists, and when the stockholders connected with the enterprise, including the founder, the family members, the managers, suppliers, and customers, are uncertain of the significant changes associated with the shift in power and authority. This is because family businesses are much different than non-family businesses in that they have the family component to contend with when making future plans. This component can have an adverse impact on the ongoing management and ownership of the business and needs to be effectively understood and managed so that the business can have continued success for future generations. Unfortunately, family businesses do not usually take advantage of consulting advisory services on how to face family issues inside and outside the business mainly because of the "dirty laundry airing" issue, but also because of a great deal of emphasis concentrated on the business end of succession such as tax issues and estate planning, instead of an effective succession process and conflict abatement within the family. Ultimately of course the success of any succession depends on the health of the significant relationships that exist within the family business (Dunemann and Barrett, 2004). The goal of this paper is to advocate the "family strategic succession plan model," and emphasize family solutions instead of merely business solutions to the family business succession in the form of a road map to follow to help family firms get through very time consuming and trying obstacles.

II. THE IMPORTANCE OF FAMILY BUSINESS

Many family businesses rely on the fact that they are dealing with family members and that they will always be able to reach some kind of agreement, but that is usually not the case; in fact, it is quite the opposite. In the US alone, family firms represent 90 per cent of all businesses and it is estimated that family-owned businesses generate about half of the country's Gross National Product and half of the total wages paid (Dyer 1986). The corresponding percentage is around 70 per cent in Europe, Australia, and Asia, while the global percentage stands around 70 per cent as well (Grant Thornton, 2002). Family firms are viewed as entrepreneurial firms, the ownership and management of which, more often than not, belongs to a family (Burch, 1972; Barnes & Hershon, 1976). Others contend that the classification is valid only when there has been at least one generation transfer (Ward, 1987), while most recent definitions concentrate on family culture as a dominant attribute (Litz, 1995; Dreux IV & Brown, 1999). Only 30% of family-owned businesses survive the succession from the founder to the next generation, and only 15% make it to the third generation despite the fact that 80% of the incumbents intend to pass the business to the next generation and 70% of the next generation shares this desire (Parker, 2007). This is because priorities for the family firm change from generation to generation sometimes critically affecting the firm's revenues.

The family firm patriarch or matriarch has quite a few options to consider when planning for succession. He or she can close the doors, sell to an outsider or employee, retain ownership and hire outside management, or retain family ownership and management control. Since most founders would like to pass their business on to the next generation, we will be examining this last option and the available approaches to effect transition to the next generation. Exhibit 1 shows the rate of generational success of the average business in the U.S. through the 3rd generation:

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Family Business Succession

There are both pluses and minuses in striving to pass the torch to the next generation. Sometimes the benefits outweigh the challenges and sometimes the exact opposite holds true:

Benefits of a Family-Owned Business:

--Working with people you love

--Being your own boss

--Flexibility and Security

--Community and Philanthropy

--Building a financial legacy for retirement and future generations

Challenges and Issues of a Family-Owned Business:

--Conflicting personalities

--Lack of shared goals

--Failure of leadership

--Work Ethic

--Compensation

--Expectations

--Family participation in the family business and under what circumstances

--Leadership and ownership in preparing the next generation to assume responsibility for the business

--Incumbent's willingness to let go of the family business

--Attracting and retaining non-family executives

--Choice of successors and how to choose among multiple successors

There are many approaches to follow to resolve these issues. The Three Circle Model presented in Exhibit 2 originally developed by Renato Tagiuri and John Davis (1982) can help family firm directors and family members better understand the diverse roles and complex relationships involved in the business family and the family business in a traditional way.

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The issues and agendas in each of the three circles can be summarized as follows:

Family: Personal finance and estate plans: "How do we take care of the family and individual family members?"

Business: Strategic and operational plans: "How do we run the business, expand the business, and change the business?"

Ownership: Ownership and successor plans: "How do we provide for an orderly transition of ownership that considers family involvement in the business?

The conceptual framework regarding family business succession approaches described in this section is a result of a synthesis of issues on Family, Business and Ownership and of the existing literature on these succession benefits and challenges through three stages, namely: The identification of the basic dimensions of a succession's success; the identification of the critical success factors that influence a succession's success, and finally the development of an integrated conceptual framework.

Identification of the Basic Dimensions of a Succession's Success

Two dimensions characterize the success of a "successful succession": First, the satisfaction with the process of all parties involved and second, the effectiveness of the process per se (Handler, 1989). When both dimensions are amplified and improved, so does the possibility of a successful succession. The satisfaction dimension represents the subjective assessment of individuals about the process, while the effectiveness dimension represents the objective determination of the process's impact on a family firm's performance (Sharma et al., 2001).

