Exit Strategies In Family Firms How Socioemotional Wealth Drives

Description
This abstract tell exit strategies in family firms how socioemotional wealth drives.

Exit Strategies in
Family Firms: How
Socioemotional Wealth
Drives the Threshold
of Performance
Dawn R. DeTienne
Francesco Chirico
Although research has shown the ability to exit from both successful and unsuccessful
ventures is important to founders, families, ?rms, industries, and overall economic health,
exiting from a family ?rm can be especially challenging. In this paper, we examine exit
strategies in the context of the family ?rm and the family ?rm portfolio. Drawing upon
threshold theory and the socioemotional wealth perspective, we develop a model that
provides guiding theoretical explanations for exit strategies. We address two questions:
(1) why do family owners develop speci?c exit strategies, and (2) how do these strategies
differ within family ?rms and family ?rm portfolios? In doing so, we contribute to family
business, portfolio entrepreneurship, and exit literatures.
Introduction
Entrepreneurial exit—the process by which owners leave the ?rm they helped to
create (DeTienne, 2010)—is a rapidly growing topic in scholarly literature as researchers
more and more acknowledge that entrepreneurship is an ongoing process of not only
identifying and creating ventures but also exiting them (DeTienne; DeTienne &
Cardon, 2012; Gimeno, Folta, Cooper, & Woo, 1997; Hessels, Grilo, Thurik, & Zwan,
2011; Ryan & Power, 2012; Salvato, Chirico, & Sharma, 2010; Wennberg, Wiklund,
DeTienne, & Cardon, 2010). While the lone entrepreneur who creates and maintains
a single venture until retirement or death remains an important part of the landscape,
many entrepreneurs enter and exit multiple ventures and often engage in portfolio
entrepreneurship—the simultaneous ownership and management of more than one ?rm
(Westhead, Ucbasaran, & Wright, 2005; Westhead & Wright, 1999; Wiklund & Shepherd,
2008).
Please send correspondence to: Dawn R. DeTienne, tel.: (970) 491-6446; e-mail: dawn.detienne@business
.colostate.edu, and to Francesco Chirico at [email protected].
P T E
&
1042-2587
© 2013 Baylor University
1297 November, 2013
DOI: 10.1111/etap.12067
In this paper, we examine exit strategies in the contexts of the family ?rm and the
family ?rm portfolio for several reasons. First, there is a literature gap in “understanding
the role exit can play in entrepreneurial regeneration of family ?rms” (Salvato et al., 2010,
p. 344). That is, exiting from a venture can be an important tool in maintaining family ?rm
viability. In addition, portfolio entrepreneurship is particularly relevant in family ?rms
(Sieger, Zellweger, Nason, & Clinton, 2011) because it provides a method to diversify
risk, meet growth aspirations, and assist family ?rms in providing career opportunities for
additional family members (Carter & Ram, 2003; Mulholland, 1997; Ram, 1994; Rosa,
1998). Accordingly, family ?rms often engage in portfolio behavior and make decisions
about which opportunities to pursue and which entities to exit—yet we know very little
about this phenomenon.
Second, the context of the family ?rm is interesting because several factors speci?c
to family ?rms make exiting these ventures especially challenging. In this research, we
examine three speci?c factors which have been viewed as important distinguishing
factors within family ?rms (Chrisman, Chua, & Steier, 2005; Chua, Chrisman, Steier, &
Rau, 2012; Sharma, 2004) and which, as we show below, have particular relevance to the
strategic exit decision. These include the family’s socioemotional wealth (SEW)—
the non?nancial aspects of the ?rm that meet the family’s affective needs (Gómez-Mejía,
Haynes, Núñez-Nickel, Jacobson, & Moyano-Fuentes, 2007)—the level of dispersion
in governance structures modeled as generation in control (e.g., Casillas, Moreno,
& Barbero, 2010; Cruz & Nordqvist, 2012; Ling & Kellermanns, 2010; Salvato,
2004) and the presence of a nonfamily chief executive of?cer (CEO; e.g., Gómez-
Mejía, Hoskisson, Makri, Sirmon, & Campbell, 2011; Gómez-Mejía, Nunez-Nickel, &
Gutiérrez, 2001).
Finally, succession remains one of the most relevant topics in family ?rm litera-
ture (DeMassis, Chua, & Chrisman, 2008; Le Breton-Miller, Miller, & Steier, 2004;
Nordqvist, Wennberg, Bau, & Hellerstedt, 2013; Steier, Chrisman, & Chua, 2004), and
others (e.g., DeTienne & Cardon, 2012; Salvato et al., 2010; Sharma, 2004; Wennberg,
Wiklund, Hellerstedt, & Nordqvist, 2011) have pointed out that succession research may
bene?t from an expanded exit focus. Research examining how family ?rms make strategic
decisions regarding exit has primarily focused upon succession, but other exit strategies
may be better suited for some family ?rms. For example, we argue that not all ?rms in a
family ?rm portfolio have similar levels of SEW, and family owners may therefore
develop different exit strategies for these ?rms.
Drawing upon threshold theory—the perspective that ?rms differ in their thresholds of
performance, and that the decision to exit or persist with a ?rm is dependent upon how
?rm performance varies above or below that threshold (Gimeno et al., 1997)—coupled
with the SEW perspective (Gómez-Mejía et al., 2007), we develop a model of exit in
family ?rms and family ?rm portfolios which provides guiding theoretical explanations
for speci?c exit strategies. In particular, we develop propositions which propose relation-
ships between SEW, threshold of performance, and three exit strategies—stewardship
based (e.g., family succession), ?nancial reward based (e.g., business sale), and cessa-
tion based (e.g., business liquidation)—identi?ed by DeTienne, McKelvie, and Chandler
(2012). Also, we address how movement from a concentrated governance structure (e.g.,
founder generation; family-member CEO) to a more dispersed structure (e.g., second or
third generation in control; nonfamily CEO) (Chua et al., 2012) affects a family ?rm’s
speci?c exit strategies. In so doing, we address two research questions: (1) why do family
owners make speci?c exit strategies, and (2) how do these strategies differ within
family ?rms and family ?rm portfolios? It is important to note that our focus is on family
owners’ voluntary and intentional exit strategies, not on exit decisions deriving, for
1298 ENTREPRENEURSHIP THEORY and PRACTICE
instance, from either the founder’s death or the ?rm bankruptcy. Our conceptual model of
exit strategies in family ?rms is depicted in Figure 1.
Our research provides several contributions to the literature. First, we contribute
to family business literature by illustrating how family ?rm-speci?c factors impact the
selection of different exit strategies. Our study extends the SEW model into new domains
by examining how SEW (through a reduced threshold of performance) impacts exit
strategies, expanding upon the notion put forth by Gómez-Mejía et al. (2007) that family
?rms will take risks to avoid a loss of SEWwhile also being unlikely to consider decisions
that would actually increase performance variability. Additionally, while SEW argu-
ments have been traditionally used to distinguish the strategic choices made by family
versus nonfamily ?rms (e.g., Berrone, Cruz, Gómez-Mejía, & Larraza-Kintana, 2010;
Gómez-Mejía et al., 2007, 2011), our focus is on sources of heterogeneity within family
?rms (Chua et al., 2012). This enables us to build arguments regarding the effect of
families’ increased SEW levels on family-?rm exit decisions, and accordingly, we con-
tribute to the behavioral agency theory on which SEW arguments are based (Wiseman &
Gómez-Mejía, 1998). We also model how a more dispersed governance structure—in
terms of later generations in control and the presence of a nonfamily CEO—impacts
strategic exit decisions.
