Chapter 9: The Life Cycle of Small Business, Part 2: Succession

In a previous chapter, we discussed the founding of small businesses, but now we turn to a later stage in the life cycle. The typical small business relies on a single individual for the entrepreneurial input — management and initiative — or at most on a compact group. The entrepreneur will often be the proprietor or owner of a significant proportion of the firm. A key manager may also be an important owner. In a family business, the chief or key manager is likely to be a family member. What happens when the chief or a key manager does not continue — due to retirement, ill health or death? This is the succession problem, and it has two aspects. First, a retiring proprietor, or his heirs, will often want to take their capital out of the business: as a retirement fund, for example. This may create a problem in that the transition to new ownership will have to be financed. If small businesses have limited access to capital, this may present a particular obstacle. Second, it will be necessary to choose a new chief manager. If the business is a family business, the new chief may be chosen from among the departing chief’s relatives. Even if the business has not been run as a family business, the heirs of the proprietor will have a particular interest in the choice of the new chief manager. In fact, it is common the world around for the chief manager of a family-owned firm to be a member of the owner family. But why so? Wouldn’t the owners be better off to appoint the best manager available, regardless whether she is a family member or not? If not, why not? Those topics will be taken in reverse order.