With this critical insight to the succession issue, we can establish a two-fold causal relation between the two dimensions. If everybody is satisfied with the transition and the succession process, then it follows that they will be more committed to it, more participative, more flexible during negotiations, and therefore more effective in accomplishing an effective "baton passing".

Furthermore, if the transition process is performed on time, as planned, and in an efficient manner, it is more than likely that everyone, or at least almost everyone, will be satisfied with it. Sharma et al. (2001) confirm this interaction by establishing a sequential cause-effect model of the relationship between initial satisfaction, effectiveness, retrospective satisfaction and succession's success, as depicted in Exhibit 3.

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Identification of Critical Success Factors Influencing a Succession

Along with the above distinction, we grouped a lot of different issues identified in the literature into five critical success factors (CSF) that affect either the satisfaction with the succession process or the effectiveness of the process per se. In turn these five CSFs are affected by a number of other criteria that will also be analyzed below.

The incumbent's propensity to leave: This factor has been cited as one of the most important in the business literature (Brady & Helmich, 1984; Christensen, 1953; Lansberg, 1988; Malone, 1989; Pitcher, Chreim, & Kisfalvi, 2000; Sharma et al., 2000; Vancil, 1987). This factor is affected by multiple criteria, such as the owner's fear of losing power both within the business and within the family, since withdrawal from the leadership position in the business could also mean an automatic withdrawal as head of the family as well. This may explain why over one third of former family firm owners are still involved in the business even after retirement (American Family Business Survey, 1997). Moreover, owners usually link their personality and way of life with the family business and fear that by leaving the business they will lose their identity and status. Allen & Langowitz (2003) showed that 13.4 per cent of family business members claim that the CEO will "never" retire. A safe conclusion from this discussion is that a low propensity of the incumbent to leave will affect satisfaction with the succession process in a negative way.

Successor's willingness to take over: This factor has also been cited by the literature as very important (Barry, 1975; Bowen, 1978; Goldberg & Woolridge, 1993; Morris et al., 1997). It seems that the successor's willingness to take over depends on three main variables: commitment to the family; the maturity of the successor, and finally; the degree of responsibility of the successor. The higher these three variables are, the higher the successor's willingness to take over, and consequently the higher the overall satisfaction with the succession process.

Successor's appropriateness and preparation: The successor's appropriateness and preparation depends on a number of variables that are easily measurable and refer to the knowledge, skills and overall grounding of the successor (Kets DeVries & Miller, 1987; Morris et al., 1997). This critical success factor ensures that the successor is chosen not by gender but rather according to his/her abilities, namely, leadership, managerial and entrepreneurial skills, and preferably a degree of formal education. Additionally, it is important for the owner to involve the successor in the business early in order to gain experience and commitment to the business through on-the-job training. On one hand, there is a constant need for valuing everything connecting the business to its tradition, but on the other hand, as mentioned earlier, over-dependence to the past should be avoided. It is safe to assume that there is a positive relationship between the successor's appropriateness and preparation and the effectiveness of the succession process.

Positive relations and communication: It is obvious that if family members share the same values and show mutual respect satisfaction will be higher, and the transition will be handled more effectively (Dyer, 1986; Morris, Williams, Allen & Avila, 1997). Trust must be built among family members and everyone should clearly identify, acknowledge and accept their roles in the business as well as in the succession process through positive communication, and unmistakably know "what's in there for them" in terms of personal gains in exchange for their support, so conflicts and rivalries that may affect the succession effort negatively are avoided. It is quite obvious that a positive relationship exists between good relations and communication and satisfaction with and overall effectiveness of the succession process.

Succession Planning: There is a lot of evidence in the literature about the positive effects of good succession planning on the success of the succession transition (American Family Business Survey, 1997; Hayes & Adams, 1990; Lansberg, 1988; Morris et al., 1997). Business advisors strongly suggest incorporating a succession planning process, and an exit strategy right into the business plan very early, because the longer the family firm succession planning, the smoother the transition process is likely to be (Ward, 1999), especially when the whole family is involved in the business succession planning discussions. Making a succession plan and then announcing it however, is the surest way to sow family discord. Therefore, getting outside help with succession planning such as professional family firm advisors, lawyers, or accountants can inject credibility and objectivity into the process.

Development of an Integrated Conceptual Succession Framework

The integration of the discussion above produces the conceptual framework presented below in Exhibit 4 which aptly emphasizes the critical need for family businesses to "professionalize" their business in three key areas: strategic planning, governance and management structures, and succession planning.

