PROBLEMS IN TRANSFER OF BUSINESS EXPERIENCED BY THE FINNISH ENTREPRENEURS
Dr. Pasi Malinen Turku School of Economics and Business Administration, Small Business Institute P.O. Box 110, FIN-20521 Turku, Finland Phone: +358-2-3383 579 Fax: +358-2-3383 393 Email:
[email protected]
ABSTRACT Transfer of business is becoming more and more important in the immediate future as large numbers of entrepreneurs in Europe are growing older. The attention paid to the phenomenon is still not adequate. The research aims at giving a recent picture on the Finnish transfer of business situation. Various writers have come up with different scenarios as to a successful transfer of business. In this research, we compare some recent Finnish findings with the data collected in connection of a larger small family business research programme. The paper presents similarities and dissimilarities with previous findings. Technical, hard issues (financing, taxation) are not the most problematic issues in transfer of business as experienced by Finnish entrepreneurs, the problems are in obtaining assistance in transfer of business planning and finding the successor/buyer. Limitations are discussed and suggestions for future research are put forward where our findings challenge previous research. INTRODUCTION Transfer of business has attracted a lot of research efforts recently in the SME research area, especially from the transfer of ownership perspective (Dyer & Handler 1994, Fox et al. 1996; Morris et al. 1996; Morris et al. 1997; Westhead & Cowling 1998; Koiranen 2000). According to Goffee (1996) family business succession still needs to be researched more. Brunåker (1999) suggests that there is a need of additional research in the area of the succession process (especially that of the successor). However, with the exception of research conducted by Koiranen (see for example 1998, 2000) and Hautala (2001) and rare on-going thesis projects family business transfer research in Finland is still underdeveloped. Internationally, family business transfer is also a very contemporary phenomenon due to the fact that larger generations that were born immediately after the World War II and who are planning their lives after 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 succession, transfer of business (ie. selling the business) or inactivating/terminating the business. The last option is less attractive from the employment and economic perspectives. The same phenomenon applies well to the Finnish situation as well. According to the Federation of Finnish Enterprises, during the next ten years almost half (over 40%) of the Finnish company base (see Table 1) is faced with transfer of business1. 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. From the employment and economic point of view the issue is crucial for individual economies in Europe as well. Table 1 Finnish company base in 2000 (Statistics Finland) Company size 0-9 10-49 50-249 over 250 Total
Number of enterprises 207004 13014 2237 562 222817
Number of employees 319741 250278 224239 507161 1301419
Turnover, milj. Euros 43,1 42,4 47,1 129,4 262,0
Company Percentage of Percentage of Percentage enterprises employees of turnover size 0-9 92,9 % 24,6 % 16,4 % 10-49 5,8 % 19,2 % 16,2 % 50-249 1,0 % 17,2 % 18,0 % over 250 0,3 % 39,0 % 49,4 % Total 100,0 % 100,0 % 100,0 %
The increase in senior generations is evident in Finland. Middle-aged people represent the biggest age group in Finland at the moment (EVA 1999). The 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 (European… 2002, 8). As a consequence, transfer of business is one of the biggest challenges faced by the Finnish economy in the 21st century.
1
In the paper, term ‘succession’ refers to transfer of business within the same family. ‘Transfer’ refers to all forms of ownership change.
65+ 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 25000
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Figure 1 Finnish entrepreneurs by age group and gender, 2000 (Statistics Finland) This study is part of a larger Family Business Research Programme launched in Small Business Institute, Turku School of Economics and Business Administration, Finland. The aim of this paper is to present a timely picture of Finnish transfer of business situation by using a selected part of a survey used for the above mentioned research programme.
RECENT FINDINGS According to literature, succession is the most critical phase of the small business lifecycle (Morris et al. 1997; see also Kets de Vries 1993). Different process models of transfer of business or succession have been introduced (see Hautala 2001). According to Fox et al. (1996) in succession 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. Similar suggestion can be given for transfer of business situations as well. Morris et al. (1996) suggest, based on their literature review that successful factors of effective succession can be classified into three general categories, namely 1) preparation level of heirs (formal education, training, work experience outside the firm, entry-level position, years working within the firm, motivation to join the firm, and self-perception of preparation), 2) relationships among family and business members (communication, trust, commitment, loyalty, family turmoil, sibling rivalry, jealousy/resentment, conflict,
shared values and traditions, and 3) planning and control activities (succession planning,
tax
planning,
use
of
outside
board,
use
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family
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consultants/advisors, and creation of a family council). Therefore, it is evident that small business transfer should be planned. According to the literature (see for example Fox et al. 1996; Morris et al. 1997; Koiranen 2000) important issues regarding succession can be divided into “soft” and “hard” issues. Soft issues relate to company or family related, and parent-child relationship issues, hard issues relating to inheritance, monetary, technical, legislative matters, and the details of executing the ownership change issues. For a successful succession various authors suggest that there has to be a mutual understanding of the 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 succession (and transfer of business) 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 succession (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 succession (Fox et al. 1996; Koiranen 2000).
