ABSTRACT. 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 con-
siderations sometimes lead to sub-optimal managerial deci-
sions from the point of view of the business. This is why a
smooth intergenerational succession is essential to the prof-
itability 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 indefi-
nitely 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.
The functioning of a family business is closely
linked to the life cycle of its owner-operator.
Residual income of the owner includes returns to
firm-specific human and organizational capital.
Investment in such capital decreases with operator
age because of a shorter planning horizon. To the
extent that this capital is only transferrable within
the family through long-term training of children,
the market value of a family business is well
below its value as a “going concern”. If the
owner cares about the future welfare of his/her
children and views the family business as part of
the assets he/she wishes to bequeath, succession
by a child is strongly preferred from the points
of view of both the owner-operator and the
This seems to be contrary to the evidence that
the life expectancy of American family firms is
only 24 years, and only about a third survive into
the second generation (Beckhard and Dyer, 1983).
However, using the statistics reported in Dunne
et al. (1989), it is estimated that only about 30%
of both family- and non-family-manufacturing
firms reach the age of 15, and that survival rate
is even lower for relatively small firms which
are perceivably more comparable to family
firms. Troske (1991) finds similar patterns in non-
manufacturing firms. These numbers suggest that
family firm survival rates are higher than those
of non-family firms, and hence succession within
the family is preferred. Richter (1988) reports that
founders of family firms tend to attach great
importance to the continuing identification of the
business with the family, and that this tendency
declines in the second generation. Hence, succes-
sion within the family occurs not only because of
economic reasons, but sometimes even despite
Even if people seek to equalize the amounts
they bequeath to each of their children, owners of
Intergenerational Succession in Small
Family Businesses: Borrowing Constraints
and Optimal Timing of Succession
Small Business Economics 9: 309–318, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Final version accepted on August 23, 1995
Department of Agricultural Economics and Management
Faculty of Agriculture
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