MANAGEMENT BUYOUTS OF PRIVATELY HELD FAMILY FIRMS: IMPLICATIONS FOR SUBSEQUENT FIRM PERFORMANCE
Carole
Howorth, UNIEI, Nottingham University Business School
Paul Westhead, UNIEI, Nottingham University Business School
Management buyouts (and buyins) are an alternative solution to the family firm succession issue. It is typically assumed that they progress more smoothly than other types of buyout or buyin, due to fewer information asymmetries and closer relationships. Novel evidence is provided from eight case studies exploring the myths surrounding the management buyout (MBO) or management buyin (MBI) of family firms. The MBO/I process is examined within an agency theory framework and utilizes complementary theoretical frameworks relating to trust and negotiation behavior. Interviews were held with former family owners as well as current members of MBO/I teams. Evidence is provided of widespread information asymmetries allowing one party to structure the deal to their advantage and influencing subsequent performance of the firm. Trust and relationships were important influences on the level of satisfaction with the outcome of the deal and performance post MBO/I. They were crucial in enabling the transfer of tacit knowledge, constraints on which had a detrimental effect on firm performance.
A dominant theme of research on family firms is the succession issue where it is assumed that intergenerational succession will be preferred. However, recent research has shown a number of family firms choosing alternatives to intergenerational succession but these have not been explored in any detail (Birley and Westhead, 1990). Many entrepreneurs consider management buyouts (MBO) and buyins (MBI) to be “a good way to solve the succession problem” (Bygrave and Muzyka, 1994) and they are an increasingly popular exit route. The major advantage of MBO/Is is that they provide the entrepreneur with funds for new ventures or their retirement whilst maintaining continued independent ownership of the firm. There is a greater possibility that the firm’s identity and ethos will remain the same, both of which are important objectives for family firm owners. A further attractive feature is that the majority of the management team may remain intact after MBO (Wright and Coyne, 1985). An additional advantage of a MBO/I is that members of the family can continue to be involved in the firm: vendors can maintain a minority equity stake and younger family members can be part of the MBO/I team. Where vendors maintain some involvement in the firm, a period of mutual role adjustment and knowledge transfer assists in easing the firm through the transition (Handler, 1994). MBOs of privately held firms continue to represent the majority of management buyouts. However, very little research considers MBO/Is of privately held firms. The objective of this research is to explore the influences on post MBO/I performance of family firms, specifically examining the way in which the MBO/I process affects outcomes following the deal. The study addresses gaps in our knowledge of family firms and MBO/Is. We identify several testable propositions that relate agency theory, trust theory and negotiation behavior to the following three broad research questions:
R1: What impact do information asymmetries have on the ownership transfer process when a MBO or MBI team acquires a private family firm?
R2: Which aspects of the ownership transfer process impact on satisfaction with the outcome for the vendor and MBO or MBI team?
R3: Which aspects of the ownership transfer process impact on the knowledge transfer between former family owners and the MBO or MBI team?
In the following section, agency, trust and negotiation theories are presented as a guide to the research. This is followed by a discussion of the case study methodology employed in this study. Analysis of the cases leads to the identification of testable propositions. The discussion section presents a conceptual framework relating to the family firm MBO/I exit route. In the final section, conclusions, directions for future research and implications for family firm owners and their advisers who might be considering alternatives to family succession are presented.
