147“MY CHILDREN DO NOT WANT THE FIRM”
Private equity as a succession option in family businesses A review and future directions
Oliver Ahlers, Alexandra Michel, and Andreas Hack
Introduction
Family firms are of particular significance for the global economy (Klein, 2000; Anderson & Reeb, 2003; Astrachan & Shanker, 2003; Morck & Yeung, 2003). Prior research acknowledges that family firms are considerably different from non-family firms and the source of distinction clearly is the “family“ (Sharma, 2004). Previous literature has defined family firms as those firms with at least 50% of ownership concentrated among family owners, and which have member(s) of the family active in the business, whether it be in management or governance roles (e.g., Eddleston & Kellermanns, 2007; Kellermanns et al., 2012). Although family firms are a heterogeneous group with varying degrees of family influence, differences in size, industry, and geography (Tsang, 2002; Chrisman et al., 2012; Chua et al., 2012), they all face the same challenge sooner or later, i.e to ensure succession and the survival of the firm as a family-owned entity (Cabrera-Suárez et al., 2001).
Succession is a highly difficult issue for family businesses. When family owners have to secure family succession, it is a decision overshadowed by emotions (Miller et al., 2003; Sharma et al., 2003). This is not surprising as a key driver for many family firms is to secure trans-generational control over the business (Zellweger et al., 2012). Emotional attachment is what most family entrepreneurs feel when it comes to the question of how their “lifetime achievement” will continue once they leave the business (Zellweger & Astrachan, 2008; Memili et al., 2013). There are a number of reasons why family succession might fail. Most commonly, the incumbent family CEO is unwilling to let go or there is simply no willing and/or qualified family successor available (Kets Vries de, 1993; Sharma et al., 2001; Sharma & Irving, 2005).
What opportunities do family firms have to ensure succession if no family successor is available? It is possible to take a succession route outside of the family. “External” family succession is when a non-family member takes over a business. Prior family business 148research has been primarily concerned with how to secure intra-family succession and has neglected the external succession route (Howorth et al., 2004; Niedermeyer et al., 2010). There are multiple options to ensure ownership transition in the external succession route, such as trade sale, initial public offering (IPO), and management buyout (MBO) (Goossens et al., 2008; Scholes et al., 2008). Trade sale involves the sale to another company, which might even be a competitor (Scholes et al., 2007). Inevitably, in a trade sale the identity and culture of the former family firm can be put at risk (Scholes et al., 2007). An IPO, the floating of shares on the stock market, is a complex and costly process, and thus, only an option for large family firms (Scholes et al., 2008). MBOs which usually involve private equity (PE) firms are another option. In general, a buyout is when PE firms together with the incumbent and/or external management take over the business (Meuleman et al., 2009).
PE firms usually acquire the majority stakes in corporations and focus their investments on established companies which are usually characterized by stable cash flow streams. Investment in more developed companies (“later stage”) rather than investments in companies that are just emerging or newly found (“early stage”) is what distinguishes PE from venture capital (VC) as an investment class (Cumming & Johan, 2009). Businesses which are acquired by PE firms are usually referred to as “portfolio firms” or “PE-backed firms.”
Buyouts by PE firms can have some advantages over IPOs and trade sales. First, in a buyout the former family business could ensure independent ownership and maintain (at least part of) the family culture, as PE firms usually treat their portfolio firms on a standalone basis, i.e., they remain independently run companies (Jensen, 1989; Scholes et al., 2007). Second, members of the family could stay associated with the business if they prefer to do so (Scholes et al., 2008; Niedermeyer et al., 2010). Third, the majority of the management team could remain in place if the MBO is structured accordingly (Scholes et al., 2007).
Today, family firms constitute an important deal source for PE firms (Scholes et al., 2009). However, according to existing research, there is considerable potential for conflict because family firms and PE firms may follow very different business “philosophies” (Poech et al., 2005; Achleitner et al., 2010; Dawson, 2011). Family firms are known to have a long-term perspective on the business and often pursue non-financial goals (Berrone et al., 2012) whereas PE firms buy businesses in order to resell them at a profit (Braun et al., 2011; Tappeiner et al., 2012). Furthermore, PE firms have been widely criticized for unsustainable performance effects in portfolio firms (Wright et al., 2009).
PE firms increasingly face competition from peers and have to specify their value proposition as well as build up capabilities to succeed in a difficult market environment (Cressy et al., 2007; Wilson et al., 2012). Specifically, PE firms need to source deals and have to successfully increase the economic value of their portfolio companies (Kaplan & Strömberg, 2009). However, PE firms are not always able to successfully create value in former family firms (Wulf et al., 2010) and the general perception PE firms have of family firms tends to be negative (Granata & Chirico, 2010; Dawson, 2011). In order for PE firms to successfully buy a family business, they may need to build up their knowledge on how to target and deal with family firms over the life cycle of an MBO (Tappeiner et al., 2012).
