Entrepreneurial exit – that is an owner-manager’s withdrawal from management and ownership – is an important part of the entrepreneurial process and it is one phase that each business owner-manager has to undertake at least once in his or her professional life. Entrepreneurial exits have a great impact on the leaving owner-manager, the firm, but often also on the community (just think about the affected job positions!). It is important to note that entrepreneurial exits can take very different forms: handover to family members (Family Buy-out; FBO), handover to former employees (Management Buy-out; MBO), sales to an external individual (Management Buy-in; MBI), sales to an investor, public offering, or liquidation. The first firm – FBO – has already been extensively studied by the family business literature.
My research deals with several antecedents as well as implications of entrepreneurial exits. Studying different entrepreneurial exit routes is important because prior research (Wennberg et al., 2011) has for instance shown that family external successors outperform family internal candidates with respect to firm performance.
The role of information asymmetry in the choice of entrepreneurial exit routes
What determines whether an owner-manager of an SME selects a family-external or family-internal successor candidate? We argue that such choices depend on informational asymmetries: The resigning owner-manager wants to be confident that the successor will continue firm operations in the way desired by the incumbent and thus he/she wants know as much as possible about the succession candidate before choosing him/her. However, and particular so for external candidates, there are knowledge gaps regarding the successor’s capabilities (information asymmetries) between the incumbent and the successor which make it difficult to choose the right successor. Prior research has stated that informational asymmetries can be reduced by “signaling” or “screening”. We apply those theories to the context of entrepreneurial exit/succession and claim: Family internal successor candidates have advantages as compared to external ones because the incumbent has superior knowledge about internal candidates. External succession candidates, however, can reduce information asymmetries and increase their probability of being chosen as successor by signaling their superior suitability (for instance by educational degrees obtained and prior professional experience). Incumbents, on the other hand, can reduce informational asymmetries by screening the external candidates’ capabilities (in depth review of document, assessment centers etc.) We argue and show that there is an inverse U-shaped association between an incumbent’s screening effort and the probability that a family external person becomes the successor: Moderate levels of screening increase the incumbent’s confidence in the external successor’s capabilities and thus increases the probability of transfer to an external. Excessive screening, however, likely daunts the external candidates. The above described relationships between signaling/screening and likelihood of external relationship become even stronger when the incumbent is strongly emotionally tied to the firm, that is when he/she has been the owner-manager for a long time.
We empirically test the hypotheses based on a sample of Swiss, German, and Austrian business transfers (collected in 2009). Applying a logit analysis we find support for the above mentioned relationships.
Link to full-text download: here (click on “pdf”)
T. Dehlen, T. Zellweger, N. Kammerlander, F. Halter. 2014. The role of information asymmetry in the choice of entrepreneurial exit routes. Journal of Business Venturing 29 (1) 193 – 209. DOI 10.1016/j.jbusvent.2012.10.001
“I want this firm to be in good hands:” Emotional pricing of resigning entrepreneurs
Prior research has shown that owner-managers that exit from their firm do not necessarily strive to maximize the sales price, but they rather strive to find a successor who is a “good fit” with the company (Graebner and Eisenhardt, 2007). I thus was interested in the question of how important such fit is (as compared to maximizing the price) for exiting owner-managers and what drives price consideration of such incumbents. Hence I asked owner-managers of Swiss SMEs about the discount (or premium) which they aim to give to their successor (only owner-managers that have already considered their exit have been included in this study). Based on arguments from behavioral finance, I argue that the relationship of the incumbent to the firm (time period of being at the helm of the company), the relationship between incumbent and successor, and the financial situation of the company affect whether the incumbent is willing to give a discount on the firm’s market value and if so, how large this discount is. An ordered probit regression of more than 1000 survey answers of owner-managers of Swiss SMEs provides empirical support for the hypotheses. The results show that owner-managers intend to give discounts between 11 and 50%, depending on their tenure, relationship to the potential successor, and the firm’s economic situation. Actual discounts (measured based on more than 400 recent business transfers) range between 22% and 42% as the study reveals.
This paper aims to make a contribution to entrepreneurship literature by drawing attention to pricing issues. Moreover, it continues and extends previous work by Wennberg et al. (2010) that has started to integrate behavioral finance into entrepreneurship literature. As discussed in the paper, findings from my study make clear that behavioral finance arguments have to be applied with caution to research on entrepreneurial exit.
This paper has been awarded with the “Transeo Best Academic Paper Award” 2014. (more information).
Link to full-text download: here (click on “pdf”)
N. Kammerlander. in press. “I want this firm to be in good hands:” Emotional pricing of resigning entrepreneurs. International Small Business Journal. (accepted for publication in Special Issue on “Entrepreneurial Edit”, guest edited by Karl Wennberg and Dawn De Tienne)
Entrepreneurial exit dilemmas
Should I hand over the firm to a family internal or family external candidate? Should I give priority to “willing” successors or to “capable” successors? Those are questions that exiting entrepreneurs are often confronted with. Those questions often constitute dilemmas as there is no “right” or “wrong” answer. At the same time, however, those questions are highly relevant since they are determinant of the firm’s future but probably also the entrepreneur’s family’s satisfaction. Building on theory on institutional logics, we come up with a series of hypotheses about how several characteristics of the entrepreneur (education, experience, family), the firm (performance), and the environment (culture) affect whether an external or internal successor and a willing or able successor is chosen. We presented a case vignette to more than 2000 owner-managers of Swiss SMEs (financial performance of the firm was randomly presented as superior or inferior) and asked about their leadership succession preferences.
This paper has been chosen as one of the Best Papers of the Entrepreneurship Divisin, Academy of Management Annual Meeting 2014, Philadelphia and it was awarded with the “Best Conference Paper Award” 2014 at the 4. Konferenz deutschsprachiger Zentren für Familienunternehmensforschung in Vienna. (more information).
M. Ganter, N. Kammerlander, T. Zellweger. 2014. The incumbent’s dilemma when exiting the firm: Torn between the family and the corporate logic. Academy of Management Best Paper Proceedings.