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LIKE FATHER LIKE SON?
TRANSFER OF ENTREPRENEURSHIP IN SMALL FAMILY
BUSINESSES IN THE FINNISH CONTEXT – SOME CRITICAL
ELEMENTS
Pasi Malinen & Irma Vento-Vierikko
Small Business Institute
Business Research and Development Centre
Turku School of Economics and Business Administration
P.O. Box 110; 20521 Turku, Finland
Tel. +358-2-3383548
Fax +358-2-3383393
pasi.malinen@tukkk.fi; irma.vento@tukkk.fi
LIKE FATHER LIKE SON?
TRANSFER OF ENTREPRENEURSHIP IN SMALL FAMILY
BUSINESSES IN THE FINNISH CONTEXT – SOME CRITICAL
ELEMENTS
SUMMARY
Family business succession in one of the greatest challenges for many Western economies in the coming
years. Finland is not an exemption. In itself, succession is the most critical phase of the small business life
cycle. Governments have introduced supportive policies and instruments for tackling succession problem.
Therefore, this research aims at investigating critical policy issues that deal with succession. Additionally,
the paper links policy issues and measures for transferring entrepreneurship between generations.
According to our findings, taxation and finance (and inheritance issues in general) were mentioned as the
biggest possible problems in succession. Transfer of knowledge, networks and relationships were
considered very problematic. The last group of potential problems arise from managerial issues (sharing
the power, letting go of the company, personnel problems). We believe firmly that entrepreneurship can
be transferred between generations by long and careful planning. This planning process can be accelerated
or guided by training, counselling, couching and other soft techniques. Additionally, policy makers can
both increase the awareness and information sharing and at the same time develop instruments for
successors to make it easier for him/her to continue the family tradition. The higher standard of education
of the younger generation as well as their different life-style expectations will put new challenges to
policy makers, interest organisations and education and training institutions, which will have to reconsider
their approach to suit the changing family business culture.
Keywords: small business succession, SME policy measures, succession assistance
INTRODUCTION
Small business importance has been acknowledged as a source for sustainable economic growth and
balance, means for meaningful employment, and a potential for new innovations. As the “baby boomers”
retire there is a serious threat for company survival (employment loss from the point of view of the whole
economy). This research is based on the fact that small family business transfer (or succession/ transition)
is both scientifically and practically an important issue for the developed countries in the world at the
moment.
In this research project, we examine as to which critical policy issues complicate the succession process in
the case of Finnish small family businesses. Additionally, we are interested in the individual, social and
financial aspects of transfer of entrepreneurship into the next generation in a family business succession
context.
This research project is part of a larger research programme aimed at examining family businesses and
especially small family business succession in Finland. An integral part of the programme is small
business succession training, a 12-month training and development programme, managed by the authors
and a team of researchers and trainers within the Small Business Institute of the Turku School of
Economics and Business Administration, Finland. The data has been collected through personal and group
interviews, questionnaires and action research methods. Policy data (triangulation) has been collected
from a case study conducted from the European perspective.
FAMILY BUSINESS AND SUCCESSION
Despite the fact that family businesses account for almost 70% of all Finnish companies (i.e. over 150.000
companies) research efforts have been very modest in the area. In addition to their large economic impact
but also for their special characteristics are they an important topic in the field of entrepreneurship. Family
businesses differ from companies in general in their strategies, management and future orientation
(Westhead & Cowling 1998).
The Finnish company statistics are somewhat similar to those of other European Union countries (see
Table 1) in a way that very small and small companies represent the vast majority of the enterprise body.
SMEs amount for 60 percent of Finnish private sector employment and over half of the turnover produced
by the Finnish companies.
Table 1: General company statistics in Finland, 1999.
Company size group Number of companies Number of employees Turnover, FIM1000
0-9 204.427 315.113 237.493.356
10-49 12.448 238.587 224.589.779
50-249 2.094 211.212 229.455.922
250+ 547 503.744 650.991.437
Total 219.516 1.268.656 1.342.530.494
Source: Statistics Finland.
According to the Federation of Finnish Entrepreneurs, during the next ten years almost half (over 40%) of
the Finnish company base is faced with family business transfer. Therefore, it touches nearly 90.000
companies in the near future. During the next three years one in ten Finnish SMEs has to come up with a
solution to the transfer problem. Less than one third (29%) of the companies have a successor from within
the family ready and available.