An agency theory perspective suggests that in a typical non-family firm prior to an MBO/I, separation of the ownership and management systems leads to an asymmetry of information, with management usually being more knowledgeable about the firm than owners. In family firms, there is often no separation of ownership and control prior to the MBO/I and the traditional agency cost issue may not apply. Information flow problems may be less prevalent in private family firms because there are fewer opportunities for information asymmetries between vendors and purchasers. Family firms may also have closer relationships and higher levels of trust between the different parties which might be expected to smooth the MBO process. Flows of information between owners of family firms and MBO/I teams can, however, be affected by the complex intertwining of family, ownership and management systems. Each individual may belong to one, two or all of the family, ownership or management systems. Many family firms are highly dependent on the intrinsic, tacit knowledge of key individuals, especially family members who may have been involved in the firm for many years (Westhead et al., 2001). This knowledge may be a family firm’s most valuable resource but since it is difficult to codify, transferring it to individuals who inherit or acquire the firm may be a lengthy process. There may, therefore, be informational asymmetry problems between family owner-managers and managers who form the MBO team. This can be accentuated where family owner-managers fail to prepare anyone to succeed them. Similarly, members of a potential MBO team may be informationally disadvantaged where succession is initially planned to involve particular family members with whom information is shared. In these cases, an ‘inside’ management team may, in practice, have no more information surrounding the firm than an ‘outside’ management team seeking a MBI, where information asymmetry problems are typically extreme. Information asymmetries may impact on the valuation procedure and the price paid. Where family firm owners have an informational advantage, the price may be high and vice versa. The true fairness of the price may only become apparent after the deal has been completed. A high price may be a drain on cash flow through servicing external finance and hence have a detrimental impact on firm performance. The perception of fairness is closely associated with the level of trust between the individuals involved in the process (Sapienza and Korsgaard, 1996). Individuals may react more favourably when they feel the process is fair, which is more likely where they are actively involved and information flows freely. Individuals are more likely to question fairness if they perceive the outcome of the process to be inequitable (Folger and Cropanzano, 1998). Effective transfer of tacit knowledge and firm valuation may therefore require a good quality relationship characterized by trust, feedback, mutual learning and friendship. However, during an MBO/I, disagreements over the structure of the deal, the value of the firm and the match between expectations pre- and post-deal may jeopardize relationships between family firm owners and the MBO team. It is important, therefore, to consider theory underpinning our understanding of trust.
Successful family firm ownership transitions are more likely with high levels of trust and where participants believe in a ‘shared dream’ (Lansberg, 1999). Similarly, high levels of trust between owners of family firms and potential MBO/I teams could be expected to be associated with lower levels of information asymmetry. Trust may be important in family firms where tacit knowledge is not widely shared or understood and a high level of trust is placed in the principal owners’ knowledge and capabilities (Davis and Harveston, 1998). Trust is increased with information sharing and where individuals identify with each other and share common goals (Lewicki and Bunker, 1996). The level of trust between owners of the family firm and members of the management team may be lower during the unfamiliar MBO/I process than in normal circumstances. Those involved in the MBO/I of a family firm are unlikely to have done so before.1 The purchase of the firm may also be a high risk for the MBO/I team. Patriarchal family firm owners may also have doubts about the competence of managers, thus reducing the level of trust (Harrison et al., 1997). Trust is also more likely to break down where it is based on dependence (Lewicki and Bunker, 1996).
The relationship between the family firm vendor and the MBO team influences the type of negotiation behavior adopted during the deal process. Family and non-family members who have close relationships and a commitment to the long term future of the firm are expected to work together towards a win-win solution. However, where individuals adopt a short term perspective and aim to maximize individual gains, negotiations will be less co-operative and more opportunistic (Day and Klein, 1987). Dabholkar et al., (1994) identify four categories of negotiation behavior. ‘Competitive’ behavior occurs where both vendors and purchasers are most interested in maximizing their own position and take a short term perspective on their relationship. The MBO/I family firm succession process is expected to be associated with competitive negotiation behavior if there are high levels of information asymmetry between vendors and purchasers. Family firm vendors with a patriarchal leadership style may exhibit ‘command’ behavior, in which they maximize individual gain, while being committed to the future of the firm. The other two categories of negotiation behavior focus on maximizing the gains for both parties and are associated with low information asymmetries. ‘Coordinative’ behavior focuses on joint gain where long term relationships are important. This type of behavior is expected in MBOs of family firms because there is a commitment to the long term future of the firm, and the relationship between the two parties is perceived to be more important than individual gains. It is less likely in an MBI because of the lower level of commitment to each other or the firm. ‘Cooperative’ behavior occurs where there is a short term focus on joint gain, and may occur in MBIs where there is no relationship between the parties either pre or post deal, but they aim to co-operate to secure the best deal for the vendor as well as the purchaser.