Second, we add to the discussion of threshold theory by developing theoretical
linkages with family ?rm literature and the SEW perspective. While Gómez-Mejía et al.
(2007) and others use the term “primary reference point” and point out that risk bearing
is subjective and can be positively or negatively framed, threshold theory provides us the
mechanism from which to understand relationships between family ?rm-speci?c factors,
thresholds of performance, and exit strategies.
Finally, we add to exit and portfolio entrepreneurship literatures through an exami-
nation of the uniqueness of family ?rms and family ?rm portfolios. In particular, outlining
a conceptual model with family owners rather than the ?rm, as the relevant level of
analysis enables us to challenge the implicit assumption that family ?rms consist only
of a single entity and that nonfamily succession exit strategies always represent a failure
for the family (Zellweger, Nason, & Nordqvist, 2012). By extrapolating different exit
Figure 1
Conceptual Model of Exit Strategies in Family Firms
Stewardship-
based strategy
-
- Threshold of
performance
Socioemotional
wealth
+
+
-
Nonfamily
CEO
Family
generation
in control
Financial
reward and
cessation-
based
strategies
1299 November, 2013
strategies from recent research in entrepreneurial exit, we begin to expand upon the
singular exit focus (succession) often present in family literature.
Theoretical Framework
Exit Strategies
Although somewhat neglected until fairly recently, exit is a critical component of the
entrepreneurial process and is one of the distinctive domains of entrepreneurship research
(DeTienne, 2010; DeTienne & Cardon, 2012; Wennberg et al., 2010). DeTienne (p. 203)
de?nes entrepreneurial exit as the process by which owners/entrepreneurs “leave the ?rms
they helped to create . . .” and argues that understanding exit is important because of the
magnitude of its effects on the ?rm, the family, the industry, and the overall economy. As
Salvato et al. (2010, p. 321) note, “hedding resource combinations that no longer add
value-creating opportunities is a critical dynamic capability in Schumpeterian markets.”
Leaders in the ?eld (e.g., Wennberg et al.) have noted that exit varies on two dimensions—
?rm exit and owner exit—resulting in different exit perspectives. Thus, in exit research it
is important to clearly outline the unit of analysis. Here, we examine the decisions and
strategic methods of family owners of family ?rms or family ?rm portfolios engaging in
voluntary exit (DeTienne et al., 2012).
Speci?cally, we use the recent theoretical framework developed by DeTienne et al.
(2012) which identi?es three speci?c exit strategies: stewardship, ?nancial reward, and
cessation based. Astewardship-based exit strategy refers to a strategy developed out of an
“ongoing sense of obligation or duty to others” (Hernandez, 2012, p. 174) and generally
provides for ?rm continuity and care of the ?rm, the family, and the employees (DeTienne
et al.). Family succession—the process through which family owners transfer the owner-
ship of their ?rm to one or more other family members, often the owners’ children
(Sharma, Chrisman, & Chua, 2003)—is a common stewardship-based exit strategy
(DeTienne et al.). Those pursuing a stewardship-based exit strategy are willing to sacri?ce
personal ?nancial gains in order to further the long-term vision of the family and to protect
the long-term welfare of other stakeholders (Miller, Le Breton-Miller, & Scholnick,
2008).
A ?nancial reward-based exit strategy is a strategy based upon the highest potential
returns to the owners (Babich & Sobel, 2004; DeTienne et al., 2012). Those pursuing a
?nancial reward-based strategy tend to favor personal ?nancial returns over other goals.
Research has demonstrated that these exits tend to include initial public offerings (IPOs)
and trade sales (Giot & Schwienbacher, 2007), though an IPO is a rare strategy among
small ?rms. Among small and medium-sized enterprises, the most common strategy is
the sale of a ?rm to an individual or another ?rm (DeTienne, 2010). A cessation-based
exit strategy is one which refers to (at some point in the future) disbanding a venture
and liquidating its assets (DeTienne et al.). In a family ?rm, motivations to disband and
liquidate could include the ?rm having served the purpose for which it was designed,
a family member or family members’ waning interest in a business, or wanting to free up
resources to serve another purpose.
We draw upon these three strategies in this current research, and in particular, we
juxtapose stewardship-based exit strategies (most often delineated in family business
literature as succession) with ?nancial reward-based and cessation-based exit strategies.
We do this because succession is the primary exit strategy addressed in family business
literature, and because both ?nancial reward-based and cessation-based strategies provide
1300 ENTREPRENEURSHIP THEORY and PRACTICE
methods to diversify risk, meet growth aspirations, and assist the family ?rm in providing
career opportunities for additional family members.
Threshold Theory
Existing research often suggests that poor performance is the most important deter-
minant of exit strategies (e.g., Brauer, 2006). Much of this previous research equates exit
with poor performance and failure (e.g., Brüderl, Preisendörfer, & Ziegler, 1992), but
recent research suggests that equating exit with failure is erroneous (Wennberg et al.,
2010). Owners exit the ventures they have created for a multitude of personal and business
reasons, which may or may not be linked to performance. Gimeno et al. (1997) were the
?rst to propose a theoretical explanation of con?icting ?ndings concerning ?rm perfor-
mance and the determinants of exit.
According to threshold theory, ?rm exit is determined by both economic perform-
ance and the organization’s threshold of performance, the latter de?ned as “the level of
performance below which the dominant organizational constituents will act to dissolve the
organization” (Gimeno et al., 1997, p. 750).
1
If threshold levels increase, owners will
be more likely to sell or liquidate the ?rm because they must reach a higher level of
performance in order to be satis?ed with the current activity. If threshold levels decrease,
owners will be more likely to continue the ?rm because they feel satis?ed with a lower
level of performance. An important insight from the work of Gimeno et al. is that there are
situations wherein entrepreneurs may exit their ventures even though, in terms of eco-
nomic performance, they would not be expected to. Conversely, there are also situations
wherein entrepreneurs, due to a low threshold, might persist with a venture even though
economic theory would suggest they would exit or be selected out. Thus, the economic
performance of a venture does not singularly determine its survival—instead, an exit
decision is driven by a venture’s economic performance relative to the threshold (Gimeno
et al.).
This perspective provides relevance to our study because it explains that ?rms may
differ signi?cantly in their thresholds of performance. And as Gimeno et al. (1997, p. 750)
describe, “by identifying how thresholds differ systematically across ?rms, we can explain
why, given the same level of performance, some ?rms exit . . . while others do not.” This
difference also points to why some ?rms might choose different exit strategies (DeTienne
& Cardon, 2012). For instance, the threshold of performance can be affected by owners’
non?nancial objectives going beyond or differing from maximizing economic returns.