In the remainder of this chapter, first, we aim to provide an overview of the current literature on PE and family firms. Thereby, we structure our analysis of the prior literature along six distinct categories. Second, we discuss gaps in the existing literature and future research opportunities focusing on methods and theories used in studies on PE in family firms, gaps within the current categories, as well as possible new categories.
149Method
A clear methodology is required to conduct a literature review. The “systematic” literature review procedure (Tranfield et al., 2003) was broken down into five steps which are (1) identification of search terms, (2) selection criteria, (3) selection of databases, (4) literature identification, and (5) analysis strategy. In the following, each step is briefly explained to maximize transparency, objectivity, replicability, and reliability of the literature review (Tranfield et al., 2003).
Literature review process
(1) Identification of search terms. This literature review deals with the research interface of (a) PE and (b) family firms. Comprehensive literature reviews for each singular research topic and multiple sub-issues are already available for family firms (Handler, 1994; Sharma et al., 1997; Casillas & Acedo, 2007; Debicki et al., 2009) and PE (Wright Robbie, 1998; Cumming et al., 2007; Wood & Wright, 2009). Thus, this review is specifically focused on the interface of PE and family firms which usually takes place when PE firms invest in family firm buyout targets. Research which goes beyond or has no particular implications for the research interface is of minor interest for this review. Accordingly, the identification of search terms began with keywords related to each side of the interface – (a) PE and (b) family firms. The initial list of keywords relate to the author’s prior experience and is complemented by three interviews conducted with two experienced academics in the field of family business research and one practitioner from the PE industry. For part (a) PE, 13 keywords were identified.1 For part (b) family firm, 4 keywords were identified.2 Part (a) and part (b) keywords were combined and resulted in the creation of 52 search strings (13*4).
(2) Selection criteria. Selection criteria were used to specify the scope of the literature review, i.e., to make it manageable. First, the review only included peer-reviewed journals and peer-reviewed conference contributions to ensure academic quality of reviewed works. Working papers were only added if they seemed to provide the very latest research insights. Second, only research published after 1995 was utilized in order for the research to be current. Third, all industries and all countries in which research was undertaken relating to this subject were considered. Fourth, research on PE minority investments (i.e., deals involving no majority control of PE firms) was included. Inclusion of PE minority investments’ research was needed because it could reveal insights about the relationship between family firms and PE and because minority investments can trigger buyouts at a later stage (Tappeiner et al., 2012). Fifth, only academic work was considered, be it conceptual or empirical, and hence, work dedicated primarily to practitioners was excluded. Sixth, works focusing on the technical specifics of deal-making only relevant for specialists such as legal, tax, or accounting issues were not included. Seventh, academic work focused on early stage investments (i.e., VC) was excluded. However, since the use of the terms “venture capital” and “private equity” is sometimes confusingly similar, papers dealing with VC when the definition was apparently referring to PE were also included. Eighth, academic work which did not devote a significant proportion of its content to the interface of PE and family firms, or did not have significant implications, was eliminated. For example, some papers on entrepreneurial exit that did not focus particularly on family firms or on the PE/buyout route were removed (DeTienne, 2010; DeTienne & Cardon, 2012). However, papers on “emotional value” were included because they could have significant implications for valuation 150in buyout deals, a key part of deal-making (Granata & Chirico, 2010). It is acknowledged that some form of academic “judgment” is needed for this criterion. Ninth, papers dealing with small business firms, PE, and negotiations in combination were included because small business firms are in practice often privately held by a family, and we considered this an important area when dealing with PE buyouts. Finally, only papers written in either English or German were considered for the review.
(3) Selection of databases. For the literature search, two prominent databases for management research were used, these being “EBSCO host” (Business Source Premier) and “ScienceDirect.” Coverage of research outlets within the aforementioned databases is subject to change and was complemented by “manual search” for which “Google Scholar” was employed. The search strings generated in step (1) were used in the respective databases. Furthermore, search in the databases was narrowed to include only the title, abstract, and author-provided keywords to make the number of search results manageable.
(4) Literature identification. For the database “EBSCO host,” a total of 380 unique search results was identified, i.e., duplicative results due to similar search strings were eliminated. “ScienceDirect” yielded 159 unique search results. The 539 papers were reviewed and used to refine the selection criteria described in step (2). Using the selection criteria, 14 papers were selected from “EBSCO host,” along with 4 papers from “ScienceDirect” (after removing duplicates with “EBSCO host”), and 10 were selected from “manual search.” Thus, a total of 28 papers were identified and selected for the literature review.
