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Family-Owned Business and Strategies Around Succession Planning

Succession planning is critical for any family-owned business. The research objective of this study is to examine the aspects of succession that are difficult for family-owned businesses and the strategies that are effective for business succession planning. Specifically, the study sought to understand the issues related to succession planning concerning the lack of a legitimate heir, the situation with an underage heir, the potential for a hostile takeover, division among the heirs of the business, and the problems with arranged marriages to build prestige for the family-owned business. A literature review methodology was used to examine the issues. The study found that having a written succession plan in place is critical importance and that family-owned businesses should seek outside help for succession planning. The study also noted how emotion plays a role in family succession planning but recommends approaching it practically. 

Introduction

Succession planning for family-owned businesses is critical, especially since approximately 88 percent of those businesses do not survive past the second generation (Olufemi, 2021). However, family-owned businesses with effective succession planning may survive many generations. For example, a business established in Osaka, Japan, by the Kongo family during 578 A.D., has remained in businesses for thirty-nine generations across ten centuries (Olufemi, 2021). Succession in a family-owned business is one of the most significant challenges the business will face (Rumanko et al., 2021). Succession planning can be problematic for family-owned businesses (Olufemi, 2021) if not handled critically. 

Research Objective

The objective of the research is to examine the aspects of succession that are difficult for family-owned businesses and the strategies that are effective for succession planning. 

Research Questions

The research questions that will be addressed in the study are:

(1) What problems do family-owned businesses experience when the legitimate successor is not of legal age?
(2) How are marriages constructed to fortify prestige, and what difficulties arise?
(3) How is succession managed when there is division among legitimate successors?
(4) How is succession managed when there is no successor at all?
(5) What occurs when there is a hostile takeover from others?
 

Methodology

The methodology used in this study is the narrative or semi-systematic literature review (Snyder, 2019). The narrative or semi-systematic review is useful when the researcher does not intend to examine every article published on a topic of interest (Snyder, 2019). The narrative or semi-systematic literature review method is used widely in business research and particularly in the examination of how a subject of interest has developed across time (Snyder, 2019). It is critical that the process of research is transparent and in the form of a strategy that supports those reading the study in conducting their assessment of whether “the judgments made were reasonable” (Snyder, 2019, p. 335). The method of analysis using the narrative or semi-systematic literature review in the present study will be in the form of a content analysis of previously published research (Snyder, 2019). The literature review in the present study obtained articles for inclusion by using the following search terms and the Boolean operator ‘AND’ using Google search: 

  • Family-owned businesses AND succession planning AND hostile takeover
  • Family-owned businesses AND succession planning AND no legitimate heir
  • Family-owned businesses AND succession planning AND marriages to fortify prestige
  • Family-owned businesses AND succession planning AND no successor
  • Family-owned businesses AND succession planning AND legitimate successor AND not of legal age.

Literature Review

Family-owned businesses and other non-family businesses have different concerns when it comes to succession planning. Olufemi (2021) noted those differences and presented them according to the dimensions of assessment, nature, orientation, the attitude in the business toward change, and membership, as shown in Table 1. 

Table 1: Comparison of family business and non-family business 

Dimensions

Family Business 

Non-family Business 

Assessment 

Based on norms of loyalty and reciprocity 

Based on contribution to the firm

Name

Emotional

Rational

Orientation 

Inwardly oriented to protect, nurture and develop members  

Profit oriented 

Penchant to changes 

Views changes as a threat to safety and security for family

Views changes as opportunity for growth and advancement 

Membership 

Involuntary 

Voluntary 

Note: Dimensions and Differences Between Family Business and Non-Family Business. Adapted from Olufemi (2021)  

The family-owned business is based on the norms of reciprocity and loyalty. In contrast, the non-family business is based on the contribution made to the business (Olufemi, 2021). The nature of the family-owned business is emotional compared to the rationality of the non-family business (Olufemi, 2021). The family-owned business views change when there is a perceived threat to security and safety threat for the family, while the non-family business views change when there is a perception of an opportunity for the business to grow and advance (Olufemi, 2021). Similarly, membership in a family-owned business is involuntary, while membership in a non-family business is voluntary (Olufemi, 2021). Therefore, the very nature of the family-owned business impacts how succession is planned whereas in the non-family business, the individual who has made the highest levels of contribution to the firm are those chosen to move into positions of power and leadership (Olufemi, 2021). According to IMD (2021), there are five most common issues that arise in family-owned business succession planning. 