This is especially relevant in the family ?rm context, where the business is not only
a source of income for family owners but also a framework for family activity and an
embodiment of the family’s pride and identity (Zellweger, Nason, Nordqvist, & Brush,
2013). In particular, founders and their heirs often refer to the business as their “baby”
(Sharma & Irving, 2005), thus implying that “exit is more than the relinquishment of
equity ownership, but also has psychological implications as well” (DeTienne, 2010,
p. 205). Therefore, we can expect that the threshold of performance may differ across
family ?rms based on the family’s SEW, which then results in different exit strategies.
Family Firms and Socioemotional Wealth
Chua, Chrisman, and Sharma (1999) de?ne the family ?rm as a business owned
and/or managed with the intention to shape and pursue a family vision—“a notion of a
1. In their work on thresholds, Gimeno et al. (1997) use the terms reference, aspiration, and threshold
interchangeably. Similarly, in this paper we follow the same approach.
1301 November, 2013
better future for the family, with the business operated as a vehicle to help achieve that
desired future state” (Chua et al., p. 24). Family ?rms play a large role in the world’s
economies (La Porta, Lopez-de-Silanes, & Shleifer, 1999) and thus make notable contri-
butions to wealth creation and job generation (Gómez-Mejía et al., 2007). They are often
depicted as commitment-intensive organizations (Chirico, Ireland, & Sirmon, 2011;
Sharma & Irving, 2005) because of the family members’ devotion and emotional attach-
ment to the enterprise (Gómez-Mejía et al.; Sharma & Manikutty, 2005). Family ?rms
also tend to share characteristics such as a long-term strategic orientation, a strong
collective identity and set of family values, a unique social context, and an extraordinary
emotional commitment to ?rm survival (Chirico & Salvato, 2008; Chirico, Sirmon,
Sciascia, & Mazzola, 2011).
Recent research has increasingly stressed how the inherent characteristics of family
?rms make portfolio entrepreneurship—the ownership and management of more than one
venture at a time (Westhead & Wright, 1999; Westhead et al., 2005; Wiklund & Shepherd,
2008)—especially attractive to family ?rms to achieve both family and business goals
(Carter & Ram, 2003; Mulholland, 1997; Ram, 1994; Rosa, 1998; Sieger et al., 2011;
Westhead & Wright, 1999; Zellweger, Nason, et al., 2012). For instance, Ram demon-
strates how family ?rms split or expand into multiple businesses in order to meet the needs
of the growing family. Also, Mulholland and Rosa provide evidence of business families
who diversi?ed their business into multiple activities not just to sustain diversi?cation but
also to accommodate family members’ needs and expectations.
In fact, family ?rms value both ?nancial and, more often, non?nancial outcomes
(Berrone et al., 2010; Gómez-Mejía et al., 2007, 2011). For example, Gómez-Mejía et al.
(2007, p. 106) explain that for family ?rms, the most important reference point (see
Wiseman & Gómez-Mejía, 1998) when framing major strategic decision choices is the
loss of SEW, that is the “non-?nancial aspects of the ?rm that meet the family’s affective
needs, such as identity, the ability to exercise family in?uence, and the perpetuation of the
family dynasty.” In a recent article, Berrone, Cruz, and Gómez-Mejía (2012) depict SEW
(in terms of family control and in?uence, family members’ identi?cation with the ?rm,
binding social ties, emotional attachment, and transgenerational sustainability) as the
most important differentiator of the family ?rm as a unique entity. As such, SEW helps
explain why family ?rms behave distinctively. Gómez-Mejía et al. (2007, p. 108) propose
that preserving the family ?rm’s SEW “represents a key goal in and of itself. In turn,
achieving this goal requires continued family control of the ?rm.” Thus, family owners
may be willing to accept low performance or even threats to the ?rm’s ?nancial well-being
in order to prevent a loss in SEW.
However, while most research regards family ?rms as a homogeneous group, calls
to investigate behavioral differences among family ?rms are being issued with greater
frequency (Chrisman et al., 2005; Chua et al., 2012; Sharma, 2004). In response, our
arguments suggest that the behavior of family ?rms, with respect to different types of
exit decisions, differs based on the degree/level of each family’s SEW. As Chua,
Chrisman, and Chang (2004) explain, whether and to what extent a ?rm is a family
business whose primary focus is the achievement of non?nancial goals may be simply a
matter of degree. That is, family involvement in a business—or more speci?cally, higher
levels of a family’s SEW—makes a ?rm or a family ?rm portfolio more and more of a
family business type.
In the next sections, our focus is on family ?rms whose heterogeneity is based on
the degree of the family’s SEW, the family generation in control, and the presence of
a nonfamily CEO in the ?rm. Later, we examine these issues within the family ?rm
portfolio. We draw upon the case studies of the Falck Group (James, 2006; Salvato et al.,
1302 ENTREPRENEURSHIP THEORY and PRACTICE
2010) and the Tía Company (Doughty & Hill, 2000) to help us offer evidence of the
rationality of our arguments.
Proposition Development
Exit Strategies in Family Firms
Exit is generally perceived to be a dif?cult and challenging event, especially when
owners are deeply emotionally involved with the business (DeMassis et al., 2008;
Gimeno et al., 1997). In a family ?rm context, the emotions of the owners are often very
intense, causing the achievement of non?nancial goals to be a primary concern
(Zellweger & Astrachan, 2008; Zellweger et al., 2013). Burgelman (1994) and DeTienne
(2010), among others, argue that when emotional logic prevails over business logic, exit
options can be undermined. There is considerable evidence that when family ?rm owners
make strategic decisions such as exit, the preservation of SEW is the most important
objective (Salvato et al., 2010). Therefore, because both ?nancial-based and cessation-
based exit strategies may be viewed as a devastating cause of SEW loss, the higher the
family’s degree of SEW, the lower the likelihood of the family developing a ?rm simply
to disband it for its ?nancial value or for a short-term purpose with the intention to sell
or liquidate (DeTienne et al., 2012; Zellweger & Astrachan; Zellweger, Kellermanns,
Chrisman, & Chua, 2012).
Accordingly, Thomas (2002), in her study of two interrelated Australian ?rms, refers
to “ownership challenge”—a scenario where many shareholders recognize that the best
share price for the family ?rm will be achieved by selling or even liquidating the whole
company, but the so-called continuing family group—those who consider themselves
stewards or custodians of the inherited family ?rm—do not make this happen due to their
strong desire to continue the business as a family-owned ?rm. Similarly, Zellweger,
Kellermanns, et al. (2012) found that selling a family ?rm is an option for the family
owners only if they are commensurably compensated for the loss in SEW.
In family ?rms, heavy emotional involvement over generations explains why conti-
nuity and success are often associated with succession (Salvato et al., 2010; Thomas,
2002). Pursuing a stewardship-based exit strategy in terms of family succession is viewed
as the primary goal in family ?rms, and is often the primary measure of performance as
well (Sharma et al., 2003). Sustaining the family dynasty is so central and crucial to
family ?rms that it is viewed as a de?ning feature (Jaffe & Lane, 2004; Ward, 1987). As
Zellweger, Nason, et al. (2012, p. 141) note, with a family ?rm “intended to remain under
family control [through family succession], business exit is always seen as a failure”—
rather than an as intentional strategy to create fresh opportunities, such as a market for new
?rms, new industries, or new ways of doing business (Salvato et al.; Sharma & Manikutty,
2005).
