Small family businesses differ from non-family businesses in that their functioning is not independent of the life cycle of the owner-operator, and in that other family considerations sometimes lead to sub-optimal managerial decisions from the point of view of the business. This is why a smooth intergenerational succession is essential to the profitability of the business, and to the welfare of the family as a whole. Succession within the family involves first of all the choice of a successor. The choice is affected by birth order, age differentials, and qualifications of potential successors. Choosing a successor means reaching an agreement about the timing of succession and income distribution before and after succession. This paper focuses on the decision of the business-operating family when to bring in the designated successor. A utility-maximizing time is shown to differ from the income-maximizing time only in the presence of binding borrowing constraints. Such constraints are likely to enhance an earlier succession in order to use the successor's accumulated off-business assets to ease the constraints and to increase future business income due to earlier accumulation of business-specific human capital by the successor. An additional model shows that the successor will not be willing to wait indefinitely for the formal ownership transfer of the business, because of the risk of being disinherited in some future period. The consequences of possible strategic behaviors of both the owner and potential successors on the results of these models is discussed informally.
Small Business Economics – Springer Journals
Published: Sep 29, 2004
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
All the latest content is available, no embargo periods.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud