BE 447 ENTREPRENEURSHIP

FAMILY BUSINESS AND SUCCESSION

Suma Mwaitenda
12th February, 2021



 Lecture Objectives on Family Business and Succession

Lecture Objectives
• Meaning of family business
• Merits and demerits of family businesses
• Key factors in management of succession
• Most important sources of succession
• Steps involved in carrying out a succession plan
•Succession practices in small firms
 What is Family Business


An organisation, which is owned, managed and

controlled by family members
It involves
- Family ownership and control family
- Family influence in decision making
- Family members as employees
- Intention to transfer the family firm to the next
generation
- majority of financial control lies within the family
members (over 50%).
 Advantages of Family Businesses
• Less bureaucratic and impersonal - decision making is straight forward
which gives the firm greater flexibility to respond to rapid changes, increase
efficiency and reduce agency costs.

• Focus on the long run - decision making by managers at any level should
consider the future generations even at the expense of immediate benefits.

• More humane working environment - there is high level of concern and

care, greater trust and flexible work practices which are favourable for job
commitment.

• Greater independence of action - Involves less or no pressure from stock

market and less turnover risk.

• Leadership stability - Low managerial turnover.

 Adv. of Family Businesses Cont….

• It creates competencies, resources and networks

of the family members.
• Easy of decision making
• Financial benefits - high possibility of raising
capital from family members at low or no interest
rates
• Easy to establish
• Information sharing - family language facilitates
easy communication which makes it difficult for
competitors to access strategic information about
business
 Disadvantages of Family Businesses

• Confusing organisation - in terms of the role of family

members where by authority and responsibilities are
not clearly defined.
• Lack of succession plan - inability to solve succession
issues may fail the survival of the business.
• Nepotism- employment and promotion of family
members without the required competence and
merits.
• Conflicts among family members may affect
business-due to lack of a clear separation between the
business and the family.
 Disadvantages of Family Businesses Cont..

•Financial strain - family members may tend to milk the

business. Confusing organisation

•Death of key owners can significantly affect the

business

•Limited access to specialised resources (knowledge,

financial, technology)

•Limitations on growth – arising from managerial

constraints
 CO-PRENEURSHIP

•Entrepreneurial couples who work

together as co-owners
•Division of labor based on expertise
rather than gender.
•It should be noted that not every couple
could work together
•Where couples are unable to work
together should accept this reality
 Requirements for Successful Co-preneurship

•Couples should ensure that their motives

and personalities would not conflict
•Mutual respect for each other and another’s
talents
•Compatible business and life goals
•Ability to keep lines of communication open
•A clear division of roles and authority
 Requirements for Successful Co-preneurship

Ability to encourage each other and to lift up a

disillusioned partner.

Separate work space to allow them to escape

when the need arises.

Boundaries between business and personal lives

so that one does not consume the other.
 Succession
• Succession is transition of ownership/ managerial decision
making in a firm.

• Passing a business to another family member, selling the

business or employee buyout.

• Decide whether or not to turn the business over to the next

generation rather than selling it to a third party.

• There is a need to plan for succession and must be handled

with care, conscious of all stakeholders interests.

• Choosing of a successor should be done when the

entrepreneur is in charge.
 Management Succession

•Research shows that most family businesses

die after death of the owner.
•Only 30 percent of family businesses survive
into a second generation.
•Only 16 percent of them make it to a third
generation.
•One of the major problems of family business
is the lack of proper succession plan.
 Ownership and Managerial Succession

• Ownership and managerial need not be exactly the

same.

• Ownership can be passed to other family member in the

current or next generation or to non-family members.

• Those in managerial positions must decide how and who

will succeed them.

• In practice, however, succession in family businesses

mostly involves transfer of both managerial and
ownership control to the next generation.
 Need for succession planning


• Succession planning prepares the owner and the business

for transition.

• It prepares the next generation to manage effectively

without conflict, a way that increases harmony among
members.

• It outlines the way a business should be managed after the

retirement, deaths, incapacity of the current owners which
prevents economic loss of value of the business.