In fact, “when the owner experiences the opportunity to pass on ownership within the
family, the ownership in the ?rm will develop a kin-keeping role, representing family
history, extending the owner’s and the preceding generations’ selves into the future”
(Zellweger & Astrachan, 2008, p. 355). Thus, contingent on the opportunity to pass the
baton within the family and to perpetuate the family ownership legacy, increased SEW
leads family owners to the perception that dismissing the business means dismissing the
family. The stewardship-based exit strategy of family succession is therefore the most
likely option (Chrisman et al., 2005; Sharma et al., 2003). On the contrary, lower levels of
SEW will make family owners more open to considering ?nancial reward or cessation-
based exit strategies (Doughty & Hill, 2000; Salvato et al., 2010). Formally:
1303 November, 2013
Proposition 1: In family ?rms, higher levels of socioemotional wealth (1) increase the
likelihood that the family owners will select a stewardship-based exit strategy and (2)
decrease the likelihood of a ?nancial reward or cessation-based exit strategy.
Although in the concept of SEW it is implicit that family owners make strategic decisions
independently from ?nancial considerations (Gómez-Mejía et al., 2007), Berrone et al.
(2010) recently (and in our opinion, correctly) warned family ?rm scholars and practitio-
ners that the SEWapproach does not imply that family ?rms are self-sacri?cial and ignore
?nancial issues. The main point is that a family’s increased SEW makes the family ?rm
“more likely to bear the cost and uncertainty involved in pursuing certain actions, driven
by a belief that the risks that such actions entail are counterbalanced by noneconomic
bene?ts rather than potential ?nancial gains” (Berrone et al., 2012, p. 261). However, it is
still not clear what intermediate variable(s) mediate and thus fully explain the relationship
between SEW and family owners’ strategic decisions such as exit. In the next section, we
argue that a crucial intermediate variable is represented by the threshold of performance,
and we develop propositions related to the role of performance thresholds as a mediator
between SEW levels and exit strategies.
The Role of Performance Thresholds. The general argument in this section is that
increased SEW motivates an important change to the reference point family owners use in
framing exit decisions. It lowers the family threshold of performance, which positively
affects the likelihood of family succession (see Wennberg et al., 2011; Zellweger &
Sieger, 2012) and which negatively affects the likelihood of ?nancial reward and
cessation-based strategies. In other words, the threshold of performance mediates the
relationship between SEW and stewardship-based exit strategies as well as ?nancial
reward and cessation-based strategies. Many studies in entrepreneurship and strategy
indirectly corroborate this view. For example, Francis and Sandberg (2000) indicate that
managers are more likely to remain committed to a lower performing venture in the long
run when affective bonds among members of the entrepreneurial team are stronger.
Similarly, Gimeno et al. (1997) argue that when entrepreneurs are motivated by noneco-
nomic goals, they obtain a greater “psychic income” from entrepreneurship, and thus are
willing to accept lower economic returns when they gain personal satisfaction from the
business. They found that higher degrees of psychic income from entrepreneurship are
negatively related to the likelihood of ?rm liquidation.
In family ?rms, higher levels of SEW make family owners willing to accept and be
comfortable with low-target performance in order to retain and protect non?nancial
bene?ts (Gómez-Mejía et al., 2007). These family owners are apt to “actively inter-
mingle business and family resources” (Haynes, Walker, Rowe, & Hong, 1999, p. 238)
to ensure the ?rm’s survival and long-term success. Also, the family ?rm’s long-term
perspective, deriving from increased SEW, enables family owners to extend signi?cant
efforts and resources (e.g., patient and survivability capitals) for the family and the
business independent from ?nancial considerations (Chirico, Ireland, et al., 2011;
Sirmon & Hitt, 2003; Zellweger & Sieger, 2012). For instance, Sirmon and Hitt and
Chirico et al. suggest that when a business is so closely tied to a family, the family
owners are willing to make personal sacri?ces—even during challenging economic con-
ditions—to keep their business viable for future generations. Accordingly, family
owners are likely to use a long time horizon for resource allocation, which reduces the
family’s threshold of performance. This favors a stewardship-based perspective leading
to family succession, and also limits the option of releasing the ?rm’s assets for other
entrepreneurial use.
1304 ENTREPRENEURSHIP THEORY and PRACTICE
The Falck case study offers some evidence in support of our arguments. Afamily ?rm
established in 1906 and originating back to1833, the Falck Group was the largest privately
held steel producer in Italy (James, 2006; Salvato et al., 2010). This family exhibited high
levels of commitment, devotion, and willingness to remain in the business even when the
company experienced low performance and even huge losses due to several environmental
and industrial reasons. Alberto Falck, chairman of the company in the 1980s/1990s,
clearly says that “it was the wealth [and investments] of his family that allowed the ?rm
to continue to bear continuing . . . losses.” He explains that “in the past we went through
. . . succession processes. . . . However, in our case attachment to the business has always
prevailed over other [economic] considerations.”
2
Thus, as James (2006) and Salvato et al. (2010) explain, and as the case study above
suggests, family owners often experience protracted dif?culties in selling or liquidating
unproductive assets when they are intimately linked to the family and ?rm’s history
(Sharma & Manikutty, 2005). Increased SEW and the related strong psychological com-
mitment to the business make family owners able to accept low or even negative perfor-
mance, and to deny or delay exit strategies which are not based on the stewardship
principle of family succession. Again, this is because the family owners’ self-concepts are
strongly emotionally tied to the family ?rm’s identity and intimately linked to the family
?rm’s history. In formal terms:
Proposition 2a: In family ?rms, the threshold of performance mediates the relation-
ship between socioemotional wealth and exit strategies. That is, higher levels of
socioemotional wealth negatively affect the threshold of performance, thus (1) increas-
ing the likelihood that the family owners will select a stewardship-based exit strategy
and (2) decreasing the likelihood of a ?nancial reward or cessation-based exit strategy.
Consequently, given the potential damaging effect of increased SEW on ?nancial reward
and cessation-based exit strategies (because of its negative impact on the threshold of
performance), we anticipate the market presence of many under-performing family ?rms
with high levels of SEW. Following the work of Meyer and Zucker (1989), DeTienne,
Shepherd, and DeCastro (2008, p. 530) de?ne under-performing ?rms as those “whose
performance, by any standard, falls short of expectations . . . yet, whose existence con-
tinues.” Our arguments suggest that when the family’s SEWis high, the family owners are
willing to tolerate and even justify low levels of performance for emotional reasons,
thereby favoring the stewardship-based exit strategy of family succession (Jaffe & Lane,
2004; Kets de Vries, 1993; Lansberg, 1988; Miller, Steier, & Le Breton-Miller, 2003).