The first issue relates to the hostile takeover of the business by the board of directors. Most family-owned businesses are one hundred percent owned by the family; however, when the businesses desire to grow and expand, they will involve investors so that the capital needed for the expansion of the business can be raised (IMD, 2021). When that occurs, the investors may take fifty-one percent ownership in the family-owned businesses, with the family retaining forty-nine percent ownership and this sets the stage for a potential hostile takeover (IMD, 2021). 

The second issue that may arise is when the family-owned business does not have a legitimate successor or successors (IMD, 2021). Although the family-owned business may be doing well, there is no way to sustain the business when there are not any legitimate successors to take the business over and continue the family legacy (IMD, 2021). When no legitimate successor exists, the family-owned business will eventually be taken over by key employees of the business or outside investors (IMD, 2021). 

The third issue that arises in family-owned business succession occurs when the legitimate successors of the business experience division or some type of rivalry (IMD, 2021). When there are multiple children, the chance for disagreements rises concerning making decisions for the business since they all hold an equal share in the business, and it creates difficulties for the family-owned business (IMD, 2021). 

The fourth issue in succession planning for a family-owned business is when marriages are arranged to fortify the position and prestige of the business (IMD, 2021). Family business owners often force their children into marriages to consolidate the connection and the wealth between two families (IMD, 2021). However, problems arise when the two in the arranged marriage do not love one another and do not want to be married, negatively affecting the family and their business decisions (IMD, 2021). 

The fifth issue that family-owned businesses may experience is when the legitimate successor is not of legal age (IMD, 2021). The problems are encountered when the legitimate successor is not of legal age including someone in the family until legitimate successor is ready (IMD, 2021). Miller (1998) shared a case study of a family-owned business and the difficulties that arose when the second-generation CEO had passed away. The board of directors oversaw naming the next CEO after the death of the second-generation CEO. At the funeral for the CEO who had passed away, problems began among members of the family, and the mother wanted her son to run the company, but the son disagreed, and the daughter stated that she wanted to run the company, and the most significant problem is that the CEO had failed to plan for his successor (Miller, 1998). None of the children of the CEO were prepared to take over the business, and the board began a search outside of the family for a new CEO (Miller, 1998). 

According to Mackeown (2021), there is a great amount of ambiguity present between the overlap that exists between the family, which is centered around emotion and the company, and the lack of practicality in the family-owned business succession planning, particularly when no plan is in place. The CEO’s failure to plan for his succession is referred to by the Institute for Family Business (2008) as “the do-nothing approach” (p. 6). One of the reasons family business owners are resistant to succession planning is depicted in Table 2. On other occasions succession planning are deferred to avoid difficulties in choosing from among their children and experiences fear associated with retirement (Institute for Family Business, 2008). However, such complications can be avoided if the succession planning is started early with clear family expectations, options are examined properly, cross-generational work is laid out, and a succession plan is written out. Outside help for training, vision and values of the family businesses must be renewed during succession planning (Institute for Family Business, 2008). 

Table 2: Reasons for resisting family business succession plan

Reasons

Explanations 

Fear of mortality 

This problem is experienced by CEO’s who have realized successes and have an ego that is powerful and with firm conviction that they are in charge of their own destiny. 

Reluctance of let go of power and control

May business owners do not want to surrender authority.

Identity losses

The owner of the business may feel that they will lose their identity since it is tied strongly to the business, so letting go results in a feeling of loss. 