Internationally, family business transfer is also a very contemporary phenomenon due to the larger
generations that were born in the late 40’s after the World War II and who are considering and arranging
their lives after an active career as entrepreneurs. Everybody wants his/her efforts to be beneficial for
themselves as well as their families! When an entrepreneur decides to retire (s)he has three basic options
to choose from, namely transfer of business, selling the business or inactivating the business. The least
option is less attractive from the employment perspective. The same phenomenon applies well to Finland
as well.
The increase in senior generations is evident in Finland. Middle-aged people represent the biggest age
group in Finland at the moment (EVA 1999). Ageing problem touches dramatically the Finnish business
sector (Figure 1). The majority of entrepreneurs are middle-aged (50+). In the EU, approximately 20% of
entrepreneurs are over 55 years old (Report… 2002, 8). As a consequence, family business transfer is one
of the biggest challenges faced by the Finnish economy in the first decade of 00’s.
Figure 1: Finnish entrepreneurs by age group and gender, 2000 (Statistics Finland).
Small family business transfer has attracted a lot of research efforts recently, especially from the transfer
of ownership perspective (Dyer & Handler 1994, Fox et al. 1996; Morris et al 1997; Westhead & Cowling
1998; Koiranen 2000). Brunåker (1999) suggests that there is a need for additional research in the area of
succession process (especially that of the successor). However, with the exception of research conducted
by Koiranen (see for example 1998, 2000) and rare on-going thesis projects family business transfer
research in Finland is very rare.
While acknowledging the fact that there are various definitions for a family business (SBA 1997; Chua &
Chrisman 1999; Koiranen 1998 & 2000), in this research project family businesses are defined as those
partially or completely owned and managed at least by two or more members of the same family. Again,
family in today’s western world is totally different to that of the past (see Chua & Chrisman 1999). In this
research project, family is defined to consist of immediate family members (grandparents, parents, and
children). There are many large multinational family businesses. In this research project the focus is on
small and medium-sized enterprises, SMEs (employing less than 250 people) due to the fact that small and
large business transfers are different issues. Ownership issues are usually more planned in larger
companies for there usually are many alternatives for business ownership change (Fox et al 1996). In this
research, family business transfer refers to the transfer of ownership and management of a family business
in question. Therefore, we exclude other types of business transfers (for example selling the business to
-15000 -10000 -5000 0 5000 10000 15000 20000 25000
15-19
25-29
35-39
45-49
55-59
65+
Male Female
employees or other interested party) in this research project. Terms ‘family business transfer’, ‘generation
transition’, and ‘succession’ are regarded synonyms.
According to literature, family business transfer is the most critical phase of the small business life cycle
(Morris et al. 1997). According to Fox et al. (1996) in family business transfer six critical relationships
have to be taken care of: 1) company and its most important stakeholders, 2) older generation and
company, 3) younger generation and company, 4) older and younger generation, 5) younger generation
and company’s most important stakeholders, and 6) older generation and company’s most important
stakeholders. Therefore, it is evident that small business transfer should be planned.
According to the literature important issues regarding small family business transfer can be divided into
“soft” and “hard” issues, soft issues relating to company and family issues, and hard issues relating to
monetary, technical and legislative matters. For a successful family business transfer various authors
suggest that there has to be a mutual understanding of company future development and company values
between older and younger generations (shared values). The incumbent should learn how to share power
and let go. Both generations need their personal as well as a joint plan for the transfer (for it is a long
process). The whole family has to be involved in this process in order to avoid conflicts between the heirs.
Third party intervention (consultants, advisors, and even stakeholders) can be used in the transfer process.
Retirement per se should be planned as well as the time of the successor’s entry to management position.