Thus, it is not surprising that some scholars refer to a poorly performing ?rm that is fully
owned and managed by a family as a “sickness” which may become “the drug of choice
[illness], with the whole family addicted to keeping some members in business together at
all costs” (Kaye, 1996, p. 350).
On the contrary, when SEW is low, we expect family owners to set higher perfor-
mance thresholds for their ?rm and to be more likely to focus their attention on ?nancial
outcomes. Thereby, if the ?rm is performing poorly, family owners will be in a better
position to opt for more ?nancially pro?table exit strategies than family succession
(Doughty & Hill, 2000). That is, the desired future state of the family—i.e., its vision
(Chua et al., 1999)—is more likely to be pursued by redeploying the family and business’s
2. Quotations for the Falck Group and the Tía Company are taken from the study of Salvato et al. (2010) and
James (2006), and from the study of Doughty and Hill (2000), respectively.
1305 November, 2013
resources elsewhere, such as in ?rms or activities that may be more capable of achieving
the expected thresholds. Formally:
Proposition 2b: Given the negative effect of socioemotional wealth on ?nancial
reward-based and cessation-based exit strategies, we expect the market will re?ect
many under-performing family ?rms with high socioemotional wealth.
Exit Strategies in a Portfolio of Family Firms
The implicit assumption in most family ?rm studies is that a family ?rm consists only
of a single business entity. This perspective, however, neglects to account for the many
“business families [that] are often engaged in several businesses,” or in a portfolio of
activities (Zellweger, Nason, et al., 2012, p. 150). Accordingly, entrepreneurship literature
mainly distinguishes entrepreneurs who own and manage a single ?rm from those that
simultaneously own and manage more than one venture at a time (Westhead & Wright,
1999; Wiklund & Shepherd, 2008). As discussed earlier, the latter are most often referred
to as portfolio entrepreneurs. Research suggests that “portfolio entrepreneurship is
particularly relevant in the family ?rm context” (Sieger et al., 2011, p. 327), providing
increased opportunities for offspring or other family members’ careers, meeting growth
aspirations, diversifying risk, and providing alternatives when the core business (usually
the founder’s business) faces market challenges (Carter & Ram, 2003; Mulholland, 1997;
Ram, 1994; Sieger et al.; Westhead & Wright; Zellweger et al., 2013).
In a portfolio of family ?rms, family circumstances may in?uence decisions to engage
in portfolio strategies such as investment into or exit from certain entities (Carter & Ram,
2003). For instance, Sharma and Manikutty (2005, p. 295) explain that “changes in the
environment require strategic responses on the part of a ?rm (such as readjustment of
the business portfolio and divestment of unproductive resources), so as to enable regen-
eration and renewal.” However, in a portfolio context, it is likely to expect that family
owners will be strongly attached to the core business and less attached to other ?rms (e.g.,
subsequent businesses that are part of the family’s extended portfolio of business activity).
For example, Pathak, Chirico, Hoskisson, and Makri (2012) recently argued that family
owners’ strong emotional attachment to their ?rm makes them reluctant to divest assets
from the core business in a portfolio of family ?rms. In fact, similar family and business
dynamics (e.g., in terms of SEWand aspiration levels of performance) have been observed
in both the single family ?rm and the core business of a family portfolio (e.g., Pathak
et al.; Ram, 1994; Rosa, 1998; Sieger et al., 2011; Zellweger, Nason, et al., 2012). For
instance, Sieger et al. (p. 327) explain that a distinctive motivation for family ?rms to
engage in portfolio behavior is “seeking growth while protecting the ?rm’s core activity,”
and facilitating succession of the core business independently from ?nancial consider-
ations (see also Rosa). Thus, we expect that:
Proposition 3a: In a portfolio of family ?rms, higher levels of socioemotional wealth
negatively affect the threshold of performance associated with the core business, thus
(1) increasing the likelihood that the family owners will select a stewardship-based exit
strategy and (2) decreasing the likelihood of a ?nancial reward or cessation-based
exit strategy for the core business.
However, when it comes to selling or liquidating subsequent businesses in the portfolio
(whether new venture creations or acquisitions) (see Carter & Ram, 2003), family owners
may behave very much like a traditional investor (e.g., a venture capitalist) wherein pro?t
1306 ENTREPRENEURSHIP THEORY and PRACTICE
and value maximization (Almeida & Wolfenzon, 2006; Iacobucci & Rosa, 2010; Ram,
1994)—not emotions—determine behavior. Accordingly, the higher threshold of perfor-
mance set by family owners in relation with subsequent businesses will lead them to be
less likely to opt for a stewardship-based exit strategy than ?nancial exit strategies for
those subsequent businesses (Iacobucci & Rosa). Interestingly, Iacobucci and Rosa
(p. 354) indirectly substantiate our view that after the establishment of the core family
business, a portfolio of subsequent businesses can be considered as a device “to maximize
the ?nancial wealth of the controlling family.” Accordingly, we propose:
Proposition 3b: In a portfolio of family ?rms, the higher threshold of performance
associated with subsequent businesses (1) decreases the likelihood that the family
owners will select a stewardship-based exit strategy and (2) increases the likelihood of
a ?nancial reward or cessation-based exit strategy for those subsequent businesses.
In line with our arguments, since in a portfolio of family ?rms the family owners’ SEW
is likely to be higher in the core business compared to subsequent businesses (Iacobucci
& Rosa, 2010; Pathak et al., 2012), we also expect that family owners will be likely to
persist with an under-performing core business and pursue ?nancial reward or cessation-
based exit strategies for subsequent businesses in order to sustain and ensure the core
business’s family succession and thus longevity (Carter & Ram, 2003; Rosa, 1998). In
formal terms:
Proposition 3c: We expect the market will re?ect many under-performing core busi-
nesses and also that the family owners will develop ?nancial reward or cessation-based
exit strategies for subsequent businesses to ensure succession as an option for the core
business.
In the next section, we further distinguish family ?rms based on the level of dispersion in
governance structures modeled as generation in control (e.g., Casillas et al., 2010; Cruz
& Nordqvist, 2012; Ling & Kellermanns, 2010; Salvato, 2004), and the presence of a
nonfamily CEO (e.g., Gómez-Mejía et al., 2001, 2011). We select these two because
“differences in governance . . . arise from the family’s involvement in ownership and
management” (Chua et al., 2012, p. 1104), and these are considered two important
differentiators and thereby sources of heterogeneity within family ?rms (e.g., Casillas
et al.; Cruz & Nordqvist; Gómez-Mejía et al.; Ling & Kellermanns; Salvato). Accord-
ingly, we detail how family owners’ ?nancial and non?nancial considerations related to
exit strategies may vary across family ?rms depending on these two factors as well.
