Tilburg Institute for Family Business

Famexit: when intra-family succession is not an option

Published: 06th April 2020 Last updated: 06th April 2020

The economic landscape in which companies operate is subject to change. Technological change occurs at an accelerating pace, fragmentation in the political landscape is increasing and the population is ageing. These changes impact a business’ way of operating.

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Joyce Kox: The family and its implications for the family business

Because the family business derives its unique characteristics from the interaction between a family and business system, trends in the external environment affect the family business directly and indirectly. The external environment not only has an impact on the business, but also affects family composition and dynamics. In turn, this has implications for the family business, given that the family characteristics flow into the business through family participation in management and ownership.

Because of several societal trends, intra-family succession has become more difficult for family businesses. As the crude birth rate dropped, the next generation is raised differently and receives better education, succession within the family is no longer self-evident. As a result of these trends, successors have more freedom to choose their own path. For many SMEs, this lack of succession within the family often means the end of the family business. Newspapers regularly report about families who have been at the helm of the family business for many generations and are closing or selling the company due to succession issues.

The identity of the family is intertwined with the firm

When family businesses do not find a successor within the family, they have different possibilities. For example, the family business can search for an external successor, sell, merge or close down. Some of these options ensure that the family still remains involved in the business, although their influence diminishes. Abandoning the family business is not an easy choice. Family members often have an emotional connection with the business. The identity of the family is intertwined with the firm. Family members may also experience pressure from previous generations. They do not want to be responsible for ending the family business after several generations.

In addition, a family business is also firmly anchored in its environment and the family feels responsible towards its stakeholders. For family members, ending the family business can therefore feel like a personal loss or failure. Research also has shown that this emotional connection between family and company influences the choice for an exit strategy. Compared to non-family firms, family businesses would be more inclined to opt for options, such as mergers, through which a part of the emotional connection is retained, despite that it might be less attractive in financial terms.[1] The higher this emotional value of the company for the family, the less inclined one would be to sell shares.[2] Thus, if there is no succession possible within the family, all involved parties should also pay attention to the psychological aspects of the process, next to the business case.

Nevertheless, due to the trends, there is an upsurge in the number of family businesses being sold. In case of being a target, the unique characteristics of family businesses, such as, the motives to sell or cultural differences, can also impact the takeover process.[3] For an effective transfer, it is therefore important that the family background of the takeover candidate is taken into account.

The effect of these trends on the wider business environment is less clear. Researchers argue that a different type of employee is attracted to working in a family business.[4] When the company is transferred to a non-family owners, how does it affect the employees? Which factors facilitate or hinder this transition? In addition, family businesses cover a large part of the total number of business and are argued to have unique characteristics. What does it mean for the economy if they lose their "family status"? Since the final part of the baby boom generation is approaching retirement and other trends will not simply reverse, this topic will remain relevant for family businesses in the coming years.

[1] Chirico, F., Gómez-Mejia, L. R., Hellerstedt, K., Withers, M., & Nordqvist, M. (2019). To Merge, Sell, or Liquidate? Socioemotional Wealth, Family Control, and the Choice of Business Exit. Journal of Management. DeTienne, D. R., & Chirico, F. (2013). Exit strategies in family firms: How socioemotional wealth drives the threshold of performance. Entrepreneurship Theory and Practice37(6), 1297-1318.

[2] Zellweger, T. M., & Astrachan, J. H. (2008). On the emotional value of owning a firm. Family Business Review21(4), 347-363.; DeTienne, D. R., & Chirico, F. (2013). Exit strategies in family firms: How socioemotional wealth drives the threshold of performance. Entrepreneurship Theory and Practice37(6), 1297-1318.

[3] Mickelson, R. E., & Worley, C. (2003). Acquiring a family firm: A case study. Family Business Review16(4), 251-268.

[4] Block, J. H., Fisch, C. O., Lau, J., Obschonka, M., & Presse, A. (2016). Who prefers working in family firms? An exploratory study of individuals’ organizational preferences across 40 countries. Journal of Family Business Strategy7(2), 65-74