A qualitative case study methodology was utilized. Prior to the interviews, theoretical constructs were identified ex ante from the literature reviewed above. Dyadic case studies were used in a structured reiterative approach. Information was gathered from eight private family firms that had gone to MBO/I. Analysis of the information from the case studies allowed the refinement of existing theoretical constructs in contrasting contexts, extending theory relating to information exchange, trust and negotiation behavior in a variety of MBO/I contexts. Based upon this information a conceptual framework relating to the family firm MBO/I exit route was developed. The eight cases were selected from respondents to a representative sample of MBO/Is of privately held firms. A postal questionnaire was administered in 1999 to all buyouts completed in 1998 held on the Centre for Management Buyout Research database. The database effectively comprises the population of UK buyouts and buyins (CMBOR, 1999). The first requirement for selection was the family firm definition (Westhead and Cowling, 1998) (i.e., more than 50% of shares owned by a single family group related by blood or marriage and the business was perceived to be a family business prior to the MBO). Theoretical sampling was employed to select cases with different ownership, management and family structures. Survey responses enabled us to ascertain the percentage of family ownership pre and post MBO/I; whether the firm was first or multi-generation; how many family members were involved in the management of the firm pre and post MBO/I and the age of the business. Cases were selected for interview with the aim of including differing mixes of attributes encompassing first and multi-generation family firms, MBOs and MBIs, and varying degrees of family involvement in management and ownership. The characteristics of the cases at the time of the MBO/I in terms of industry, business age, sales turnover, employment size, ownership form, generation of family ownership, age of the principal vendor, percentage of equity owned by the family, number of family managers and purchased through a MBO or MBI are summarized in Table 1. Multiple sources of evidence were utilized enabling data to be cross-checked, thus improving consistency and reliability. Responses to the 1999 survey provided information on the firm, the deal, reasons for the MBO/I and structure and strategy of the firm. Face to face interviews (1–2 hours) in 2000/1 gathered information relating to antecedents to the MBO/I decision, motivations of family firm owners and MBO/I teams, the deal process and performance of the firm following the MBO/I. A major strength of this study is that in 50% of cases interviews were held, separately, with members of both parties (i.e. previous family owners as well as members of the MBO/I team). The use of multiple respondents increases the validity of conclusions and allows the exploration of the previous and continuing relationship between current and former owners, including comparative levels of involvement and knowledge of the firm and its operations. Each case is given a fictitious name, to preserve confidentiality.
This section first examines reasons for the MBO/I in order to provide a context for each case. Within each section of analysis propositions are derived from the case study evidence and previous studies.
In the majority of cases, the incumbent principal family firm owner indicated that there was no suitable family successor prior to the MBO/I. In some cases, a successor had been identified but they lacked interest or had insufficient current ability to manage the business (e.g., LOCKS, PIPES and PLANTS). The owner of TROLLEYS viewed the MBO as a transitional stage in the firm’s family succession. Family members had management positions in the family firm but he believed that they did not have enough experience. When he was forced to retire through illness, his son and daughter with the company’s management accountant (who had a minority stake in the firm) formed the MBO team. The inability to identify a successor was not the only reason leading to the selected MBO/I exit routes. Family owners of FILMPACKS and DISPENSERS never considered transferring ownership to family. The MBO of FILMPACKS followed a severe breakdown in the relationship between family owners and the management team. As “a last ditch effort” to save the firm, the family owner asked the management team to put forward a MBO deal. In contrast, the second generation owners of DISPENSERS sought to realize their investment through a trade sale or MBO. The brothers who owned DISPENSERS recruited an outside managing director who joined the firm with the intention of leading a MBO.