(5) Reviewing strategy. To review all 28 papers in a consistent and systematic manner, each work was summarized and classified in terms of (a) “specific research topic,” (b) “research question,” (c) “research perspective,” (d) “theories applied,” (e) “characteristics of the sample,” (f) “geographic scope,” and (g) “key findings.” Six (largely) distinct categories can be distilled from the findings of this prior research. The categories are (A) “market,” (B) “information asymmetry,” (C) “PE firms’ perception and decision-making,” (D) “family firms’ perception and decision-making,” (E) “bargaining power in buyout negotiations,” and (F) “value creation in family firm buyouts.” An overview of each work and composition of each category is given in Table 8.1. Table 8.1 describes the sample of selected studies in terms of publication date, research approach, key research, and theories applied. Findings of the literature review are discussed in the next section.
Discussion of key findings
In the remainder of this chapter, the key findings of the literature review are presented according to the six content categories into which the selected works have been grouped and which are illustrated in Figure 8.1. Subsequently, the key overall findings of each content category are summarized and evaluated.
(A) Market. There is very limited information available on the market size and quantitative characteristics of family firm buyouts. Only one of the studies comprises a detailed review of market information on family firm buyouts (Scholes et al., 2009). Unfortunately, information is only given until 2007 and no follow-up studies are available. Although buyout markets have undergone changes since 2007, including contraction during the financial market crises (Wilson et al., 2012), the information available does shed some light on specific characteristics of family firm buyouts.
Three aspects can be concluded from the market-related research study. First, family buyouts are usually smaller in size. It is important to recognize the size of family buyout deals because smaller firms (SMEs) might have distinct characteristics in deal-making due to size and not due to family influence. Thus, one needs to be cautious when attributing phenomena to family influence when it could occur because of the firm size. For example, smaller firms might face expertise disadvantages when dealing with PE firms because they possess insufficient resources and capabilities (Barney, 1986; Barney, 1991; Peteraf, 1993). Second, family firms constitute a key source of deals for PE firms and thus represent a large share of the buyout market. Third, one needs to be cautious when interpreting the information on family buyout markets. It has already been acknowledged that definitions of family firms differ and the reviewed work only employs one of many definitions (Klein, 2000; Astrachan et al., 2002; Klein et al., 2005; Chua et al., 2012). Thus, other definitions of family firms might yield considerably different results.4 Figure 8.2 displays all data from 1998 until 2007.
Table 8.1 Literature review: overview of selected works
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Source: Author.
Figure 8.1 Identified categories of literature review
Source: Authors.
Figure 8.2 Buyout market for family firms
Source: Modified, based on Scholes et al. (2009).
(B) Information asymmetries and decision-making. Four studies dealing with aspects of information asymmetry could be identified. In particular, one study highlights the role 160of information asymmetries in selecting a succession route (Dehlen et al., 2014) and three studies deal with information asymmetries in buyouts (Howorth et al., 2004; Scholes et al., 2007, 2008). Howorth et al. (2004) emphasize the role of positive relationships and relational factors such as trust and mutual involvement between the deal parties when planning for the buyout which facilitates the flow of information. The work of Scholes et al. (2007) illustrates how family firm characteristics such as the involvement of the founder and professionalized management structures can contribute to improved information-sharing. Scholes et al. (2008) show that mutual involvement of the management team and the selling family firm owner when planning the succession is beneficial, in that it limits information asymmetries and helps address conflicts of interest in family firm buyouts.
A mutually agreed sale price is more likely to result when no family successor is available or financial objectives are of the family firms’ priority (Scholes et al., 2007). However, the role of PE firms in achieving a mutually agreed sale price remains unclear – Scholes et al. (2007) show that a mutually agreed sale price is more likely when the PE firms are involved in buyout planning whereas in the subsequent study of Scholes et al. (2008) PE firms’ involvement leads to a mutually agreed sale price being less likely.
The study of Dehlen et al. (2014) underlines the role of information asymmetries one step earlier, i.e., when the decision for a succession path is made by (family) owners. It illustrates that family firms are generally biased towards intra-family succession paths (Dehlen et al., 2014). However, if family owners undertake efforts to reduce information asymmetries, such as screening, the external succession through a buyout can become more likely (Dehlen et al., 2014). Socioemotional wealth (SEW), measured by age of firm, can limit screening activities, and the authors conclude that emotional attachment makes family succession more likely and leads to increased difficulties for family departure from business activities (Dehlen et al., 2014).
