Critical success factors and best practices for business succession.

Table Of Contents

Table Of Contents

List Of Tables And Figures

List Of Abbreviations

1. Introduction
1.1. Research Background
1.2. Aim And Objectives
1.3. Overview of Research Methodology
1.4. Structure Of The Dissertation
1.5. Summary

2. Literature Review
2.1. Introduction
2.2. Sources
2.3. Overview of Family Business Studies
2.3.1. Introducing The Family Business
2.3.2. Current Status Of Family Business Studies
2.3.3. Succession
2.3.4. Success In Succession
2.4. Related Business Studies
2.4.1. Entrepreneurship
2.4.2. SMEs
2.4.3. Differences Between SMEs In The UK And The German “Mittelstand”
2.5. Generating The Hypotheses
2.5.1. The Business
2.5.2. Ownership And Corporate Finance
2.5.3. The Family
2.5.4. Time Horizon.
2.6. Conclusion And Research Gaps

3. Research Methodology
3.1. Introduction
3.2. Research Philosophy
3.3. Data Collection
3.3.1. Research Strategy
3.3.2. Case Study Design
3.3.3. Research Methods
3.3.4. Selection Of Cases
3.4. Data Analysis
3.5. Reliability, Validity And Limitations
3.6. Ethical Considerations
3.7. Summary

4. Presentation Of Case Studies
4.1. Introduction.
4.2. Case Study Macsween: The Chieftain Of Scottish National Dish Haggis
4.3. Case Study Kammerer: From A Basement To International Success
4.4. Case Study Wiesbadener Wach- und Schließgesellschaft: In 100 Years From Night Watchmen To Modern Security Solutions
4.5. Summary

5. Analysis Of Findings
5.1. Introduction.
5.2. Background Information.
5.3. Cross-Case Analysis
5.3.1. The Business – How To Change Without Changing Too Much.
5.3.2. Ownership – How To Keep Control
5.3.3. The Family – Trust And Support Or Source Of Conflict?
5.3.4. Time Horizon – Inheriting The Past, Building The Future
5.3.5. Communication – Connecting The Perspectives
5.4. Single-Case Analysis
5.4.1. Critical Success Factors For Macsween Of Edinburgh.
5.4.2. Critical Success Factors For Kammerer Gewindetechnik
5.4.3. Critical Success Factors For Wiesbadener Wach- und Schließgesellschaft
5.5. Summary

6. Conclusion And Recommendations
6.1. Introduction.
6.2. Summary Of Findings And Conclusions
6.3. Recommendations And Best Practices
6.4. Limitations
6.5. Suggestions For Future Research

References

Bibliography

List Of Tables And Figures

Figure 2.1.1: Visual representation of the literature review

Table 2.2.1: List of consulted journals

Figure 2.3.1.1: The Family Firm System

Table 5.2.1: Overview of company data

Figure 6.3.1: A new model for family business succession

List Of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

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 businesses 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 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 University 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 businesses 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.

The underlying research questions are:
- Why do only 5 % – 15 % of the family businesses succeed in transferring their business to the third generation?
- How do family businesses change as they are passed on from generation to generation?
- What are the critical success factors in business succession?
- 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:

- To critically evaluate the relevant literature in the field of family business studies and related fields
- To formulate hypotheses for critical success factors for business succession
- To test the formulated hypotheses by studying three family businesses, one from the UK, two from Germany
- 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 management 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 performance of family businesses in general nor other challenges within family businesses outside the succession process.

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 generated 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 recommendations 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.

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 ownership, 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.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2.1.1: Visual representation of the literature review, compiled by the author. Based on (Lansberg, 1988, p. 122)

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. Academic 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).

Table 2.2.1: List of consulted journals, compiled by the author from (Association of Business Schools, 2010; Schrader & Henning-Thurau, 2009).

Abbildung in dieser Leseprobe nicht enthalten

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 mentioned 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 Lansberg (1988), among others.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2.3.1.1: The Family Firm System (Lansberg, 1988, p. 122)

The three circle model describes the different stakeholders and possible perspectives 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 ownership of the firm (Lussier & Sonfield, 2010).

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 relationship 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 comparisons 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).

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 ownership. 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 transferring 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).

Following the three-circle model, a succession can therefore be seen as successful 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 individual 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 measurement 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.

2.4. Related Business Studies

2.4.1. Entrepreneurship

Family Business Studies and Entrepreneurship Studies are closely linked in their historical development (Katz, 2003) with the former being seen as a discipline of the latter (Katz, 2003). Entrepreneurship has been defined by Stevenson (2004, p. 3) as “the pursuit of opportunity beyond the resources you currently control“. This definition states that the entrepreneur is part of a bigger societal context and needs the resources of the society to be successful (Stevenson, 2004, p. 3). The same is true for family business that needs the family to be successful.

Entrepreneurship within family businesses (corporate entrepreneurship) has been investigated by Kellermans and Eddleston (2006, p. 809) to define and describe what exactly a family business is. This approach is supported by Rosplock and Welsh (2012). The close connection of entrepreneurship and family business was also investigated by Aldrich and Cliff (2003) who state that the majority of businesses are family businesses, and therefore they encourage a family perspective in entrepreneurship studies.

2.4.2. SMEs

Small and Medium-Sized Enterprises (SMEs) are often seen as synonymous with family businesses although family businesses are not defined by statistical or economic criteria (Mandl, 2008, p. 2) as shown in chapter 2.3.1. Due to their similarity, SMEs and FBs often have similar issues. SMEs are the most common type of business in Europe, representing 99 % of all companies based on the definition of the European Commission (EC) (2005, p. 51).

Definition of SME

According to the EC (2005, p. 14), small and medium-sized enterprises are those that have less than 250 employees and an annual turnover of less than €50 million or an annual balance under €43 million. This definition will be used because it is made by an official body of the EU and both the countries researched in this dissertation are part of the European Union.

Based on this definition, SMEs account for 99.5 % of all enterprises in Germany and 99.6 % in the UK, respectively. They employ 52.7 % of the total workforce in Germany and 54.3 % in the UK (European Commission, 2012a; European Commission, 2012b).

2.4.3. Differences Between SMEs In The UK And The German “Mittelstand”

In contrast to the SME definition of the European Commission, both the UK and Germany use different criteria. In the UK an enterprise is seen as a SME if it has less than 250 employees (BIS , 2011). In Germany, there is no common definition for SMEs (Günterberg, 2012, p. 174). According to one popular definition of the “Institut für Mittelstandsforschung”, an SME has less than 500 employees and a turnover of less than €50 million (Günterberg, 2012, p. 174). A special form of SMEs in Germany is the ‘Mittelstand’. Companies that are independent and ownership and management are in the hands of one person (IfM, 2013). This definition is very similar to the definition of family businesses and therefore the German ‘Mittelstand’ is often used synonymously to refer to the German family business sector (IfM, 2013). The ‘Mittelstand’ is often referred to as the “backbone” of Germany’s economy (CBI, 2011, p. 10). These often family owned businesses are highly successful in their markets (Roper & Malshe, 2012).

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^[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)