The balance of information and completeness of information flows varied considerably between cases. LOCKS exhibited complete information flow between family firm owners and the MBO team with up to ten years planning prior to the MBO. There was a high level of involvement and good relationships between both parties and continuing interest in the business from the former family owner which facilitated knowledge transfer. The BOXES and DISPENSERS cases also exhibit the benefits associated with an extended period of mutual role adjustment. In BOXES this occurred in an informal, ad-hoc manner, whereas in DISPENSERS the knowledge transfer was formalized and explicit. FILMPACKS is more like a typical public or divestment MBO where owners are distanced from the day to day running of the firm, and less knowledgeable about its operations. Knowledge transfer was therefore not an issue and, as discussed earlier, the MBO team dominated negotiations. DUMPS and PIPES were typical MBIs with high levels of information asymmetry between the vendors and the purchasers. Both firms were highly dependent on the tacit knowledge of former family owners. Similarly, information asymmetry was evident during the MBO of PLANTS. Prior to the MBO, the firm employed 300 people, but it was still a “one man band” in the way it relied on the founder. There may be information asymmetry in terms of knowledge of the MBO process. In the DISPENSERS case, at the time of the MBO, both parties had approximately equal knowledge of the firm but the new managing director had more knowledge of the MBO process giving him a control advantage. Conversely, the former principal owner of TROLLEYS was very knowledgeable about the commercial activities of the firm, but suffered a severe information asymmetry during the MBO deal process, because he had minimal involvement in structuring the deal due to illness and allowed the purchasing team to control the process. This is also relevant to analysis (below) of negotiation behavior.
This discussion suggests the following propositions:
P1a: Information asymmetries between private family firm owners and the MBO team will be reduced if both parties plan over a reasonable period of time for a MBO.
P1b: Informational asymmetry problems are less prevalent in MBOs rather than MBIs of private family firms.
P1c: Informational asymmetries between private family firm owners and the MBO team will be reduced if both parties are equally involved in the firm and equally involved in the MBO process.
The two main actors in the LOCKS case identified strongly with each other and their trust was maintained during and after the MBO. Trust, however, did not appear to mitigate information asymmetries. We failed to detect any evidence that where there were high levels of trust either vendors or buyers required less information. Instead, there was more sharing of information with high level trust. As intimated above, other cases were associated with little preparation for MBO, high levels of information asymmetry between vendors and purchasers as well as poor relationships and low levels of trust. In both PLANTS and TROLLEYS dependence based trust broke down during the MBO negotiations. As expected, there is a less strong relationship between vendors and purchasers in the two MBIs. There were also low levels of trust in the MBIs and in both cases the relationship between vendor and purchasing team broke down soon after the MBI.
This discussion suggests the following propositions:
P2a: Information asymmetries between private family firm owners and the MBO team will be reduced if both parties have good relationships prior to the MBO (i.e., high levels of trust, mutual understanding and friendship between the participants).
P2b: The MBO/I negotiation process will break down if either the private family firm owners or the MBO/I teams exhibit high levels of dependence based trust on one another.
P2c: Trust and good relationships are more likely to be exhibited and maintained during the MBO (i.e., family owners and the MBO team identify strongly with each other) rather than the MBI of a private family firm.