(Fox et al. 1996; Morris et al. 1997; Koiranen 2000) Family consensus is difficult to achieve and
generation differences vis-à-vis company future are potential problems faced in a transfer situation
(Morris et al. 1997). Next generation may be reluctant to continue running the family business (Stavrou
1999; Stavrou & Swiercz 1998; Koiranen 2000) although in a situation when employment condition are
unfavourable or unpredictable, offspring would be willing to join the firm (see Mäki 1999 or Jack &
Anderson 1998). Additionally, there might be rivalries among family members (Morris et al. 1997), or the
number of potential successors in a family might be limited (Fox et al. 1996). Social norms in every
individual family (Brunåker 1999; Koiranen 2000), work vs. family free time conflicts (Dyer & Handler
1994; Foley & Powell 1997) and environment as well as stakeholder relationships (including company
personnel) are but a few other issues that are important in family business transfer (Fox et al. 1996;
Koiranen 2000). In the literature, hard issues that have to be tackled in a family business transfer situation
refer to taxation, inheritance, financing the transfer and the nuts and bolts of executing the ownership
change issues (see for example Fox et al. 1996; Morris et al. 1997; Koiranen 2000).
TOWARDS SUPPORTIVE POLICIES FOR SUCCESSION
Existing Policies and Business Environment
According to a recent EU Expert Group Paper (Report… 2002, 9-10), there are a few identified problems
in business transfer in general. Firstly, psychological or emotional problems, which are based on the fact
that small businesses are personified with the owner-manager entrepreneurs, companies are developed and
build up over a number of years and entrepreneurs are thus naturally reluctant to let go. Secondly, the
transfer of business is complicated in itself and entrepreneurs usually have no previous experience of
handling the situation. Thirdly, national legislation (company law, taxation and administrative formalities)
might be an obstacle in a business transfer situation.
Due to the current importance of the issue, there are various SME policy measures aimed at assisting
family business transfer in Europe. Regulatory (tax and legal measures) and non-regulatory measures
(business support, counselling, consulting, training and development programmes, company databases for
buyers and sellers etc.) can be used in assistance. Tax reductions and financial support are most used
methods in family business transfer assistance. There are more legal measures than tax measures in use
among the EU member states for national governments are reluctant to use tax measures as they imply a
loss of income for them. (Report… 2002, 29)
As many as 13 EU member states provide special rules for inheritance and gift taxes in the case of
business succession. For example in Greece, transfers of sole proprietorships, shares of a sole
proprietorship or a general partnership to the entrepreneur’s spouse or children due to retirement are tax-
free. In Germany, there are lower capital taxes in business transfer situation. In France, there is an
inheritance tax relief when transferring the ownership between spouses. In Belgium, there are special
funds/foundations for small business transfer within a family or the transfer of company ownership to the
employees. (ENSR 1994, 224-225; ENSR 1995, 175; Report… 2002, 16; 29)
In Finland, the measures concerning tax exemptions and allowances for descendants and successors have
been difficult. The amount of the tax to be paid depends largely on the difference between the tax base
and the market value. The relief provided under current relief legislation has lost much of its force as
taxable values have climbed sharply over the past few years and are now generally very close to market
values. Under the Finnish taxation policy, the main principle is neutrality of the taxation and different
exemptions do not always support neutrality. However, there are efforts in supporting succession in
Finland. Entrepreneurship Project, which is included in the Government Programme and run by the
Ministry of Trade and Industry, aims at introducing other support measures for business transfer.
Currently in Finland, unfortunately, the provision of support is still fragmented and information flow on
the issue to entrepreneurs is far from ideal. (Report… 2002, 39)
Developing New Instruments
Information about succession is still too limited. Despite of the fact that there is a lot of support available
on the succession issue, the awareness of the succession planning is also limited. Based on our previous
experiences companies participating succession training programmes are exceptional. Education and
training are typical tools in trying to influence a changing business environment or large-scale problem.
Counselling or coaching is another way of interfering the problem. (Report… 2002, 20-24) New training
programmes and support packages are created and offered, but even so they reach only a small number of
all those firms, whose clock is ticking and the risk of having to act on an urgency situation without
preparation is growing greater all the time.
Various countries and regions have started “market places” for companies in transfer situation. There are
examples of publicly and privately held markets for sellers and buyers in Europe. Financial assistance can
take many shapes and forms. Assisted loans, provision of guarantees, and forms of equity capital are ways
of helping the successor in the succession situation. (Report… 2002, 20-24) According to recent EU
Expert Report (Report… 2002, 43) there is also a trend for increased business transfers to third parties (i.e.
not to another member of the family). Selling the business to a non-family member is different to a
situation where a family member continues the business. Therefore, when introducing new instruments in
business transfers the unique features of family business succession must be taken into consideration.