RECENT FINNISH FINDINGS ON SUCCESSION According to a recent qualitative research conducted by the author (Malinen 2002) small family business succession problems in Finland are similar to those (international findings) presented earlier. Taxation and finance are regarded the most difficult in the small business succession. However, the problem may be that taxation and financial issues might be difficult if succession is not planned. 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. When the importance of planning has been acknowledged, other difficulties arise, which, according to the author, prove to be more difficult. 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). Inheritance issues are an important part of succession planning. Transfer of knowledge as well as the transfer of networks play very important role in the succession. Issues dealing with power and management might complicate the succession (reluctance to share power, pressures in continuing the business). There might be big differences of opinion regarding the development of the company in the future between generations. Company personnel issues are of great importance in the succession. Finally according to previous research, informing the most important stakeholders (financiers, personnel, customers, contractors etc.) is an issue that should be approached in a planned way. According to a recent Finnish study on SME family business succession (Ministry of Trade…2001; n=2644) one third of the Finnish company base is faced with transfer of business in the next ten years (see Appendix 1, Table 2). Geographically, the Pohjanmaa, Varsinais-Suomi and Uusimaa regions were areas with the biggest hurry in the issue in Finland when compared between various regions. However, the difference was not statistically significant. Company size was not a decisive factor as far as transfer of business in concerned (see Appendix 1, Table 3). There were no statistically significant differences in transfer of business relevance and company size (see Appendix 1, Table 4). In the same study (Ministry of Trade…2001), 46% of entrepreneurs had neither concrete plans nor certain successor available and, therefore, 54% had already a successor available (n=1563). Out of
those 54%, family members were the biggest group of potential successors in the business (83%) followed by competitors (6%) and employees (6%) (see Appendix 1, the Table 5). In the same study (Ministry of Trade…2001), 34% of entrepreneurs did not name any problems concerning the issue (not relevant at the time of the study), whereas 66% of the respondents named problems concerning succession. To find a successor (49%), taxation issues (18%) and transfer of knowledge (13%) were named as main challenges in succession (see Appendix 1, Table 6).
DATA COLLECTION The data used in this study is a small part of a large survey material collected for a basis for our family business research programme. The sample was designed to be representative of the Finnish SME company base. Excluding LSEs was based on the fact that most Finnish LSEs are publicly traded and, therefore, transfer of business is different from that of a family business. Additionally, we excluded companies with yearly turnover less than 8.300 DQGFRPSDQLHVRZQHGE\RWKHUFRPSDQLHVZLWKPRUH than 50% share. These criteria were based on the facts that the business has to be big enough and an independently operated entity to be “a real company”. Statistics Finland was approached in order to get a random sample of 2,500 companies in Finland. Out of that list a stratified random sample of 1,000 companies was selected with the following principles, restrictions and decisions: •
18 companies with inappropriate information on the size criterion were excluded
•
all sample companies with 5 employees or more were selected. The division between different size classes were as follows: o 5-9 employees: 185 companies o 10-19 employees: 104 companies o 20-49 employees: 54 companies o 50-99 employees: 25 companies o 100-249 employees: 5 companies
•
companies with less than 5 employees: a random sample of 627 companies (ie. 2,500 minus all the companies in other size groups).
•
at a later stage, additional contact information of 300 companies was selected in order to get responses for the larger company group as well (10-49 employees: additional 100 companies; 50-248 employees: additional 200 companies)
Telephone interviews were conducted between April and May 2002. The response rate was 39,4%, which is good compared to response rated on mail surveys and moderate for telephone interviews. A total of 214 companies denied participating in the research. A check for non-response bias using company descriptors (size, sector) produced no significant differences between respondents and non-respondents. Respondent companies are described in the following Table 7. Table 7 Background data of researched companies Number of employees 1-9 10-49 50-249 Total
Frequency 307 128 57 492
Valid percent 62,4 26,0 11,6 100
Turnover size Less than 2 M 2-9,9 M 10-49,9 M Over 50 M Total
Frequency 337 89 27 5 458
Valid percent 73,6 19,4 5,9 1,1 100
Company age Less than 3 years 3-5 years 6-9 years Over 10 years Total
Frequency 12 67 125 289 493
Valid percent 2,4 13,6 25,4 58,6 100
Business sector Industry Construction Trade Hotels and catering Transportation Services Other Total
Frequency 91 65 105 25 58 136 12 492
Valid percent 18,5 13,2 21,3 5,1 11,8 27,6 2,4 100
The sample is somewhat biased, because we wanted to get enough answers in every company size group within our pre-planned 500-company respondent group. Larger SMEs are a bit over-represented in the sample compared to the Finnish company data. Industry and construction sectors are personnel intensive sectors, thus, the bias is reflected in the respondents’ business sector. When generalising findings one must test if weighting is necessary. It becomes necessary if chi-square independence test indicates that company size is statistically significant (p