Only one case (LOCKS), exhibited co-ordinative behavior based on long term and joint gains perspectives. The BOXES case exhibited amicable but command negotiation behavior by the former owner. Members of the MBO team reported “That’s the way he used to work, . . . he used to just decide.” The owner identified a ‘fair price’ for the firm and he presented his directors with an ultimatum: “I’m determined to sell out and go and if you’re not going to do it somebody else is. . . . The price is not something I’m going to haggle on. If you want it, you buy it at that price.” Nevertheless, the owner was concerned about the long term viability of the firm and its current managers and other employees. The MBO team reported a comparable emotional commitment to the long term future of the firm, “We think that’s important, the continuity.” The DISPENSERS case exhibits command negotiation behavior by the MBO team rather than the former family firm owner. The managing director dominated proceedings and structured the deal to “get what he wanted.” Command negotiation behavior by the MBO team was also exhibited in the FILMPACKS case. A MBO exit route was sought after a severe breakdown in relationships between the family firm owner and the management team. In this case, the family firm owner was competitive in negotiating a price. The PIPES and DUMPS cases both exhibit competitive negotiation behavior. Both parties focused on individual short term gains. The family firm owners of DUMPS started out by trying to adopt a command strategy with concern over the long term future of the firm and expected an involvement following MBI. Disagreements over the price of the firm led to a breakdown in the weak relationship with the MBI team and the former owners refused to be involved after the MBI. The principal family owner of PLANTS and the MBO team also exhibited competitive behavior. Prior to the MBO, the eldest son of the principal owner indicated he was not interested in taking over the business, and he left the firm. The principal owner indicated his desire to sell the family firm and the youngest son led the MBO team. Everyone focused upon individual gains, hostile behavior was evident; father and son have not spoken since the MBO deal was completed and the father has not been near the firm since. In response to the illness of the principal owner of TROLLEYS, the firm’s management accountant dominated negotiations and led the MBO. He asserted that he had been sympathetic to the illness of the owner, but he wanted the solution that was best for everyone. This response appears to typify co-ordinative negotiation behavior. The former principal family firm owner, however, suggests that the management accountant was more interested in maximizing his own personal gain and, in fact, took a very strong command role.
In summary, only one of the eight cases exhibited the expected co-ordinative behavior on both sides of the family MBO/I negotiations. In four cases, one individual adopted a command style of behavior and the others tended to concur. However, it was not always the family owner who was in command, which might have been expected in a stereotypical patriarchal family firm. In the other three cases, negotiations were competitive, with the emphasis on individual gains and a short term perspective. This included both MBIs (i.e., PIPES and DUMPS) and PLANTS where there had been a total breakdown in relationships. There is, therefore, little evidence to suggest that private family firm MBOs are generally associated with co-ordinative negotiation behavior reported by family firm owners and the MBO teams. Where negotiations had been competitive, the former family firm owner was not involved in the firm following the MBO/I.
This discussion suggests the following propositions:
P3a: Co-ordinative forms of negotiation behavior between family firm owner(s) and MBO teams is expected if they are both committed to the future of the firm and they consider joint, as opposed to individual, gains.
P3b: Family firm owners are not likely to be involved in the firm after the MBO/I if the MBO/I negotiation behavior had been competitive.
P3c: Family firm owners are more likely to be employed in the firm after the MBO/I if the MBO/I negotiation behavior had been co-ordinative.