The prominent role of information asymmetries is unsurprising given adjacent literature. Most family firms are often privately held (Klein, 2000; Wang, 2006; Praet, 2013). The quality and quantity of information available about private firms is usually lower compared to information about public firms (Capron & Shen, 2007). Limited information availability on privately held companies is due to a weaker market for corporate control (analysts, investment banks, etc.) and less stringent regulations on information disclosure (Shen & Reuer, 2005; Ragozzino & Reuer, 2010). The market for corporate control has an important function in providing information and supporting asset evaluation (Capron & Shen, 2007). In addition, information availability could be further constrained by family firms’ high degree of tacitness and a lower willingness to share information with those outside the family (Nonaka & Takeuchi, 1995; Cabrera-Suárez et al., 2001; Lee et al., 2003). In particular, management buyin (MBI) deals might suffer from information asymmetries because the existing management is not part of the buying coalition (Howorth et al., 2004).
A few preliminary conclusions can be drawn from the selected literature on information asymmetries. First, family firm owners and the incumbent management team potentially face conflicts of interest, especially in MBI deals, in which case the buying and selling side should be wary (Howorth et al., 2004). Second, the high complexity of a buyout route requires long-term planning in order to prepare and to achieve a sound information basis for successful deal-making. The collaboration of management and family owners appears to be beneficial in this process (Scholes et al., 2008). Families’ needs for SEW potentially lead to a “biased” or “postponed” succession process (Dehlen et al., 2014). Third, the actual relationship between buyer and seller in buyout deals can play a key role in facilitating information flows and co-operative bargaining solutions (Howorth et al., 2004). Last, advisors 161might play a valuable role in facilitating the buyout process and in brokering deals (Scholes et al., 2009).
(C) PE firms’ perceptions and decision-making. Another category of papers examines if and how family firms are perceived by PE investors, compared to non-family firms. There are six identifiable papers in this category (Upton & Petty, 2000; Silva, 2006; Granata, 2010; Granata & Chirico, 2010; Dawson, 2011; Ahlers et al., 2014). Family firms are often perceived differently by potential acquirers, compared to non-family buyout targets – which is highlighted in several studies (Silva, 2006; Granata, 2010; Dawson, 2011). In particular, family firms are considered riskier investment targets because of the higher complexity resulting from the intertwinement of family and business systems (Silva, 2006; Granata, 2010). Additionally, family firms are associated with less professional management that could favor particular family interests and by doing so emphasize non-financial goals over financial ones (Granata, 2010), leading to lower company valuations (Granata & Chirico, 2010). Dawson (2011) argues that family firm investment targets could be perceived more positively by PE investors if selling owners exit the business soon after the buyout and if management structures are already professionalized. If PE investors participate in succession financing (usually minority investments), the qualifications of the successor, the business strategy, and the degree of harmony in family relationships are considered by PE firms (Upton & Petty, 2000).
Two main findings can be concluded from this review category. First, family firms are indeed perceived by PE investors as being different from non-family firm targets (Ahlers et al., 2014). Second, the difference in perception is rather negative, i.e., PE investors emphasize the negative side of family influence and in particular the additional risks associated with family firm investments (e.g., owner-centricity). However, these findings contrast with research on family firms highlighting performance advantages of family firms (Anderson & Reeb, 2003; Villalonga & Amit, 2006) and prior research that argues family firms can be both a source of performance advantage, but also disadvantage (Sirmon & Hitt, 2003; Miller & Le Breton-Miller, 2006).
(D) Family firms’ perceptions and decision-making. The perception of PE firms represents only one perspective of the relationship between family firms and PE (deals). It is not surprising that another strand of studies examines the family or vendors’ perspective. A total of 10 works fall into this category (Poutziouris, 2001; Graebner & Eisenhardt, 2004; Poech et al., 2005; Astrachan & Jaskiewicz, 2008; Zellweger & Astrachan, 2008; Niedermeyer et al., 2010; Salvato et al., 2010; Zellweger et al., 2011; Tappeiner et al., 2012; Ahlers et al., 2016). Poutziouris (2001) shows how family firms are hesitant to use external sources of financing and in particular sources that would require them to give up ownership control, which applies to PE financing – indicating that the pecking-order hypothesis could apply to family firms. The pecking-order hypothesis proposes the preference of internal funds over debt, and, once debt capacities are maximized, external equity is used (Myers, 1984). However, Tappeiner et al. (2012) argue the pecking-order hypothesis needs modification and refinement where family firms are concerned. In particular, the authors illustrate that family firms’ demands and the likelihood of utilizing PE (minority) investment are driven not only by financing needs but also by how well PE firms are equipped to provide non-financial resources, the costs associated with ceding control rights, and how relational factors play out (Tappeiner et al., 2012). Furthermore, it is important to consider family influence such as the need for SEW to understand financing decisions of family firms (Tappeiner et al., 2012). For example, family owners would be willing to cede control rights if family conflicts can be resolved due to PE firm involvement, the PE firm is able to 162provide complementary expertise, and if the PE firm is regarded as trustworthy (Tappeiner et al., 2012).
