Family Business And Exit Strategies:

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Family Business and Exit Strategies: an Empirical Research

Ugo Lassini Bocconi University - Strategic and Entrepreneurial Management Department V.le Isonzo, 23 20135, Milan, Italy Tel: +39.02.58362520 Fax: +39.02.58362530 [email protected]

Key Words : family business, survival, succession, sale Intended Target Journal / Conference: Entrepreneurship Theory and Practice; Family Business Review / AoM; Workshop on Family Firm Management Research (Jonkoping); FBN-IFERA

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05-16 Introduction The literature on family business has generally devoted great effort to studying problems arising from succession processes, actors involved, their effects on firm performance and the ways of managing processes. However, empirical evidence shows that, in most countries, family businesses are not likely to survive after the third generation. Statistics prove the difficulty to accomplish a successful succession: only nearly 25-30% of family businesses successfully hand over leadership on to the second generation and only 10-12% on to the third one (Beckhard e Dyer, 1983; Murray, 1999; Pellegrin, J. 1999). Moreover, only nearly 2-3% manage to go in for permanent development, whereas most of the m go not beyond the third generation and either close down or are sold. Nevertheless, the literature of concern has never investigated the sale of family businesses nor empirical researches do exist. The rate of survival generally depends on the success of the succession process: the situations leading to wound up are not so clearly distinguished from those in which the firms are sold. If a firm closes, it is a failure, but we are not able to express such a clear judgement in case of trade sale: is it due to the failure of the succession process? What happens to the family who sold the business? And what happens to the business that has been sold? The decision to sell the business greatly impact on the company itself, on its economic purpose, management and work force in general. In particular for family businesses, it is a very complex decision to make implying numerous economic variables arising from highly diversified aspects not only merely economic. Emotional aspects have often a strong impact: the firm decisional core in fact includes partners/entrepreneurs who are directly involved in risk capital and ordinary management. The main purpose of this research is to identify the motivations underlying the decision to sell the family business and to understand what happens to the entrepreneurial family after the sale.

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05-16 Methodology The empirical analysis was carried out on a sample of Italian family businesses 1 active in some sections of the following industries: instrumental and sundry mechanics and electro- mechanics that were sold 2 between 1990 and 2000. The method applied also implied the use, jointly or additionally, of questionnaires and cases. First of all, a macro population of reference was identified in the body of companies sold in Italy in the mecha nic industry between 1990 and 2000. Such identification was carried out by way of a cross-analysis of some reports on M&A occurred in Italy (Kpmg Consulting 1989, 2001). The analysis of all sales prior to 2000 determined the period of reference, meant to understand the related consequences over a couple or years, to prevent any record failure of the main actors involved in the transfer process. We then proceeded to identify a sample of Italian family businesses sold between 1990 and 2000 working in the mechanics industry that well mirrored the main features of the population of reference. We carried out 32 interviews to both sector experts and to representatives of Industrial and Industry Associations that enabled the identification of 237 disposed of family businesses. We then collected some data on the sample of businesses identified by way of questionnaires submitted to both purchasers and vendors. For every business sold, we collected the data concerning structural and descriptive variables of both the acquired business and qualitative variables of the purchaser in terms of reasons of the sale/purchase and about the economical and financial situation of the business following the sale. The questionnaires have therefore enabled the identification of the features of the sold businesses and of the purchased ones, of the reasons behind sales (from both the seller and the purchaser’s points of view), to analyse the reasons of the acquisition and the results achieved after the sale (not the precise purpose of the present research).

1 In this research, family businesses are those firms (of small, medium or large size) controlled by one or more owners reciprocally related by family ties and kinship. 2 The sale of a family business implies the family transfer of control over a new entrepreneurial group by selling, either the majority or part of the firm or some shares.

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05-16 The 68% of questionnaires were returned (163 businesses), a rate high enough not to invalidate the sampling method (also holding the situation of the industry of concern and the year of occurrence). Also the theme of the reasons underlying both sales and purchases emerged during the 32 interviews to the industry experts, on the basis of the information they acknowledged so improving the intrinsic value of the research by getting from a triple source of data.

Preliminary Results The samp le of reference shows prevalence of family businesses (nearly 60-65%) small and medium sized where one or few family shareholders control the risk capital and are directly involved in the governance and management boards whose members are hardly ever non- family members. It also includes family businesses where a certain number of family members control the share capital (over 5-6 people): these are medium/big sized businesses with both family and non- family members in the Board of Directors and all other bodies. Nevertheless, present development conditions strongly dependent on the families, as they hold shareholding sufficient to economically control the company. Moreover, the typical profile of the sampled businesses is of some interests in terms of number of generations succeeded in either the ownership or the management of the sold business. In particular, we notice prevalence of ownership quite exclusively concentrated in the first generation and, at the same time, the management is appointed to both the first and second generation. Finally, we observed the temporal gap between establishment and sale: the latter never occurs during the first 5 years of the business life and in a few cases during the first 15 years, whereas lots of businesses are sold 30-35 years after foundation. The empirical research carried out shows that there is a broad range of reasons underlying the decision to sell, which can be grouped into three different categories: 1) strategic motivations (technological obsolescence and need of constant investments; inadequate size to work within the industry; inadequate profitability compared to the ownership’s expectations; difficulty to attract skilled human resources, financial motivations and personal motivations); 2) financial motivations 4

05-16 (maximization of the transfer price following an advantageous offer; business financial need losses that cannot be settled; family financial need) and 3) personal motivations (heirs indifferent or unable; disagreement among partners; lack of heirs; intention to start a new activity; decrease of passion; conflicts with trade unions).The research shows also that the third group of motivations (which reflects problems arising from the succession process) was the main reason just in 30% of the cases. Due to the different nature of the underlying motivations, selling turns out a valid alternative to grant the business continuity (and the brand’s that often coincides with the family name). It indeed does not mark the very end of the entrepreneurial venture, nor is the consequence of a failed succession. In the research branch of the family business, succession needs to be distinguished between entrepreneurial succession of the family and life of the family business. A detailed analysis of both the future of the fa mily who sold the business and the economical/competitive results achieved under the new ownership is needed. This research shows that: a) there is no strong evidence that the family who sold the business starts a new business after the sale and b) that the firm sold gains better performance if at least one member of the former property keeps a role of minority shareholders and/or remains actively involved (either temporarily or permanently) in the governance or the management of the firm after the sale.

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