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Succession and Strategy Changes in Family Firms: Evidence from Management Buy-outs

Succession and Strategy Changes in Family Firms: Evidence from Management Buy-outs. M. Louise Scholes Nottingham University Business School, UK Mike Wright Nottingham University Business School, UK and Hans Bruining Erasmus University, Rotterdam, NL

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Succession and Strategy Changes in Family Firms: Evidence from Management Buy-outs

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  1. Succession and Strategy Changes in Family Firms: Evidence from Management Buy-outs M. Louise Scholes Nottingham University Business School, UK Mike Wright Nottingham University Business School, UK and Hans Bruining Erasmus University, Rotterdam, NL Thanks to EVCA, Barclays Private Equity and Deloitte for their support

  2. Succession Options • Transferring the business to another family member When a suitable family successor is not available. There are three other possibilities: • Sale to internal or external management (management buy-out/in) • Trade sale (sale to another firm) • Listing on a stock exchange

  3. Management Buy-outs/ins as a Percentage of UK Takeover Activity Source: CMBOR/Barclays Private Equity/Deloitte/Office for National Statistics

  4. Management Buy-out/in Activity Across Europe Source: CMBOR/Barclays Private Equity/Deloitte

  5. Origin of Management Buy-outs/ins (2006) Source: CMBOR/Barclays Private Equity/Deloitte

  6. Research Questions 1. What are the reasons for selling the business? 2. Do owners plan for succession? 3. What succession options are considered? 4. Are changes in firm strategy after a buy-out/in related to: • Ownership before the buy-out/in (founder, non-family managers with equity stakes) • Governance before the buy-out/in (NEDs, management or VCs involved in succession planning) • Debt after the buy-out/in (gearing) Where new firm strategy can be: • Efficiency Improvement of existing business • Growth

  7. The Sample • Family firms having a venture capital backed buy-out between 1994 and 2003 • Survey undertaken June -September 2004 • 1,645 firms across Europe contacted • 117 replies (7%) (in line with other European surveys) • 108 replies used in this study • Representativeness checked • National distribution • Industrial distribution

  8. Results

  9. Fig. 1: Reasons for the Sale of the Business Source: CMBOR/EVCA

  10. Fig. 2: Formal Succession Planning Source: CMBOR/EVCA

  11. Fig. 3: Succession Options Considered Source: CMBOR/EVCA

  12. Table 1: Strategy Changes vs. Founder Presence Calculated using Marginal Homogeneity Tests. Responses on a likert scale of 1 (very low importance) to 5 (very high importance). Median response before and after buy-out.

  13. Table 2: Summary 1 Calculated using t-tests

  14. Conclusion • Alternatives to succession within the family • If a family successor is not available or willing, sale to a private equity firm and/or incumbent management is most popular alternative. • Succession planning • A large proportion of family firms don’t plan for succession at all. • Ownership • When solely family are in control of the firm prior to the buy-out/in, there is significant scope for growth and expansion. • Governance • NEDs appear to have a beneficial effect on company strategy as strategic change is less when they have been present. • Should a venture capitalist be involved in the succession process, the most likely outcome is a drive towards efficiency improvements. • Debt • Debt levels have little effect on strategic direction post buy-out/in.

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