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When asked: "What issues are of the greatest importance and greatest difficulty to you?" (Grant, 2002) family business owners responded as follows:

(1) Resolving conflicts among those in the business;

(2) Formulating a succession plan;

(3) Developing a strategic business plan;

(4) Developing an estate plan.

Succession therefore is a process that takes place over years and should be started as early as possible.

III. FAMILY SUCCESSION: CONCENTRATING ON A FAMILY STRATEGIC PLAN

It is quite obvious from the discussion so far, that the family firm operates within a web of institutional and personal relationships which as independent variables and factors affect and influence both succession effectiveness and satisfaction with succession. This should be of primary concern for family members as well as family business advisors and practitioners because in a family firm relationships are often more complex and potent than those encountered in other types of firms (Dunemann and Barrett, 2004). The importance of "relationships" as the way to approach a successful succession process constitutes in our view the only way to generate positive succession results, keeping in mind of course that there is no one single way to transition a family business to the next generation. Family communication should be the single most important aspect of a successful transition, and each family member needs to know where all the other family members stand on the idea of succession, what role they will be playing, and what their goals are for the future. It is important for family business owners to always remember that when they are dealing with family what is said and done are taken more personally because "sticks, stones, AND words hurt bones"!

Different situations call for different approaches, but what we advocate is that in order to have a successful succession the "family strategic plan" model during the transition needs to be emphasized much more than tax, legal, or a strategic management process similar to non-family businesses. Traditional business strategic plans regarding family firm succession however, merely deal with legal strategies and tactics to avoid taxes and transfer control to the next generation, and do not address values, morals and matters of the heart (Harris, 2007). Many surveys and family business consultants focus more on the business side of succession more than on the family side. This is odd because the first and foremost thing on most family firm incumbents' mind is not necessarily preserving the family business but preserving the family itself, especially in close-knit cultures (Stavrou, Merikas, and Vozikis, 2008). Studies have also failed to show how family firms scan their environments, assess their capabilities, or search for and evahiate alternative strategies; how the strategy formulation process is influenced by family considerations and interests; whether the alternatives considered are many or few, or better or worse than those generated by non-family firms; how the dynamics and politics of decision making are different in the family business; and which types of family influences are advantageous and which are harmful to the process (Sharma, Chrisman, Chua, 2001).

Therefore, strategic planning in a family firm should involve not only the assessment of the business, the internal operations and the current external environment (i.e., economic, technological, social and political forces) in a SWOT analysis format, but more importantly, it should primarily involve a family strategic plan for both the business and the family that needs to be created with input from all parties involved in the succession process. Mazrui (1996) suggested the following checklist aimed to a much larger extent at the formulation of a family strategic plan for family business succession rather than an ordinary business strategic plan:

Communicate

(1) Create a business strategic plan, including business mission, business goals, strategy to achieve goals

(2) Create a family strategic plan, including a:

--unified vision of the family's role in the business

--code of conduct for family members

--joint operating policies that serve the family and business

--family mission

(4) Prepare a financial plan for retirement

(5) Prepare a succession plan including:

--arranging for successor training

--setting a retirement date

--championing your successor

Understanding therefore the difference between the traditional Business Strategic Plan of Business succession concept (BSP-FBS) and our proposed Family Strategic Plan of Family Business Succession concept (FSP-FBS) will help keeping the business issues and family issues separate so that problems in the family do not transcend over to the business environment and vice versa. Before the succession process is undertaken family relationships need to engage in open honest dialogue, where respect for others is maintained, and can help foster a rational focus on what are the most important considerations for achieving a smooth succession (Shaheena and Woods, 2002). Too often families are torn apart, because decisions are being made based on what's best for the business and not for the family. Strong intra-family relationships are critical to the succession of a family business. It does not matter how sophisticated the financial plans are or how productive the business, or how competent the successor may be, if family members cannot work together in harmony, and a successful succession becomes a "fleeting dream" (Rawls, 2006). Therefore, an effective Family Strategic Plan for Family Business Succession (FSP-FBS) needs to deal first with ensuring the family satisfaction component and phase of the family firm's prospective succession process by settling first issues of different family members that need to be discussed, vetted, and resolved such as:

1. What are the long-term personal and professional goals of family members?

2. What is the family mission? Why are you committed to establishing and operating the business?

3. How do you envision the firm in the future?

4. Will family members be active in management or will they be passive members?

5. How will issues such as compensation, benefits and performance evaluation be handled? (Walsh, 2007).

The entire family should contribute in the development of a mission statement or creed that defines why it is committed to the business. By sharing priorities, strengths and weaknesses, and the contribution each member can make to the business, the family will begin to create a unified vision for success. This vision will include personal goals and career objectives of the family member. Ultimately to make succession work there needs to be clear lines of communication within the family. There are many things that should be discussed and communicated within the family prior to planning for succession and ensure family satisfaction with the succession outcomes. Leadership succession is a big question on everyone's mind and should be addressed by showing how and when a successor will be chosen. There should be standards with which everyone is familiar with. Compensation policies need to be discussed and agreed upon so that everyone will know why they are receiving and what their rights and responsibilities are as well those of non-family employees especially relating to ownership issues. Long-term planning for the business will help everyone stay on the same page when transitioning, so working with outside advisors sometimes needs to be pursued since outside advisors provide a neutral and objective perspective that can be very useful during the process. Regular family meetings can educate the family about the nature of the firm, the kinds of leadership skills needed, entry and exit conditions, decision-making policies and conflict resolution procedures. Casual conversation about these issues can also contribute to agreement and satisfaction later on and help diffuse any "time bombs".

Since every family-owned business has different family dynamics, the different planning, strategies and actions, the family and non-family protagonists and their perspectives must be identified and understood in order to ensure an effective succession. Without this understanding, managing a family business will be difficult. Each group of actors in a family firm has its own perspective and set of concerns and is capable of exerting different types and degrees of pressure within the family and the firm that will ultimately affect the effectiveness of the succession process. These types of "actors" and potential successors who create the family dynamics unique for each family firm are divided into family members and non-family members and are also categorized according to whether they are employees and/or owners (Mazrui, 1996).

A Family Member but Neither an Employee nor an Owner: Children and in-laws are usually in this group. Although they may not be part of the business operations, they can exert pressure within the family that directly or indirectly affects the business. For example, children may resent the time a parent spends in the business. This creates a problem because parents usually develop guilt feelings as a result of their neglect and the resentment expressed by the children. In-laws, on the other hand, are viewed either as outsiders and intruders or as allies and therefore are usually ignored or misunderstood. For example, a daughter-in-law is usually expected to support her husband's efforts in the business without a clear understanding of family or business dynamics. She may contribute to family problems or find herself in the middle of a family struggle.

A Family Member and an Employee but not an Owner: This family member works in the business but does not have an ownership position. For this type of individual, conflict may arise for a number of reasons. For example, if they compare themselves to the family member who has ownership position but is not an employee, a sense of inequity or resentment may occur especially when decisions are made only by owners. Family members employed in or associated with a family business generally expect to be treated differently from non-family employees.

Family Member and an Employee and an Owner: These individuals may find themselves in the most difficult position. He or she must effectively handle all actors whether they are family and non-family. As an owner, he or she is responsible for the well-being and continuance of the business, as well as the daily business operations. He or she must also deal with the concerns of both family and non-family employees. The founder falls in this category and bears an enormous amount of responsibility and accountability especially if he or she is the sole owner and chief executive.

Family Member but not an Employee but an Owner: This group usually consists of siblings and retired relatives. Their major concern usually is how the income provided by the business is handled, and thus, anything that threatens their current or future financial security may cause conflict. For example, if the managing owners want to pursue a growth strategy that requires expenditures in the current time frame which also creates an element of risk for future dividends, they may face some strong opposition from retired relatives who are concerned primarily about current and future cash flows rather than the firm's growth.

Non-family member and an Employee but not an Owner: This group deals with the issues of nepotism and coalition building and the effects of family conflicts on daily operations. The owner's concerns for non-owner employees usually revolve around issues relating to recruiting and motivating non-family employees and non-family managers who have little or no opportunity for advancement in a "concrete ceiling" instead of a glass ceiling sense and minimizing political moves that support family members over non-owner employees.

Non-family member and an Employee and an Owner: With the embrace of stock-option plans, this group can become more important, because employees may become owners during a succession. In companies where a successor has been chosen, partial ownership of the company by its employees can foster cooperation with the new management because the employees will personally share the benefits and responsibilities of the family firm. In cases where there is no family successor, selling the company to the employees who have helped build it makes good business sense. Employees who own a share of the company will want to be treated like owners, which may be difficult sometimes for family members to understand and accept.