Succession is a unique event/phenomenon in the history of entrepreneur and business. The rise of new
type of entrepreneur complicates the matters even more. Serial entrepreneurs are different to “craft-type”
entrepreneurs. Therefore, dynamic, selective and flexible instruments are needed. (Report… 2002, 41-42)
New fast paced economic environment and the need for new innovations stress the importance of training.
ENHANCING TRANSFER OF ENTREPRENEURSHIP OVER
GENERATIONS
Like Father like Son – Is It So?
Small family business transfer problems in Finland are similar to those (international findings) presented
earlier. Taxation and finance, and the lack of potential successor are the biggest problems mentioned in
few member requests conducted by The Federation of Finnish Entrepreneurs or The National Chamber of
Commerce. According to the previous family business transfer programmes conducted by the Small
Business Institute, the problems faced by families can be summarised as follows. There seems to be a
clear lack of planning in almost every small family business transfer. This is partly due to the fact that
transfer is a long and difficult process. Additional problems arise from the lack of openness within the
immediate family. In many cases “soft matters become hard ones!”, i.e. sensitive and difficult personal,
generation related and parent-child issues and the like are brought into the (too rare) discussions and
usually with passion (see also Brunåker 1999). In some cases, there are more or less unexpected situations,
which might affect the transfer process. For example, entrepreneur is selling the company without
considering his/her child a potential entrepreneur. Additionally, sudden unplanned tragedies such as a
heart attack or a car accident may force the family to make decisions over the company future suddenly
and without the possibility to plan a long time. There might be big differences in opinions regarding
developing the company in the future between generations. Openness in discussions and planning are tools
in tackling this potential problem. Finally, informing the most important stakeholders (financiers,
personnel, customers, contractors etc.) is an issue that should be approached in a planned fashion
according to our previous experience.
According to the data collected there were no notably differences between the two generations present
although everybody answered to the posed research questions individually. According to the group
discussion taxation was rated as the biggest possible problem concerning family business transfer. Tax
issues were regarded as difficult and, therefore, named as a major problem in a transfer situation.
Inheritance taxes as well as taxes based on the “selling of the company to heir(s)” were viewed as
problematic. However, there is a difference between assumptions of taxation being problematic over the
fact of not knowing about the legal and technical issues in general and for the family business transfer in
particular. The author is a strong believer of the former explanation to be the case here.
The interviewees felt that financing the transfer was the second biggest problem. This concern is based on
the fact that parents do not usually want their child(ren) to end up with too difficult a financial situation
after the transfer. Other close related issues that were mentioned could be grouped under the following
questions:
• From where does the successor get the financing?
• At what price to sell the business (with regard to tax issues and financial issues)?
• What are the best methods of financing the sale?
• Problems concerning financing were closely related to the taxation issues mentioned earlier. By this
we mean that “the value” of the company has direct relevance to taxation as well as financial issues.
Inheritance issues are closely related to the both taxation and financing issues, too. In the case of family
business transfer, all the heirs are involved. Additionally and interestingly, the spouses of the heir(s) were
mentioned as potential players in the situation as well. This stresses the importance of open discussion
among the extended family in a transfer situation.
Transfer of knowledge related issues were possible problems feared by the interviewees (especially
incumbents). How to transfer the tacit knowledge that the incumbent has to the next generation was the
question raised as an answer to asked question by the author. Additionally, transfer of networks or
relationships were regarded as potential problems in a transfer situation as suggested by Fox et al. (1996).
Transfer of knowledge or network/relationships refers to a situation where the incumbent has to train the
successor(s) to cope with the business environment, customers etc. of the company.
Reluctance of sharing management power and pressures for continuing managing the business by the
successor were mentioned as potential problems in a transfer situation (see Morris et al. 1997). In a way,
these problems are closely linked to the previous group of problems, where the both parties involved are
not sure what to expect from and how to act towards the other generation. Open discussion between
involved parties can be seen as a potential method for overcoming this group of problems.
The last group of problems mentioned was related to company personnel problems (see Fox et al. 1996).
The shift in management position is a threat in any organisation even more so in a small family business.
Successors felt that it takes time for them to gain the authority over the employees. The age of the
successor vis-à-vis the employees of the company plays role a here. Additionally, the experience of the
successor in the company day-to-day operations is an important issue. Too dramatic a change in
management style has an effect on the company. Open communication (in a suitable situation) towards the
company personnel is important. In a transfer process, timing of informing the employees about the future
situation is crucial to avoid the potential problems experienced by the employees in a change situation.