Family Generation in Control
Generation in control refers to “the generation that holds the majority of the equity,
and thus guides the ?rm” (Ling & Kellermanns, 2010, p. 324). Many scholars have
addressed the impact of generation in control on family ?rm outcomes and entrepreneurial
behaviors (e.g., Casillas et al., 2010; Cruz & Nordqvist, 2012; Gómez-Mejía et al., 2007;
Ling & Kellermanns; Salvato, 2004). The general underlying rationale is that family
owners from different generations will differently perceive and value both ?nancial and
non?nancial goals, thus affecting their strategic decisions, including exit (Gómez-Mejía
et al.; Salvato et al., 2010). Generational effects, as well as the related dispersions of
ownership among family, alter the dynamics and decisions among family members over
time. For instance, Gersick, Davis, Hampton, and Lansberg (1997) contend that as
1307 November, 2013
familial distance increases from (1) controlling owners to (2) sibling partnerships and (3)
cousin consortium, the values, beliefs, and consensus of the family become more diluted,
and family relationships become more complicated. Also, Ensley and Pearson (2005,
p. 269) explain that “the greater kinship distance and dispersion of the family members in
the familial teams will serve to dilute the strong central beliefs and ties of a more closely
knit social group.” Accordingly, family business literature suggests that the degree of
family identi?cation, commitment, in?uence, social capital, and personal investment in
the ?rm is highest in the founding-family ?rm, and tends to decrease as the ?rm transitions
into subsequent generations (e.g., Gersick et al.; Gómez-Mejía et al.). In particular, the
emotional attachment of the controlling family to the ?rm gradually evaporates over
generations. Corbetta and Salvato (2012) refer to “generational drift” as the progressive
decay of family members’ affective commitment to the ?rm, following the increase in the
number of family and nonfamily members with each new generation.
These factors, along with the increasing professionalism characterizing many later
generations (generations further from the ?rm’s foundation), lead family owners to focus
more on ?nancial rather than emotional objectives (Stewart & Hitt, 2012). As a conse-
quence, the ?nancial considerations related to the ongoing business will move to the
forefront as more generation transitions occur in the family ?rm (Gersick et al., 1997;
Gómez-Mejía et al., 2007, 2011). Accordingly, it seems reasonable to expect that
socioemotional wealth will be stronger in ?rms controlled and managed by the founding
family, and decrease as the ?rm moves on (Gómez-Mejía et al., 2007, p. 109). Addition-
ally, in later generations, while ?nancial expectations (and thus the family’s threshold
of performance) increase, family owners will potentially be less likely to choose a
stewardship-based exit strategy and more likely to choose a ?nancial reward or cessation-
based exit strategy because they must reach a much higher level of performance to
continue.
For instance, Doughty and Hill (2000) and Salvato et al. (2010), respectively, found
that the more family members perceive themselves distanced (in terms of number of
generations) from the founding roots of their ?rm, the more they pursue exit strategies in
terms of sale (Tía Company; Doughty & Hill) or asset liquidation (Falck Group; James,
2006; Salvato et al.). This is primarily to achieve higher performance returns to reinvest
into other entrepreneurial activities outside or within the family. In particular, Salvato
et al. analyzed the Falck Group before its exit (liquidation) from the steel industry in 1996,
which was followed by the successful startup of a new renewable energy business.
Federico Falck, chairman of the Falck Group, explains that “we were in our ?fth genera-
tion (including George Henri Falck I) when we discontinued the business, which means
pretty far from the founders’ motivations.” In another case study, Doughty and Hill
describe the sale of the Tía Company—a third-generation family retail business from
Argentina founded in 1933. Interestingly, while the previous generation still considered
the family business their “baby” and “part of their life,” Francisco de Narváez, exiting
family owner and general manager of the family ?rm, generally perceived the ?rm as a
pure business rather than a family business and as only one of many other activities and
businesses in which he was engaged. After the ?rm sale in 1999, Francisco de Narváez
noted that it “was time to move on” and viewed the sale of the family ?rm as a great
business opportunity. Within months of selling Tía, he quickly became involved in new
and different projects. By August 2000, he had invested $30 million of the money from
selling the business into multiple new and existing activities, and had a portfolio of 12
companies.
These two family ?rm cases corroborate our argument that in later generations family
owners are more likely to use ?nancial-based exit strategies and to leverage the related
1308 ENTREPRENEURSHIP THEORY and PRACTICE
gains into other business endeavors (Coelho & McClure, 2005). In particular, the Tía
Company case study and our earlier arguments (Pathak et al., 2012; Ram, 1994; Rosa,
1998; Sieger et al., 2011; Zellweger, Nason, et al., 2012) suggest that this logic does not
apply only to single family ?rms but also to the core businesses of family ?rm portfolios.
For example, Sieger et al. found that the knowledge, skills, and experience of family
members that helped create the core business become less relevant at later stages of the
portfolio entrepreneurship process. On the contrary, in order to support the growth of
a portfolio of family ?rms across generations, the family needs to gain more and more
entrepreneurial knowledge independent of the context or industry of the core business.
Accordingly, the bond and emotional attachment of family owners with the core business
are likely to progressively decay, following the process of generational drift described
earlier (Corbetta & Salvato, 2012) and which is also found in Francisco de Narváez’s
behavior. Family owners of later generations tend to prioritize pro?t and value maximi-
zation in the family portfolio, and thus follow ?nancial reward-based exit strategies in
relation to the core business if required by the market. Unproductive resources are
divested and reinvested in more productive businesses (Doughty & Hill, 2000). In formal
terms:
Proposition 4: Both in a single family ?rm and in a family ?rm portfolio, lower levels of
the family’s socioemotional wealth associated with later generations in control positively
affect the ?rm’s threshold of performance, thus (1) decreasing the likelihood that the
family owners of later generations will select a stewardship-based exit strategy and (2)
increasing the likelihood of a ?nancial reward or cessation-based exit strategy.
The Presence of a Nonfamily CEO
Although the in?uence of owners on strategic decisions can be strong, executive
managers, in particular the CEO, retain the most direct in?uence on the ?rm’s strategies.
In the family ?rm, the family CEO tends to meet and satisfy the family’s desires, and thus
is more inclined to avoid strategic decisions that might threaten the family’s SEW
(Gómez-Mejía et al., 2011; Sharma, 2004). In fact, under the light of agency theory,
family CEOs tend to be unwilling to risk the family’s wealth and jeopardize the ?nancial
and social well-being of future generations. However, a family ?rm may also appoint
a nonfamily CEO who can bring more objectivity to the decision-making process
while increasing the level of professionalization in the business (Blumentritt, Keyt, &
Astrachan, 2007; Gómez-Mejía et al.; Salvato et al., 2010; Sciascia, Mazzola, & Chirico,
2013). Indeed, the literature on change agents and exit strategies suggests that change and
divestment decisions are facilitated when a new CEO (or top management team) takes
over (e.g., Hayward & Shimizu, 2006; Miller & Shamsie, 2001).
In family ?rms, the decision to employ nonfamily executives is often seen as a good
option to make rapid changes. Although the nonfamily CEO plays an important role,
research on nonfamily CEOs in family ?rms is surprisingly scarce. Son?eld and Lussier
(2009) found that the presence of nonfamily managers is accompanied by an increase
in the use of sophisticated ?nancial management techniques as well as the tendency to
consider initial public offerings. Gómez-Mejía et al. (2001) found that nonfamily CEOs
are generally held more accountable for ?rm performance than are family CEOs, but also
receive higher compensation than nonfamily CEOs for their service. Recently, Woods,
Dalziel, and Barton (2012) presented the crucial role of outside board members to avoid
family members’ escalation of commitment toward under-performing activities leading to
bankruptcy.