• It is a living document that help to guide decisions about

ownership, leadership, business structure and tax strategies.
 Key factors affecting succession plan

1. Pressure and interests inside the firm

Family members – when they are employees
Hanging onto or getting hold of company control
Selection of family members as managers (to designate a heir)
Continuity of family investment and involvement
Building a dynasty
Rivalry

Non Family employees

Rewards for loyalty
Sharing of equity, growth and success
Professionalism
Bridging family transitions
Stake in the company

The non family employees are critical to the enterprises success and their demands
cannot be ignored.
 Key factors affecting succession plan

2. Pressure and interests outside the firm

Family members
Income and inheritance
Family conflicts and alliances
Degree of involvement in the business

Non family elements

Competition
Market, product, supply, and technology influence
Tax laws
Regulatory agencies
 Key Factors Affecting Succession Plan

3. Forcing Events
Illness or some other form of non terminal physical
incapacitation
Mental or psychological breakdown
Abrupt departure-retire immediately
Legal problems
Severe business decline
Financial difficulties
Death
 Sources of Succession

Inside successor
Son, daughter or nephew, niece

Non family outsider

Professional manager
Financial specialists
 Developing a Succession Strategy

It involves the following important steps

•Understanding the contextual aspects
•Identifying successor qualities
•Understanding influencing forces
•Carrying out the succession plan
 Understanding the Contextual Aspects

Time
The earlier the entrepreneur begins to plan for
successor the better the chances of finding the
right person
Type of venture
High-tech operations, a venture that personal
business contacts throughout the industry are the
key factors for the venture’s success etc.
 Understanding the Contextual Aspects

Capabilities of Managers
The skills, desires, and abilities of replacement will
dictate the future potential and directions of the
enterprise
Entrepreneur’s Vision
Entrepreneur’s expectations, hopes and desires
Environmental Factors
Changes in business environment may necessitate
changes in the enterprise management
 Identifying Successors Qualities

•Sufficient knowledge of the business

•Fundamental honesty and capability
•Good health, energy, alertness and
perception
•Enthusiasm about the enterprise
•Personality compatible with the business
•High degree of perseverance
•Stability and maturity
 Identifying Successors Qualities

• Reasonable amount of aggressiveness

• Thoroughness and a proper respect for detail
• Problem solving ability
• Resourcefulness
• Ability to plan and organize
• Talent to develop people
• Appropriate agreement with the owner’s
philosophy about business
 Understanding Influencing Forces

The choice must take into account:

• Family and business culture issues

• The owner’s concerns

• Family members concern

 Family and Business Culture Issues

•Business environment
•Stage of the firm’s development
•Business’s traditions and norms
•Family culture, strength, and
influence
•Owner’s personal motivations and
values
 Owner’s Concerns

•Relinquishing power and leadership

•Keeping the family functioning as a unit
•Defining family member’s future roles in the
business
•Assuring competent future leadership in the
firm
•Educating family and non family members
about key roles
•Keeping non family resources in the firm
 Family Member Concerns

•Gaining and losing control of family assets

•Having control over decisions made by
business leadership
•Protecting interest when ownership is
dispersed among family members
•How to get money out of the business, if
necessary
•Assurance that business will continue.
 Succession planning process

How to carry out the succession plan

• Development of succession strategy.
• Identify the qualities of successor.
• Creating a survival kit (plan) for the the successor.
• Grooming an heir and promoting an environment
of trust and respect.
• Identify a Successor- who can do the best job
keeping the firm going.
 Steps in succession process

Initiation
A period of which children and family members learn about the
business.
It needs high motivation from the owner to the potential successor.
Owner discusses with stakeholders to receive their opinions and
concerns.
Owner must have a defined plan to guide the initiation process.

Selection
Who will be the next leader?
Who possesses the qualities needed for an effective successor?
the owner must put down the requirements for someone to qualify as
the successor and let the potential successors compete for the
opportunity, each presenting his/her own vision and strategy for
carrying the business and family forward.
 

Steps in succession process


Education
Training or educating the successor.
It is a chance to evaluate the successor more effectively.
Place the successor in a useful, responsible position with well-
delineated objectives.
Should be introduced to the owners network so that he/she is
known and allowed to work with business associates, banks,
customers, etc.

Transition
Transfer power and/or control gradually.
Let the successor see what it is like to manage the business
alone.
 

Steps in succession process


Letting go

Owner must plan as early as possible and provide effectively his/her

own retirement

Having sound financial plan for retirement

Having activities outside the business that can provide social contact
and power.