SEW seems to play a bigger role when families exit the business. Family firm owners struggle to sell their businesses and have difficulties letting go of their businesses due to emotional attachment which is driven by the emotional costs and benefits that have occurred over time (Astrachan & Jaskiewicz, 2008; Zellweger & Astrachan, 2008). In particular, it can be a feeling of responsibility to carry on the family’s heritage that makes it difficult to make decisions as to how to shed resources (Salvato et al., 2010). Zellweger and Astrachan (2008) emphasize how family business owners’ emotional attachment is a key dimension of SEW that can develop over time and may distort family business owners’ value perception, i.e., family sellers attach a higher value to the firm that cannot be explained by the financial value of business performance, but rather by “emotions.” This might make it difficult to transfer the business to a PE firm in a buyout, as “emotions” cannot help justify to the market what might be an acceptable price for the family firm (Zellweger & Astrachan, 2008). In a similar vein, it was confirmed that a positive relationship exists between trust and goal congruence influencing the family business seller’s affective deal commitment (Ahlers et al., 2016). However, emotional value can also lower the market price when family CEOs sell to family members – as shown by Zellweger and colleagues (2011). Moreover, it is not only the type of buyer but also the quality of the buyer-seller relationship (with factors such as organizational rapport, relational trust, cultural fit and a long-term interest shown by the buyer in the prosperity of the business) that plays an important role (Graebner & Eisenhardt, 2004; Ahlers et al., 2014). Unsurprisingly, Niedermeyer et al. (2010) hypothesize how families’ deal satisfaction can be driven not just by an adequate sales price but also by factors of procedural fairness, goal alignment, opportunities to select among different buyers, and an ongoing post-sale connection with the former family business (Romano et al., 2001; Niedermeyer et al., 2010).
Psychological “barriers” might exist when family firms are dealing with PE firms. The study of Poech et al. (2005) illuminates how family sellers often feel confronted with a different “mindset” which does not match family firm philosophy when dealing with PE firms (Poech et al., 2005). Family perceptions, however, might be biased according to stereotypes and a lack of prior experience/knowledge when dealing with PE, and accentuated by selective information processing (Poech et al., 2005).
From the literature on family business sellers’ perceptions and decision-making, three conclusions can be made. First, sellers assume an active role when selling the business. Second, family firm sellers might be concerned to whom and how the business is sold while the maximization of the sale price is only one of many sale objectives. Third, reciprocal perceptions of family firms and PE could be a source of conflict and a positive relationship might be critical in relationships between family firms and PE firms.
(E) Bargaining power in buyout negotiations. We identified two papers dealing with “negotiations and bargaining power”; moreover, several further papers that we assigned to the information asymmetry category also touched on the topic of price negotiations. Based on negotiation theory, which explores what makes people work together towards an agreed goal or price, the authors of one of these papers investigate two areas of concern. First, that information in the negotiation process is not equally distributed and second, that some negotiation parties aim to achieve a maximization of their goals rather than a mutual agreement. Especially in sales negotiations, vendors who aim to maximize the price may not disclose all information. Generally, vendors are less reluctant to share information and thus more willing to engage in fruitful negotiations if the vendor is the original business founder, who 163primarily focuses on strategic objectives and long-term success of the firm. Moreover, it is also the case if no clear successor is present and if the buyer is already involved in succession planning before the actual negotiation process starts (Scholes et al., 2007).
A recent study on small business firms in general, which can also be applied to family businesses, has investigated the perceived bargaining power between PE firms and (family) business owners selling their business. Thereby, the three factors competition, expertise, and time pressure determine the perceived bargaining power of PE firms. A negative relationship between PE’s bargaining power and bidder competition exists, whereas PE’s expertise and the buyout seller’s time pressure positively influence PE’s bargaining power (Ahlers et al., 2016). A further area of interest are the attributes of the vendor such as first or later generation (Scholes et al., 2007) or their gender as Amatucci and Swartz (2011) showed that women vendors negotiate differently than male vendors.