1309 November, 2013
Given that “nonfamily CEOs are responsible for generating superior business perfor-
mance like their peers at other businesses” (Blumentritt et al., 2007, p. 321) and are in a
better position to feel detached from the business family (Salvato et al., 2010), we expect
they are more likely to set higher ?nancial goals and encourage and support sensitive
?nancial reward-based exit strategies while also mitigating emotional considerations
related to the exit decision (i.e., SEW) if necessary (Salvato et al.; Woods et al.). In
support of this line of thought, Berrone et al. (2010) argue that SEW is less salient
in decision-making processes when the CEO is not a member of the family. In other terms,
the presence of a nonfamily CEO should positively moderate the relationship of family
SEW and threshold of performance.
As an example, consider again the case of the Falck family ?rm. Salvato et al. (2010)
found that “the critical appointment of Achille Colombo, a nonfamily CEO, in 1989
represented a turnaround point in Falck’s history.” This appointment signi?cantly helped
the subsequent exit (asset liquidation) from steel production, and energized entrepreneur-
ial regeneration into the new renewable energy business. The nonfamily CEO was able to
set higher aspiration levels in terms of ?nancial results while still bringing awareness of
under-performance to the family members (James, 2006). Speci?cally, Alberto Falck, the
chairman of the company, commented that the appointment of a nonfamily CEO generally
“dramatically improves the quality of strategic decisions. It allows an objective view of
the situation that . . . [a] deeply involved family member may not capture. An example?
Achille Colombo has signi?cantly helped us realize that the steel crisis was irreversible.”
Similarly, Doughty and Hill (2000) describe how important the appointment of an external
CEO, Fabian Ferraro, was to the process of selling the Tía Company. Prior to the
acquisition, Ferraro increased the ?nancial value of the company and facilitated the exit
process, mitigating the concerns related to the emotional issues of some family owners
about the decision to exit (e.g., Francisco de Narváez’s mother). From a ?nancial per-
spective, the sale was very successful, thus enabling the family owners to exit from the
core business and to invest the wealth generated into other existing and new entrepre-
neurial activities.
To sum up, we propose that the presence of a nonfamily CEO is likely to mitigate
family owners’ concerns about exit and value its potential ?nancial bene?ts, thus posi-
tively moderating the effect of family SEW on the threshold of performance. This will
discourage stewardship behavior leading to family succession and favor a ?nancial
reward-based or a cessation-based exit strategy. Moreover, building on the Tía Company
case study and our previous arguments (Pathak et al., 2012; Ram, 1994; Rosa, 1998;
Sieger et al., 2011; Zellweger, Nason, et al., 2012), again it is evident that this logic will
also apply to the core business of a portfolio of family ?rms. Formally:
Proposition 5: Both in a single family ?rm and in a family ?rm portfolio, the presence
of a nonfamily CEO positively moderates the socioemotional wealth/threshold of
performance relationship, thus (1) decreasing the likelihood that the family owners will
select a stewardship-based exit strategy and (2) increasing the likelihood of a ?nancial
reward or cessation-based exit strategy.
Discussion
The family ?rm is the primary form of business throughout the world and em-
ploys over 80% of the workforce. In the United States, over one third of the S&P 500
has signi?cant family in?uence, and more than 50% of the gross national product is
1310 ENTREPRENEURSHIP THEORY and PRACTICE
produced by family ?rms (Miller et al., 2003; Neubauer & Lank, 1998). Thus, in-
creasing our understanding of the long-term perspective or “search for longevity”
in family ?rms is relevant to strengthening both theory and practice. A central topic in
family ?rm research is about transferring the ?rm’s ownership within the family
(Nordqvist et al., 2013), which represents “both an exit of current owner-managers and
the entry of the next generation” (Wennberg et al., 2011, p. 352). However, family
succession is only one of many other exit strategies that family owners may pursue in
family ?rms.
Accordingly, existing entrepreneurship research has been focused on multiple exit
strategies (Wennberg et al., 2010). In this research, we focus upon exit in family ?rms and
in family ?rm portfolios in terms of stewardship, ?nancial reward, and cessation-based
exit strategies (DeTienne et al., 2012). We believe that understanding exit strategies from
a type of business that is so prevalent worldwide is not a trivial issue. Although obtaining
exact ?gures for private company exit data is dif?cult, an examination of 2011 global
middle-market exits—those over $2 million and under $500 million—indicates a total
transfer of $805 billion (PrivCo, 2012). This is an enormous transfer of wealth which will
have signi?cant consequences for not only the family but also for other stakeholders and
institutions.
In this paper, we draw upon threshold theory (Gimeno et al., 1997) and SEW argu-
ments (Gómez-Mejía et al., 2007) to suggest that the family’s threshold of performance
mediates the relationship between family ?rm-speci?c factors and exit strategies.
Increased SEW causes an important change in the reference point that the family uses to
frame decisions (see Wennberg et al., 2011; Zellweger & Sieger, 2012). Our arguments
lead us to conclude that higher levels of SEW negatively affect the threshold of perfor-
mance, which positively affects the stewardship-based exit strategy of family succession
as well as negatively affects ?nancial reward (business sale) and cessation (business
liquidation) exit strategies. As a consequence, we predict the market presence of many
under-performing family ?rms with high socioemotional wealth. Further, we contend that
this logic will also apply to the core business of a portfolio of family ?rms, given the
similar family and business dynamics (in terms of SEW and aspiration levels of perfor-
mance) that have been observed in both the single family ?rm and the core business of a
family portfolio. Rather, for subsequent businesses, family owners will behave very much
like a traditional investor wherein pro?t determines behavior unless the core business’
succession is at risk. Finally, due to their effects on SEW and threshold of performance,
later generations in control and the presence of a nonfamily CEO favor ?nancial reward
and cessation-based exit strategies in relation with both single family ?rms and family
?rm portfolios (see Figure 1).
Interestingly, the arguments theorized in our work seem to ?nd some practical evi-
dence in the business world—e.g., the Falck Group from Italy (Salvato et al., 2010) and
the Tía Company from Argentina (Doughty & Hill, 2000)—in which later generation
family owners, helped by the presence of a nonfamily CEO, were ?nally able to sell and
liquidate their respective (core) family businesses and to invest the resulting resources
acquired in other new or existing businesses.
We believe that our focus on multiple exit strategies in family ?rms is relevant. For
instance, emerging transgenerational entrepreneurship research centering on how family
?rms achieve growth through entrepreneurial activities (e.g., through a portfolio of
family ventures) suggests that we may misunderstand and underestimate longevity/
continuity when we examine family ?rms only through the lens of the continuing suc-
cessful successions of a (single) family ?rm (Sieger et al., 2011; Zellweger, Nason, et al.,
2012). To clarify, when we assume that nonfamily succession exit strategies are always
1311 November, 2013
negative outcomes, we may be underestimating the importance of exit strategies and their
impact on the family ?rm and the global economy.