It is important to make adequate preparations, with specific time

schedule for retirement.
 Problems and issues in succession

• Few African are willing to prepare for their exit

• Most businesses are run as extensions of the lives
of the owners
• Children are often encouraged to study and
develop interest in the professions rather than in
business
• The culture does not encourage non-family
members to inherit the business
• The culture does not encourage people to sell
their businesses
 Appropriate Handling of the Succession

Replacement decision should take into

account the interests of different stakeholders
of the business – the owner, his family,
employees, customers, suppliers,
government, community

Getting someone who is right for the

business, not copy of the former owner-
manager
 Appropriate Handling of the Succession

•Choosing successor in advance and training/

mentoring him/her
•Gradually transfer power, Choosing a successor
should be done when the entrepreneur is in-
charge, whenever possible
•Avoiding the temptation of picking a non-
performing/unproven relative – he/she will have
responsibility to all stakeholders
•Getting advise from other managers and
stakeholders
 Why Businesses Die with Founders

• Lack of proper succession: owners do not choose

successors in advance, wait until death
• There are no qualified/capable/skilled/experienced
successors
• Lack of policies/procedures on succession
• Cultural obstacles: family conflicts over property –
business dismantled
• In case of personal services – family has no skilled
person to take over
 Why Businesses Die with Founders

•Reputation of the business is attached to the

specific person
•Limited exposure of family members of the
business:
•One man show – governance structures
•Business activities/records not documented
•Offspring of many successful people are spoilt
•African men do not involve their spouses in
affairs of the business
Thank You
 Theories and models of family business

Three cycle model

Family

Business

Individual members

• The interaction of the three systems can create conditions that impact the
operations and performance of business (Tagiuri and Davis, 1996)
• Family firms must balance the interests of family, business and individual
members.
 Three Cycle Model

• The business should be seen as a system intended to

create wealth for the family
• Every family member should target mainly on the
economic performance of the business
• Eventually, family and business should be viewed as
complementary, rather than competing entities.
!
Agency & Stewardship Theories

• Two theories of organisational behaviour, namely agency

theory and stewardship theory, have frequently been
used to explain the unique aspects of family firms.
• Though these are opposing theories, both study some
of the same dimensions of family business i.e.,
behaviour, governance and performance outcomes
 Agency Theory

• Agency theory is based on the principal-agent

relationship, which is the owner-manager relationship in
the family business context.
• It suggests that individuals are driven by economic
motive; they behave in opportunistic ways and work to
maximise their own returns even at the cost of causing
damage/loss to the organisation – termed as agency
cost.
• The agency theory perspective advises family firms to
structure governance mechanisms that monitor and
incentivize checking of opportunistic behaviour, shirking
responsibility or free-riding. This minimises agency
costs, thereby improving firm performance.
 Agency Theory

• Agency problems may exist in family firms on both behavioral and

governance dimensions. For instance, on the behavioral dimension –
relationships among family managers may create problems of
piggybacking or moral hazard.
• Misaligned shareholder objectives or opportunistic behaviour of
diversion of resources may also cause agency problems
• On the governance dimension, agency theory suggests establishing
mechanisms that check opportunistic behaviour. Family firms have
been found to setup monitoring and incentive mechanisms to direct
managers towards desirable behaviours
• Family - firms should be free from agency problems.
• Owner - management in family business will increase convergence
of management and owner’s interests leading to lower monitoring
costs (Kets de Vries, 1993).
 Theories & models of family business 


Stewardship theory
On the other hand, stewardship theory is based on the humanistic model,
which considers managers as stewards with intrinsic desire to serve the
firm and thus, naturally align with the principal (owner).

They work in a pro-organisational and collective manner serving the

interests of all stakeholders. Stewardship theory suggests governance
mechanisms based on trust that cooperate and involve everyone so that a
natural alignment of the manager and the owner is achieved.

This leads to wealth maximisation, thereby contributing to firm

performance.

Thus family business must develop an understanding of both agency and

stewardship theories;
 Theories & models of family business 


Stewardship theory
• Focus on commitment by the management to organisational objectives
(Chrisman et al, 2004).
• Postulates that separation of ownership and management in family firm
could be an effective structure for managing family business. It should
align the interests of both owners and managers.
• The role of the owner is to mentor and involve management in strategic
decision making and value creation.

Organisational control theory

• Clan and social control systems are more effective than bureaucratic and
administrative systems.
• Social interaction among family members allow the use of informal and
cultural mechanism that replace or complement formal administrative
systems (Mintzberg, 1983).
 Theories & models of family business

Resource based view of the firm

• Possession of unique, valuable, non-
substitutable and immutable resources is
essential for the creation of competitive
advantage and growth of the firm (Barney,
1991).
• Close interaction of family and business
systems may be a source of advantage or a
constraint.
• Human, social, survivability, patient and
governance are distinguished to be unique
resources a family-firm possesses for its
success and survival.