(F) Value creation in family firm buyouts. Eight papers can be identified as falling into the “value creation” category (Goossens et al., 2008; Klöckner, 2009; Achleitner et al., 2010; Scholes et al., 2010; Wulf et al., 2010; Braun et al., 2011; Grundström et al., 2012; Chrisman et al., 2012). Klöckner (2009) subsumes the effects PE buyouts can have on the former family firm broadly under “economization” and “professionalization” – the former referring to all activities, be they strategic (e.g., M&A) or operational (e.g., planning) and the latter comprises a general shift from partially non-financial goals to purely financial ones (Klöckner, 2009). Thus, “economization” and “professionalization” stimulate the creation of economic value in family firm buyouts (Klöckner, 2009). “Professionalization” is also emphasized in the work of Braun et al. (2011) who argue that governance structures of family firms and buyout vehicles represent two different “business philosophies.” While family firms are generally regarded as having a long-term orientation (Carney et al., 2015) and show co-existence of financial and non-financial objectives, buyout structures especially in the form of LBOs are reckoned to be characterized by short-termism and purely financial goals (Braun et al., 2011). Furthermore, the authors argue that LBOs are more successful in economic growth cycles, whereas family firms have performance advantages in economic downward cycles (Braun et al., 2011; Bertoni et al., 2011). In another work related to innovative behavior, the case study’s evidence suggests that family successors show cautious innovation behavior whereas external succession through buyouts is associated with a higher degree of strong innovation behavior (Grundström et al., 2012).
Achleitner et al. (2010) agree with prior research that changes in corporate governance (“governance engineering”) can stimulate value creation in buyouts, but “how” it occurs in family business buyouts is distinctively different from non-family buyouts. While value creation in non-family buyouts, in particular those involving publicly held companies, originates in creating more concentrated ownership structures with lower agency costs (Jensen, 1989), this line of argument could not be applied to family firm buyouts that most commonly already have concentrated ownership (Achleitner et al., 2010). Thus, according to Achleitner et al. (2010), value creation in family buyouts originates from strategic and operational improvements achieved by the representation of PE managers in supervisory boards as well as higher incentivization of the top management in portfolio firms. Similarly, the work of Chrisman et al. (2012) highlights how different family firm governance configurations (ownership, management) create different levels of agency costs pre-buyout, which leads to greater unpredictability of agency cost reduction in the post-buyout period. This is in line with related literature on family firm governance, which argues that family influence can be both beneficial and detrimental to the firm’s financial structure (Koropp et al., 2014) and performance – the potential agency cost advantage might be lost due to owner-manager or 164owner-owner agency problems leading to asymmetric altruism, managerial entrenchment, and hold-up (Schulze et al., 2001, 2003a, 2003b; Villalonga & Amit, 2006). Furthermore, Chrisman et al. (2012) hypothesize agency cost reductions in family firm buyouts could occur on other levels than previously thought, i.e., not between owners and managers, but between upper and lower management. Former asymmetric altruism (e.g., favoring family members) with detrimental effects on agency costs (Schulze et al., 2001) can be reduced in the post-buyout phase. Last, it is also emphasized that buyouts in family firms will shift the composition of agency costs from residual losses (due to opportunism) to newly created agency control costs, as former family firms rely less on formal control mechanisms (Chrisman et al., 2012).
Empirical studies that use a quantitative approach do not entirely confirm that value creation in family firm buyouts is any different from non-family buyouts. Goosens et al. (2008) could not find differences in post-buyout performance where changes in efficiency and company growth are concerned. On the contrary, Scholes et al. (2010) could confirm for family configurations with no “non-family management with equity stakes” (who would have no incentive to perform higher because they have no equity stake) in the former family firm are associated with higher growth and efficiency. Wulf et al. (2010) only found positive effects of PE involvement on performance for formerly underperforming family firms when it comes to professionalization of organizational structures and systems. The impact of PE firms could turn negative if PE firms’ involvement becomes operational (cost-saving) in nature (Wulf et al., 2010).
Three conclusions can be drawn from the literature on value creation. First, family firms might undergo strategic changes after a buyout. These changes stem from a greater orientation towards financial goals in the post-buyout period. Second, strategic changes and financial value creation are not certain and sound empirical evidence remains scarce. Third, different family configurations might need investigating to determine whether and under what circumstances value creation occurs.
Literature gaps and future research
After having reviewed the works dealing with the interface of family firms and PE, literature gaps become evident. Literature gaps are structured according to (1) opportunities for methodological or theoretical improvement which is needed in future research, (2) research issues within current research categories not yet covered, and (3) new research categories requiring consideration in the future.
(1) Methodology and theory. High-quality research requires both a strong theoretical basis and an appropriate as well as reliable methodology (Bird et al., 2002). Concerning the papers in this literature review, the methodologies used offer opportunities for improvement and future research.
Future research might rely more on quantitative empirical research. The majority of reviewed studies are either conceptual or, if empirical, rely heavily on case study evidence.5 Case study research is especially appropriate in early stages of research development to provide inductively a foundation upon which quantitative research methods can be built deductively (Miles & Huberman, 1985; Eisenhardt & Graebner, 2007). Thus, the key objective of case study research is to identify and recognize key elements, structures, and relationships of a “field situation” (Barzelay, 2007; Eisenhardt & Graebner, 2007). Given the comparably low number of publications on family firms and PE, case study research can be considered as being a suitable means to prepare the ground work for further quantitative research.
