Why there must be a divide between the first and subsequent business successions

 

Personal ability plays a significant role in small firm growth (Sexton and Bowman-Upton, 1991; Jennings and Beaver, 1997; Covin and Slevin, 1997; Wiklund and Shepherd, 2003).

Founding teams produce a strong path dependence* which increases over time and which is more significant that the influence of later CEOs (Eisenhardt and Schoonhoven, 1990).

Two propositions ensue from the above: 

(i) it is not the size of a company what influences growth after the first succession, but the path dependence which amplifies resistance to change after the founder exits and the successor steps in;

(ii) the first business succession in a company's history has a stronger impact on its growth than later successions.

These propositions imply that business succession is most vulnerable to external and internal factors if it is a first-time transfer of the founder's managerial and/or ownership position. Therefore, measuring first-time successions promises a lower level of noise and, accordingly, a clearer evidence. That, in turn, will lead to a "weather-tight" practice (namely, prescriptive succession patterns), whose efficiency in extreme conditions of first-time successions guarantees its appropriateness in less critical situations of later successions.

Footnote definition

* Path dependence means that both the starting point and accidental events can have significant effects on the outcome. In other words, history matters.

References

Covin, J. G. and Slevin, D. P. (1997). High growth transitions: theoretical perspectives and suggested directions. In Sexton, D. and Smilor, R. (Eds), Entrepreneurship 2000. Chicago, IL: Upstart Publishing Company.

Eisenhardt, Kathleen M., Schoonhoven, Claudia Bird (1990). Organizational growth: Linking founding team, strategy, environment, and growth among U.S. semiconductor ventures, 1978-1988. Administrative Science Quarterly (RSS).

Jennings, P. and Beaver, G. (1997). The performance and competitive advantage of small firms: a management perspective. International Small Business Journal, 15, 2, 63–75.

Sexton, D. L. and Bowman-Upton, N. B. (1991). Entrepreneurship: Creativity and Growth. New York: Macmillan.

Wiklund, J. and Shepherd, D. (2003). Aspiring for, and Achieving Growth: The Moderating Role of Resources and Opportunities. Oxford, UK and Malden, MA, USA: Blackwell Publishing.

Generic types of business succession - examples and refined chart

 

Some real-life examples of business successions wouldn't fit in the chart introduced in the previous blog. That useful obstacle led to this "take two" version of the matrix.

  

Figure 1. Generic types of business succession

Below are typical managerial decisions which relate to the four generic types of business succession.

1. Management retained / Ownership retained

a) Partial management succession

This type of business succession includes cases when the company franchises (or licenses) out the right to use its business model, so the franchisees become de facto business unit managers of the franchiser.

b) Partial ownership succession

In this generic type of succession the company's owner retains the majority stake in the equity in 

undertaking public listing on a stock exchange, 

• merging with another company, 
• establishing a joint venture, 
• selling business to a financial investor or to other types of external or internal buyers.

2. Management transferred / Ownership retained

In this type of succession the owner benevolently gives the management to employees or to external parties but holds the majority or full ownership control of it.

3. Management retained / Ownership transferred

This generic type refers to situations when the company's owner sells the majority stake but holds a managerial position due to specific personal assets in the same sorts of deals as named in 1b.

4. Management transferred / Ownership transferred

This covers cases of the owner's full withdrawal from the company through selling it to internal or external buyers. That cause of succession also includes

• divestments, 
• contracting out, 
• rescues.

References

Co-Operatives (2003), “Delivering employee and community buyouts”, available at: www.uk.coop/document/delivering-employee-and-community-buyouts-guide-succession-process (accessed December 2013).

Hawkey, J. (2002), Exit Strategy Planning: Grooming Your Business for Sale or Succession, Gower Publishing, Aldershot.

Howorth, C., Westhead, P. and Wright, M. (2004), “Buyouts, information asymmetry and the family management dyad”, Journal of Business Venturing, Vol. 19 No. 4, pp. 509-34.

Sherman, A. (2003), Parting Company: Innovative Strategies to Plan for Succession, Manage the Transition, Sell or Transfer Your Business, Kiplinger Books, Washington, DC.

What is business succession anyway?

 

The most "corporate" definition of business succession appears to be the following:

A deliberate and systematic effort by an organization to ensure leadership continuity in key positions, retain and develop intellectual and knowledge capital for the future, and encourage individual advancement (Rothwell, 2001, p. 6).

It stresses management turnover but ignores the ownership transfer side of business succession.

There is an ownership-focused definition out there, though:

The transfer of a business that results from the owner’s wish to retire or to leave the business for some other reason. The succession can involve a transfer to members of the owner’s family, employees, or external buyers. Successful succession results in a continuation of the business, at least in the short term (Martin et al., 2002, p. 6; SBS, 2004, p. 7).

This one, alternatively, omits management turnover and stresses the ownership transfer problem of business succession.

In my second entry of this blog I modified the line pointing out that business succession “… in broad terms, it is a process through which companies plan for the future transfer of ownership and/or top management …” (Ip and Jacobs, 2006) into yet another definition that attempts to reconcile the first two:

Business succession is a transfer of ownership and/or top management in companies (Ip and Jacobs, 2006).

To present it graphically I constructed the grid shown in Figure 1:

Figure 1. Generic types of business succession.

Important - The term “owner” does not necessarily refer to a founder of a company. It merely indicates the one who owns a company (i.e. holds a major stake of shares) at the time of succession. My research design will, most probably, require partitioning a premier and subsequent business successions. In that case replacing the “owner” with the “founder” should explicitly imply that a company’s first succession is meant.

References

Ip, B., Jacobs, G. (2006), “Business succession planning: a review of the evidence”, Journal of Small Business and Enterprise Development, Vol. 13 No. 3, 2006, pp. 326-350.

Martin, C., Martin, L. and Mabbett, A. (2002), SME Ownership Succession - Business Support and Policy Implications, Small Business Service, London.

Rothwell, W. (2001), Effective Succession Planning: Ensuring Leadership Continuity and Building Talent from Within, 2nd ed., AMACOM, New York, NY.