Bias against any succession planning 

Successful succession planning requires planning that is long-term and business owners tend to do rather than planning. 

Note: Issues with Succession Plan in Family Business (Institute of Family Business 2008) 

Summary

Emotions do come into play when family-owned businesses plan for succession and not making appropriate succession plans can even bring business losses. Various issues may arise with succession planning, such as a legitimate successor being under the legal age required for succession, there may be sibling rivalry, lack of a legitimate heir, problems with a marriage of convenience that creates problems for the family, and even hostile takeover of the family-owned businesses during the time of succession. 

Discussion and Recommendations

The information presented in this study has highlighted the need for succession planning to take place in family-owned businesses. Since succession planning takes time and for the successor to understand their role, responsibilities, follows the vision, and keep the family-owned business values, earlier discussion and preparation are recommended. Succession planning should involve the successor not only learning the business but also working as a team with the individual who is in the present role of leadership. Another recommendation is to have a written succession plan to avoid a situation with a hostile takeover and to avoid problems in the family.

The recommendations arising from the research in the present study include those stated as follows:

(1) Family-owned businesses should prepare for succession in advance by training and preparing the successor.
(2) Family-owned businesses should seek outside help from professionals for succession planning.
(3) Family-owned businesses should have a written succession plan in place to guide the board of directors and to avoid a possible hostile takeover. 
(4) The succession plan should be communicated among all family members, the company’s board of directors, and any stockholders so that everyone knows what to expect. 

Conclusion

The objective of the research was to examine the aspects of succession that are difficult for family-owned businesses and the strategies that are effective for business succession planning. The research questions are about the problems experienced in family-owned business during succession when the legitimate successor is not of legal age, how arranged marriages that serve to fortify prestige create difficulties, the lack of a legitimate heir, in the event of no successor exists at all, and what happens when a hostile takeover occurs. The literature review indicated that lack of succession planning in the family-owned business results in critical problems which can be avoided with proper and early planning. It was also noted in the study, many times the business owner fails to plan for succession because they are just not comfortable with the idea of retiring and losing control over the company. Yet, failure to plan for succession puts the family-owned business in danger of a hostile takeover when no heir apparent is ready to step into the leadership role. Family-owned businesses do have an emotional component but need to be overcome for all practical purposes to thrive and succeeds. As noted in the literature reviewed, it is advisable that family-owned businesses should seek outside help with succession planning if it can’t be solved internally within the family.  

Author: Bobby Boruah

References

Family Business Institute (2019). Family business in transition: Data and Analysis, 1-24. https://www.familybusinessinstitute.com/wp-content/uploads/2019/01/Family-Business-Succession-Planning-White-Paper.pdf

IMD (2021). 5 Common family business issues.https://www.imd.org/lfb/focused-reflections/family-business-issues/

Institute for Family Business (2008). Family business management perspectives: Succession, 1-32. https://www.uvm.edu/sites/default/files/IFB-succession-planning-guide.pdf

Mackeown, P. (2021). A successor by any other name. https://www.campdenfb.com /article/successor-any-other-name

Miller, W.D. (1998) Siblings and succession in the family business. Harvard Business Review.https://hbr.org/1998/01/siblings-and-succession-in-the-family-business

Olufemi, A. (2021). Succession planning: A key to sustainable family business. Journal of Business and Social Science Review, 2(7), 26-38. https://jbssrnet.com/wp-content/uploads/2021/08/3.pdf

Rumanko, B., Lusnakova, Z., Moravanska, M., &Sajbidorova, M. (2021). Succession as a risk process in the survival of a family business – Case of Slovakia. Journal of Risk and Financial Management, 14(458), 1-20. https://www.mdpi.com/1911-8074/14/10/458/pdf

Snyder, H. (2019). Literature review method as a research methodology: An overview and guidelines. Journal of Business Research, 104, 333-339. https://www.researchgate.n et/publication/334848557_Literature_review_as_a_research_methodology_An_overview_and_guidelines

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