165Existing quantitative empirical research in existing literature would have benefitted from greater methodological rigor, such as the application of more sophisticated statistical techniques, including multiple regression, moderation and mediation analysis, structural equation modeling, and the use of statistical constructs confirmed by factor analysis (Baron & Kenny, 1986; Hair, 1987; Kline, 2005). For example, Scholes et al. (2007) acknowledge that their use of logistic regression analysis for cross-sectional data would benefit from techniques of structural equation modeling to establish causality and interactions between variables. Furthermore, Scholes et al. (2007) or Wulf et al. (2010) use single-item variables which could suffer from measurement error compared to statistical constructs (Scholes et al., 2007). In the work of Scholes et al. (2008), bivariate non-parametric statistical tests (such as Mann-Whitney “U” test, Chi-square test) were used to analyze whether statistically significant differences between respondent groups exist. However, these kinds of statistical tests require the complementary use of statistical techniques such as moderation or mediation analysis in multiple regression so that control variables can be included (Hair, 1987). Scholes et al. (2010) use of univariate analysis and when testing also multivariate analysis have to relativize their results. There are notable exceptions in this literature review whose authors exhibit great methodological rigor such as the works of Dehlen et al. (2014) and Zellweger et al. (2011). Also, relatively new statistical approaches – such as conjoint analysis in the study of Dawson (2011) who examines trade-offs in decision-making – can be considered a promising route for future research (Lohrke et al., 2009). Future empirical research might try to validate current research findings by using robust and state-of-the-art statistical techniques.
The treatment of family firms also needs more sophistication in current work on family firms and PE. It was previously mentioned that family firms exhibit great heterogeneity, so simple dichotomous differentiations might be misleading (Tsang, 2002; Hack, 2009; Chrisman et al., 2012; Chua et al., 2012). In the prominent study of Villalonga and Amit (2006), it was shown how a change from defining family based solely on ownership rights leads to different forms of family involvement and thus changes family firm performance from being positive to negative (Hack, 2009). Therefore, it may be necessary to test various forms and configurations of family firms to appropriately differentiate between varying degrees of family influence and its consequences. If family influence is not investigated comprehensively, research might fall victim to unjustified generalizations (Melin & Nordqvist, 2007). Moderation and mediation analysis might be appropriate means to ensure more sophisticated treatment of family firm configurations in statistical analysis, but researchers also need to capture different characteristics of family influence (e.g., ownership, management) in surveys as a precondition.
Multiple respondent studies and larger sample sizes could also contribute to higher statistical reliability. Most quantitative empirical studies rely on the key informant approach (Kumar et al., 1993) and studies often either take the perspective of the buyer or seller (Niedermeyer et al., 2010; Dawson, 2011). New insights and more representativeness might be achieved if multiple respondents from both the buying and selling side are investigated simultaneously to capture a less biased perspective (Eddleston & Kellermanns, 2007). Additionally, most studies rely on comparably low sample sizes (Granata & Chirico, 2010; Dawson, 2011) compared to other fields of management research. This is likely due to the difficulty in gaining access to data, given the confidentiality that surrounds buyout deals.
The use of novel theories could inspire new research insights. Established theories such as agency theory, stewardship theory, and the resource based view (RBV) dominate works in this literature review. However, management theory is not limited to the aforementioned theories, but offers a broader spectrum of theories. More diverse theoretical approaches 166could point out interesting insights. A number of prominent theories such as upper-echelon (Hambrick & Mason, 1984), institutional theory (Meyer & Rowan, 1977; DiMaggio & Powell, 1983), commitment-trust theory (Allen & Meyer, 1990; Meyer & Allen, 1991) or insights from the field of behavioral finance (Thaler, 1993; Ackert & Deaves, 2010) might provide promising paths for future research.
(2) Research gaps within current categories. The literature review followed the different research categories that had been identified. Within the market category, there is a need to provide more recent information on the dimension and characteristics of family firm buyouts. Furthermore, it might be necessary to distinguish between different definitions of family firms that could yield different results for the market characteristics of family firm buyouts and PE activity. Additionally, it would be beneficial to have more detailed insights into the contractual terms of family deals vs. non-family deals (e.g., covenants, degree of control) and potential antecedents.
Within the information a symmetries category, it would be complementary to existing research if long-term consequences of information asymmetries for buyout deals were investigated, i.e., the consequences for financial success and deal satisfaction of the involved parties. In particular, for the buying side, it could be insightful to evaluate whether specific strategies in the due diligence process of PE firms focused on family aspects reduce information asymmetries (Puranam et al., 2006).
