A Transaction Cost Rationale
for Transition of the Firm
within the Family
Small Business Economics
19: 123–133, 2002.
2002 Kluwer Academic Publishers. Printed in the Netherlands.
ABSTRACT. This paper is about the transition of ownership
of shares in small and medium-sized enterprises (SMEs)
within the family (i.e. from parents to children). In spite of
the fact that such successions are rather prevalent among
SMEs, there are no explanations in the literature as to why
transitions are preferred to outright sale.
In this paper we assume that the decisive factor in the
choice of succession mode is the desire for efficiency
expressed as the highest possible firm value. A firm should
stay in the family if this is the most profitable transition
alternative. One reason for intergenerational succession to be
the most profitable alternative is knowledge idiosyncrasy.
However, the benefits of knowledge idiosyncrasy cannot
be reaped without an institutional framework that constrains
human activities in a proper way. A part of an institutional
framework are the laws that act as constraints in successions.
Do these laws foster or prevent efficient transition of family
firms? This question is addressed in a study of the Swedish
inheritance and inheritance tax laws in the light of the policy
recommendations on succession made by the European
In most countries a majority of the firms are not
listed on a stock exchange. Many of these non-
listed firms are family-owned and there are plans
for the children in the future to take over the
ownership, and perhaps also the management.
Furthermore, some of these firms have already
been family-owned for more than one generation.
That firms stay within the family for generations
has not received much attention in the economics
literature. There seems to be a lack of theoretical
explanations as to why a succession of firms to
heirs would be rational.
The question addressed in this paper is: “Are
there any beneficent reasons why firm value would
be positively affected by succession instead of the
sale of a family firm to new non-family owners?”
A transaction cost-approach will be used to show
why there are such efficiency reasons for inter-
generational transitions of firms. This approach
will also be used in a discussion of how well the
Swedish inheritance and tax laws are adapted to
foster efficiency reasons for succession within the
Transition of family businesses within the
family can be studied from three major angles.
Succession of ownership of shares; transition of
leadership in the family firm; and the influence
of the family (e.g. through a family board) on the
transition process. We limit this paper mainly to
questions concerning succession of ownership.
Transition of ownership can, and sometimes
should, be made to outsiders. We concentrate on
transitions within the family and we also give
arguments why this should be preferred and
promoted by legislative efforts. A transition within
the family can be planned and carried out during
the lifetime of the owner or left to be decided upon
his or her death. We concentrate this paper on
certain aspects concerning transition of ownership
of shares through inheritance. Furthermore, we
limit the discussion to mainly the Swedish inher-
itance and inheritance tax law systems.
In order to achieve these objectives the study is
structured as follows. We begin in Section 2 with
a short background and the policy recommenda-
tion of the European Commission. Section 3
presents our transaction cost approach to the
Final version accepted on March 12, 2001
Jönköping International Business School
P.O. Box 1026
S-551 11 Jönköping