When the two brothers who ran the successful Dassler shoe company in Herzogenaurach, Germany, in the 1930s ended their business relationship with a rancorous feud, it not only divided a family, it divided the city. When the company split, Adolf Dassler took his business to one side of the Aurach River and created Adidas. His brother Rudolph stayed and created Puma. The citizens of Herzogenaurach became just as radically divided, wearing either Adidas or Pumas to show their fierce loyalty. Businesses loyal to one company refused to serve workers from the other, gangs developed in local schools, and, to this day, people look down to see what shoe someone is wearing before beginning a conversation. The Dassler brothers carried their feud to the grave and are buried on completely opposite sides of the local cemetery.
“When a business is a family business, there’s much more at stake,” said Bill Worthington, assistant professor of management and entrepreneurship at Baylor University in Waco, Texas.
Worthington and John Schoen, adjunct faculty in management and entrepreneurship, began studying the ways family businesses plan transitions in leadership positions. They set out to discover how family businesses work toward developing successors and how, when and why leaders chose to leave their positions.
The project began with Schoen looking at select financial planners from across the nation who were advisors to family businesses, asking them about how and when their clients planned to step down from their leadership roles in their family business. The top four considerations for those company leaders were being able to maintain their lifestyle, the ability to fund long-term care needs, their relationship with their spouse and their relationships with their children.
The next step for the researchers was to collect similar data from Texas-family business CEOs. Of the 310 respondents, the top four considerations were the maintenance of their lifestyle, funding their long-term care needs, a sense of “mission completion” and the ability to accept their new identities.
The final group surveyed was 269 farm or ranch CEOs of the top-producing agricultural family businesses in the nation. For the farmer-ranchers, their main consideration was a sense of completing their mission, followed by lifestyle maintenance, long-term care needs and the acceptance of their new identities.
Ranking the reasons
After studying the data collected, the researchers broke down the retirement decision-making factors from most to least important:
- Health (physiological and mental)
- Wealth management (financial well-being of the retiree)
- Psychological well-being/family relationships
- Wealth transfer
- Continuity/viability of the enterprise
- Ownership transfer
- Leadership succession
“It was surprising to us that leadership succession was the very last thing considered, and that ownership transfer [when control actually changes] is so far down on the list,” Schoen said. “From an academic standpoint, and from a practitioner’s standpoint, these are two extremely important things.”
Worthington believes they are often considered last because they are difficult for families to discuss.
“In my own family’s business, to this day, we talk about talking about it, and that’s as far as it gets,” he said.
A global perspective
Their findings led Worthington and Jamie Collins, assistant professor of management and entrepreneurship at Baylor, to team up with Schoen to collect data from family businesses in India.
Their research focused on leadership succession and ownership transfer.
“After the initial surveys, which centered mostly around Texas CEOs, we wanted some insight into what is happening around the world,” Collins said.
The team collected data from 265 Indian family businesses, with an average age of 25 years. The oldest firm had been in business for 200 years. The businesses surveyed employed between 14 and 540 people.
“Family businesses are so prevalent in India,” Collins said. “We estimate that as many of 75 to 80 percent of all businesses in the U.S. are family businesses, but there may be even higher percentages in developing countries.”
When the CEOs of the Indian businesses were asked when they plan to retire or turn over leadership of their companies, an astounding 52.2 percent said they planned to work in their current position until they died. “In the U.S., the number of leaders who plan to work until they die is around 16 percent,” Schoen said.
The researchers also found CEOs prefer that one of their sons (preferably one who has worked extensively in the family business) become the new leader. For those who intend to retire or scale back on their involvement, most desired to move away from day-to-day concerns of the company, but wanted to maintain social and family relationships. And, as in the U.S., Indian family business leaders are not focusing on issues of continuity planning, ownership transfer or leadership succession.
Owners want to maintain family harmony, and at the same time, have a successful transfer of power. This means, according to the Baylor researchers, that more time needs to be put into personal and career development and other “soft” issues that are sometimes overlooked. Instead of looking just at financial transfers, it’s important to look at the behavioral issues too.
“Better solutions come from having a foot on both sides,” Collins said.
William Worthington IV (email@example.com) Jamie Collins (Jamie_Collins@baylor.edu) and John E. Schoen (John_Schoen@baylor.edu) belong to the management and entrepreneurship department at Baylor University’s Hankamer School of Business.