Entrepreneurial Career – Duty or Choice
From the macroeconomic point of view family business transfer in extremely important for any economy.
There are many jobs at stake. Additionally, closing down an established and profitable business is always
a waste of scarce resources directly (job generation potential, tangible and intangible investments etc.) and
indirectly (lost taxes etc.).
There are clear advantages for the successors to continue running the family business as far as the research
data are concerned. According to the data collected we can conclude that the bigger the family business is
the more interested the potential successors are. Having said that we acknowledge the fact that the size of
the business and profitability/generated profits is a totally different issue. Employment and career options
play a big role in a situation of low employment. Many of the successors felt that they were “socialised”
with their family business during their summer jobs and occasional other short periods of “helping on the
shop floor”. In a few cases, the successors have been employed by their individual family business for a
while prior to discussions about family business transfer.
Family tradition plays an important role in old and established family businesses. The successors felt that
they must continue the family tradition. Therefore, their option of an alternative career choice is limited.
However, family tradition is a strong driving force for keeping the family business in operation. Family
tradition also prevents many family businesses to take risks that many entrepreneurs would be willing to
take.
For the successor, an established business is important. It does not give him/her only employment and
career opportunity but also a means for successful living and in many cases a life-style that (s)he is
accustomed to living in a family with a small business. In most cases, established business also means
established customers and products/services/processes. The successors stressed growth as a potential goal
for the enterprise more often than their parents. This gives us an indication of development issues that are
of importance in a small family business transfer situation. From the macro economic point of view
employment potential lies partially in these companies (see Birch 1979).
CONCLUSIONS
In spite of all the information about the coming succession boom, the preparation for the situation often
seems to have been left until very late. Due to the delicate nature of the issue, decision of families often
need a long time to ripen into action. This means that also the support measures offered to SME family
businesses are often underused and training groups are slow to fill up.
Both soft and hard measures are needed in tackling the problem. Raising the general level of awareness
and creating a supportive public attitude towards the problems of the great numbers of ageing
entrepreneurs would help on the soft side, which is by far the more complicated in most cases. Individual
problems should be helped to be solved by tailored tools over a longer period of time.
Long training courses, if the transfer of entrepreneurship is the goal, have proved successful in achieving a
situation, where the family members could together set themselves to look for alternative solutions and
have the experts of the programme as their tutors and consultants and their peer families as mentors and
benchmarkers. A long-term planning span for the actual realisation of succession gives better results both
from the financial, fiscal and emotional point of view.
From the recent studies of the measures aimed at facilitating the family SME succession show that the
policy makers have fully realised the situation and many actors have taken a keen interest in providing
optional ways of alleviating the impact of the biggest change within the SME sector after World War II. It
is to be anticipated that the structure and culture of the sector will change considerably thus requiring also
different policies nationally and internationally.
RECOMMENDATIONS FOR FUTURE MEASURES AND
STUDIES
A lot of research on succession as a business and family process has been done, but studying the
supportive measures and policies to enhance the process is still scarce and pragmatic. The more
sophisticated aspects of the complicated transfer process have to be looked into in order to help the policy
makers in the difficult task of answering to the massive succession boom, which obviously is one of
biggest SME challenges of the coming years.
The decisive factors of entrepreneurship as a career choice is also worth a closer look. The younger
generation is on the whole far better educated and used to greater affluence than their parents and
grandparents used to be when starting the business – at least this is the case in the majority of SMEs in
Finland. As a result entrepreneurship as a personal, social and financial decision is not always a very
alluring choice for them. Many, however, are seriously contemplating the choice, and that is a sign that
many unconcrete factors are at play there. To understand these factors would help the understanding of the
process of transfer of entrepreneurship on the personal level.
An interesting point for further study would also be the impact of the higher standard of education as well
as the different life-style expectations of the younger generation on the entrepreneurial values. That leads
to the need of policy makers and interest organisations to adjust their approach in order to serve the needs
and requirements of the next generation family businesses. An equal challenge will be also put to training
and consultancy services, which also makes it necessary for business education institutions to revise their
curricula and business cooperation concepts to include more offer to family businesses.
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