The second phase or component of a family strategic plan of a family business succession (FSP-FBS) deals with the effectiveness component of the family firm's prospective succession process. Most family business owners have a strong wishful thinking of having one of their offspring become the successor and in their minds an effective succession is only when one of their children takes over the helm of the firm. Thus traditionally, a successful succession is viewed as the transfer of leadership to the next generation. We strongly advocate however, that for a successful succession to occur the successor does not always have to be an offspring of the patriarch or matriarch and in some cases it does not even have to be a family member.

Although there is little in the literature examining the need for alternative forms of family firm succession planning other than a succession between a parent and an offspring, most existing studies have shown that different family dynamics have to be considered when a specific succession strategy is considered for a particular situation.

For example, Post (1993) suggests that in order for family firms to remain successful after the succession takes place, they must generate a new strategy for every generation that joins the business. Otherwise, the family firm's net business value is seriously diminished because of potential performance lags and gaps during and after the succession event in the form of succession leadership discontinuity and lower (at least initially) post-succession performance (Sigalas, Chondrakis, Zaharopoulos, and Vozikis, 2008).

Similarly, family business succession does not always have to entail a complete handover of a business from one generation to the next. As a matter of fact other businesses can be spawned off from the core family business. In many cases, this benefits all parties involved much more than the stress and uncertainty of transitioning management and ownership of the core family business as a whole. By learning how to run a smaller piece of the puzzle of a family business, the younger generation can ease into the responsibility of ownership themselves without taking on the big picture all at once and enhance the firm's net value.

Another alternative for an effective succession may be the transfer of the family firm to a key employee. It is important not to forget the key employees who helped make the success of the business possible and to reward them fairly, especially in cases when there may not be a suitable successor within the family to take over ownership. In that case, if there is a sufficiently qualified key employee that could not only take over the ownership role but also turn around and employ the family members as executives or just pay dividends to the family member shareholders the family firm will have carried out a successful succession. This is especially true when the roles of key employees are at least as critical to the successful continuation of the family firm as any traditional family members, and a separate ownership or shareholding maybe a good option to offer a key employee. For example, the family could offer the employee a loan to help jump start the key employee's side of the business, or the equity purchased could also originate from "sweat equity", cash, or the reinvestment of profits.

IV. CONCLUSION

Research and practice tell us that there are many variables that influence the success of a family firm's succession planning that ensures the success of the transition to the next generation. Understanding the difference between the traditional Business Strategic Plan of Family Business succession concept (BSP-FBS) and our proposed Family Strategic Plan of Family Business succession concept (FSP-FBS) will help keeping the business issues and family issues separate so that problems in the family do not transcend over to the business environment and vice versa. This concept is meant to help family firms overcome the human factors and unique family dynamics that prevent good communication and governance within a family business organization. Individual attitudes and presumptions about the future of the family firm can prevent the family members involved from being able to work as a single cohesive unit to achieve the unitary goal for the business to make a safe passage to the future through its succession process. The dynamics in every family are unique and this fact makes it impossible to offer a single model to guide family businesses with the arduous task of family succession into the next generation. However, common themes and patterns occur during the succession process which allows us to better plan for these events before they become detrimental to our goals. Therefore, the first component of a successful Family Strategic Plan for Family Business Succession (FFBS) involves dealing first with ensuring the family satisfaction component of the family firm's prospective succession process by settling first issues of different family members that need to be discussed, vetted, and resolved. Family business succession and planning is a vision that must be shared by all the parties involved, family and non-family alike. Outside help is important to gain a neutral perspective, but there are issues that families must overcome before the acquiring of outside consulting can help. The second component of a family strategic plan of a family business succession (FSP-FBS) deals with the effectiveness component of the family firm's prospective succession process. For a successful succession to occur the successor does not always have to be an offspring of the patriarch or matriarch and in some cases it does not even have to be a family member. Therefore, given the outcome of the first phase of Family Strategic Plan for Family Business Succession (FSP-FBS) dealing with the nature and the degree of satisfaction with the succession process and prospective outcomes within the family, alternative forms of family firm succession planning other than a solely a succession between a parent and an offspring should be investigated in order to ensure the effectiveness of the family business succession.

We do hope that the Family Strategic Plan for Family Business Succession (FSP-FBS) model that we proposed in this paper dealing with satisfaction and effectiveness of a family firm's succession process and its overriding importance compared to the traditional Business Strategic Plan of Family Business succession concept (BFBS) which only emphasizes tax and legal issues, can help family firms resolve some critical succession issues in a timely and efficient manner so that their family firm may flourish for generations to come.

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GEORGE S. VOZIKIS

California State University, Fresno

K. MARK WEAVER

Louisiana State University

BRIAN GIBSON

University of New England, Australia