Our study offers some important contributions. First, while exit has received con-
siderable research attention in the strategic management (e.g., Gimeno et al., 1997) and
entrepreneurship literature (e.g., DeTienne, 2010), surprisingly few scholastic works
have been devoted to the study of family ?rm exit strategies other than succession
(e.g., Salvato et al., 2010; Sharma & Manikutty, 2005; Wennberg et al., 2011; Zellweger,
Kellermanns, et al., 2012). For instance, Sharma and Manikutty (p. 294) note that “[d]ue
to a combination of emotional entrapments and practical reasons, scholars note a signi?-
cant inertia against resource shedding in a timely manner. . . . Beyond this observation,
virtually nothing is known of the divestment processes in family ?rms where decisions are
governed as much by ?nancial and rational motivations as they are by the emotional forces
and family traditions.” By combining threshold theory and SEW arguments, our research
sheds light on family ?rmexit strategies, thus representing an initial step toward developing
a comprehensive framework of the roles of SEW and performance threshold on family
?rm exit decisions. We examine stewardship, ?nancial, and cessation-based strategies
as alternative exit options. In reality, a company may simultaneously (1) sell a portion of the
business, (2) liquidate another part of it, and (3) reinvest the wealth generated into other
activities outside or within the family. Part of the remaining business and the wealth
generated fromthe sale or liquidation may even be transferred to the next generation. Thus,
the reallocation of resources may be also coupled with or lead to family succession.
Also, our focus is not only on single family ?rms, but also family ?rm portfolios. This
“addresses a very important research gap,” (Sieger et al., 2011, p. 345) as knowledge about
portfolio entrepreneurship in family ?rms is scarce despite the fact that both family ?rms
and portfolio entrepreneurship play important roles in the economic landscape. In par-
ticular, shifting the level of analysis from the ?rm to family owners in the context of exit
strategies enabled us to contrast the majority of family-business studies that (1) neglect to
account for the many business families that are often engaged in several businesses, such
as a portfolio of activities, and (2) fail to recognize other forms of exits (e.g., sale), not as
family ?rm failure types but as intentional strategic decisions to free up resources and
redirect them into new entrepreneurial activities (Sieger et al.; Zellweger, Nason, et al.,
2012). Paradoxically, we argue that the stewardship logic of family succession at all costs
may lead to the market presence of many under-performing family ?rms.
Extending and complementing existing literature is a second contribution of our work.
The SEW model has been traditionally used to distinguish the behavior and strategic
choices of family-controlled ?rms from other types of organizations. We extend this line
of research into a new domain, namely the decision by ?rm owners to opt for different exit
strategies in both the family ?rm and family ?rm portfolios. Non?nancial considerations
may indeed explain exit decision choices, depending on the framing of loss or gain by
dominant owners. Relatedly, we enhance the behavioral agency literature on which SEW
arguments are based (Wiseman & Gómez-Mejía, 1998) by theorizing how the framing
of exit decisions may involve non?nancial concerns, and how principals may apply
socioemotional criteria when interpreting norms of economic behavior.
We also expand on the SEW construct through our focus on family ?rms which
enabled us to build arguments about how increased levels of a family’s SEW affects exit
decisions within family ?rms. In particular, our work suggests that a family’s SEW can
cause family owners to feel locked into a business and harms the potential gains deriving
from nonfamily succession exit strategies. In this regard, Berrone et al. (2012, p. 269)
invite scholars to direct more research attention toward the negative side of SEW, given
that existing studies “are mainly focused on discussing positive aspects of SEW,” though
1312 ENTREPRENEURSHIP THEORY and PRACTICE
“family owners also experience negative aspects related to their affective experiences.”
The family’s SEW is often viewed as an affective asset or endowment. In line with recent
research (Kellermanns, Eddleston, & Zellweger, 2012), our work suggests that it may also
be an affective liability or burden that can be costly to family owners.
However, our study does not imply that increased SEW is always bad. In fact, as
discussed earlier, the SEW approach does not denote that family ?rms ignore ?nancial
issues all the time (Berrone et al., 2010, 2012). Family ?rms make strategic choices using
SEW as the reference point, but their short-term choices may also have the intention of
maximizing performance outcomes in the long term. In fact, we recognize that family
?rms are particularly equipped to survive in the long term because they do not simply
chase short-term pro?ts, and increased levels of SEW may enable family ?rms to resist
short-term urges to sell or liquidate. Therefore, while high levels of SEWmight encourage
the continuation of some under-performing ?rms, some of these ?rms may be better
positioned to pro?t in the long term.
Additionally, we believe that by adopting the concept of “threshold of performance”
(Gimeno et al., 1997), our theoretical work clari?es how SEW affects family members’
strategic decisions. We specify that SEW negatively impacts ?nancial reward-based strat-
egies while favoring the stewardship-based strategy of family succession because it
changes the reference point in the threshold of performance that family owners use to
frame exit decisions. We believe the concept of “threshold of performance” is central
to understanding the SEW logic. Thus, our study extends and adds value beyond the
notion of SEW and the related works of Gómez-Mejía and colleagues. We also contribute
to threshold theory (Gimeno et al.) by developing theoretical linkages with family ?rm
literature and the SEW perspective.
Moreover, our research complements the work of DeMassis et al. (2008), which
centers on the factors that prevent intra-family succession from occurring. Instead, our
work focuses not only on (1) why family succession often takes place, but also on (2) the
circumstances in which this is not the case. Accordingly, we look at two exit strategies that
may lead to renewal and regeneration (Salvato et al., 2010).
Finally, this research argues that family ?rms are heterogeneous groups, and as such
behave differently (Chrisman et al., 2005; Sharma, 2004). We show how the family’s
SEW, the family generation in control, and the presence of a nonfamily CEO are vital
differentiators that explain why family owners of single family ?rms and a portfolio of
family ?rms choose one exit strategy rather than another. This represents an important
addition to existing SEW literature. As Berrone et al. (2012, p. 270) explain, although
family business literature has recently “emphasized existing differences within family
?rms . . . these differences have not been linked to SEW issues. The SEW literature must
reach beyond this oversimpli?cation and explain the factors behind the varying sources
and degrees of SEW.” Also, while arguing that later generations of family owners are less
likely to pursue family succession and more likely to pursue ?rm sale and liquidation, we
indirectly shed some light and offer some explanation for the negative statistics regarding
family ?rm succession. Existing research shows that although family owners expect to
transfer their companies to a family member when they retire, in reality, family business
research indicates that a small percentage of family ?rms “survive” across generations and
that this percentage tends to decrease over time (e.g., Le Breton-Miller et al., 2004). Our
arguments lead us to conclude that family ?rms may simply redeploy resources into other
business activities after exit. A broader view of family ?rms is thus needed.
In general, we believe this work serves as a foundation to sharpen understanding of
exit strategies as they relate to family ?rms and family ?rm portfolios. More speci?cally,
we hope that this research adds knowledge and inspires future work on exit strategies in
1313 November, 2013
these organizations, and helps these ?rms—as well as family ?rm scholars—to better
understand the importance of different exit strategies for the family business and the
economy worldwide.
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