Research within the category PE perceptions and decision-making has not yet assessed how perceptions on family firms might lead to cognitive biases in the investment decision-making of PE firms (e.g., overconfidence) (Thaler, 1993; Kahneman et al., 1999; Ackert & Deaves, 2010). For example, PE firms might not recognize company strengths in family firms because family firms are cognitively associated with certain weaknesses. Furthermore, PE managers might refrain from investments in family firms as they try to avoid higher perceived risk due to family involvement or use certain strategies to mitigate risks. For example, PE firms might negotiate specific investment contracts (e.g., earn out) or use certain monitoring arrangements.
Within the category Family firm perceptions and decision-making, literature gaps become apparent when specific selection criteria of family sellers are concerned. While there is a strong indication that the relationship side matters to family sellers (Graebner & Eisenhardt, 2004; Poech et al., 2005; Niedermeyer et al., 2010; Tappeiner et al., 2012), the specific elements of the relationship that matter the most are yet to be fully discovered. Conjoint analysis could be a methodological instrument to investigate decision trade-offs of family owners (Dawson, 2011). Specifically, it needs to be evaluated how financial and non-financial objectives are weighted relative to each other, given that family firms have a preference for non-financial goals (Corbetta & Salvato, 2004; Chrisman et al., 2007; Gómez-Mejía et al., 2007). For example, how does a characteristic of the relationship, such as trust, have an effect on sellers’ financial objectives during the sale? Additionally, there is a need to understand whether and how negative perceptions of family sellers on PE firms might change once family sellers interact with PE firms (Poech et al., 2005).
For Bargaining power in buyout negotiations, literature has so far mostly neglected the negotiation phase of deal-making; however, this phase is considered as highly important in many transactions due to the complexity of deals and the lack of market transparency (Birley, 1984; Tyebjee & Bruno, 1984; Cumming & Johan, 2009). Multiple aspects of negotiations could be important, such as bargaining power or bargaining tactics (Kim et al., 2005), and how they affect the outcome of the firm transferring process. Moreover, attributes of the vendor such as gender (Amatucci & Swartz, 2011) are also so far understudied.
167The Value creation in family business buyouts literature needs to close the gap on whether value creation strategies for family firms need to be different and how. In particular, it could be beneficial to identify whether forms of family influence post-buyout are successful given adjacent literature claiming that family influence can be both a source of high performance and low performance (Sirmon & Hitt, 2003). Combined influence of former family business owners and PE management could create value, as complementary expertise could be combined to achieve competitive advantage. All these facets need to be investigated over longer time periods to effectively differentiate between short-term and long-term effects.
(3) Future research categories. The reviewed literature does not touch some areas that can have importance in family firm buyout deals. First, there are literature gaps regarding the increasing importance of the role of advisors and intermediaries (Strike, 2012). For example, we do not know if family sellers employ advisors to support them in deal-making (Michel & Kammerlander, 2015) and the selection of PE partners as well as how family sellers select such advisors. Second, literature gaps exist when it comes to the initiation of buyout deals. It might be particularly interesting to find out how family sellers and PE firms get into contact with each. Third, the whole planning process family firms undergo to prepare a buyout and how this affects the success of the deal could be of great research interest. Fourth, future literature might resolve contradictory issues arising from different research categories – such as the valuation of family targets (Ahlers et al., 2014) given findings related to lower valuations in the marketplace (Granata, 2010; Granata & Chirico, 2010), but higher valuations by family sellers (Zellweger & Astrachan, 2008; Zellweger et al., 2011).
Conclusions
From this literature review, some key messages can be distilled. Information asymmetries might be characteristic for buyout deals when family firms and PE firms are involved. It is also evident that two different management philosophies could “clash” when PE firms interact with family firms in buyout deals. Reciprocal perceptions might not be entirely positive, and decision-making criteria and deal objectives might place different emphases on financial and non-financial objectives. More research is needed to fill the outlined research gaps within the existing and entirely new categories. Future research might also be concerned with more quantitative empirical research and the methodological rigor needed to address the complexity of buyout deals as well as the breadth and diversity among family firms. More diverse theories should be able to stimulate new insights.
Notes
1 The keywords are: acquisition, business transfer, business exit, buyout, divestment, divesture, emotional value, financial investor, LBO, MBI, MBO, private equity, and takeover.
2 The keywords are: family business, family firm, family ownership, privately-owned business.
3 Poutziouris subsumes under venture capital what is usually referred to as PE/buyout investments.
4 Scholes et al. (2009) have defined family firms as where a single family group has >50% ownership of a firm.
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