In cases with low levels of information asymmetry between vendors and purchasers (e.g., LOCKS, BOXES and DISPENSERS) both family firm owners and MBO/I teams generally agreed the price paid had been fair. Where information asymmetries provided one side with an advantage that party was highly satisfied with the price paid, but the other party was highly dissatisfied (e.g., FILMPACKS). Competitive deal negotiation behavior was generally associated with win-lose situations and low levels of trust or complete breakdowns of trust between the vendors and the purchasers. Breakdowns in information flows and trust between the vendors and purchasers, particularly during competitive MBO/I deal negotiations, in part, retarded the performance of some firms after the deal had been completed. For example, the former family firm owner of PLANTS reported he sold the business at its peak value. Following the MBO, the performance of the firm failed to live up to previous expectations and, in response, the venture capital firm funding the MBO requested that the managing director be replaced. In this case, it would appear that the vendor acted opportunistically even though a member of the MBO team was family. The TROLLEYS case highlighted relationships between vendor and purchaser can break down after completion of the MBO. After the deal, it became apparent that the managing director in the MBO team had actually sought a ‘win situation’ to maximize his personal gain. The former family firm owner and the current managing director of the MBO team have conflicting views about the outcomes of the deal process. The former family firm owner believes he was ‘ripped off’ as the price had been deeply discounted in the expectation that his children would be the major shareholders in the business after the MBO. High levels of information asymmetry and lack of trust between family firm owners and MBI teams impacted on the MBI deals. For example, at the post-completion audit for DUMPS, £0.5 million was deducted from the price paid for the firm. Not surprisingly, the vendor fell out with the MBI team. The performance of the firm after the MBI has been worse than expected. The most profitable contracts team within the firm left DUMPS soon after the buyin to join one of the company’s agents. In addition, some of the firm’s clients placed their contracts with individuals that left the firm. Even allowing for the reduction in price, members of the MBI team believe that the price paid for the firm was too high and in particular, a one-off contract is believed to have boosted earnings immediately prior to the MBI. Informational asymmetries suggest that at the time of the deal the MBI managers were not aware of these issues. The PIPES business was similarly dependent on the contacts, knowledge and relationships of the former family firm owner. After the MBI, the business experienced declining profit margins which the MBI team attribute to, inter alia, a lack of knowledge of where price increases will be tolerated; lack of legitimacy to negotiate lower prices with suppliers; and inability to deal with the problem of late payment by customers they have not previously dealt with. The employment of family firm owners in businesses after the MBO was more likely when the vendors and MBO teams had good relationships, high levels of trust, good information flows, co-ordinative behavior; and they both perceived the price to be fair.
This discussion suggests the following propositions:
P4a: Vendors and purchasers are more likely to consider that the price paid for the private family firm was fair if there was low information asymmetry during the MBO/I process.
P4b: Vendors and purchasers are more likely to consider that the price paid for the private family firm was fair if there were high levels of trust between both parties.
P4c: Vendors and purchasers are more likely to consider that the price paid for the private family firm was fair if co-operative negotiation behavior had been exhibited by both parties.
P4d: Vendors and purchasers are more likely to perceive after the deal has been completed that a fair price had been paid for the private family firm if they were actively involved in the MBO/I.
P5a: Continued involvement by former family firm owners in businesses after the MBO/I is unlikely if high information asymmetries were exhibited by vendors and / or purchasers during the MBO/I of the private family firm.
P5b: Continued involvement by former family firm owners in businesses after the MBO/I is unlikely if low levels of trust were exhibited by vendors and / or purchasers during the MBO/I of the private family firm.
P5c: Continued involvement by former family firm owners in businesses after the MBO/I is unlikely if competitive negotiation behavior exhibited during the MBO/I of the private family firm.
P6: Continued involvement by former family firm owners in businesses after the MBO/I is unlikely if the vendors or the purchasers perceived that the price paid for the private family firm was unfair.
DISCUSSION: A CONCEPTUAL FRAMEWORK
This paper set out to examine three broad research questions relating to the information asymmetries surrounding MBO/Is of family owned firms. In respect of the first research question, considerable information asymmetries may exist. These may be reduced if both parties plan over a reasonable time for a MBO and may be less prevalent in MBOs than MBIs. In addition, from a trust point of view, informational asymmetries may be reduced if both parties have good relationships prior to the MBO. With regard to the second research question, satisfaction with the outcomes will be positively related to low information asymmetries, high levels of trust, good relationships and co-ordinative forms of negotiation behavior. In examining the third research question, knowledge transfer and continuing involvement are influenced by the level of information asymmetries and trust between vendors and purchasers, and the form of negotiation behavior adopted during the ownership transfer process. Continued involvement is also influenced by the perceived fairness of the deal outcomes. A clearer illustration of the relationships between influences on the ownership transfer process and the direction of causality is provided in the post-analysis conceptual framework (Figure1). The structure of family, ownership and management systems within the firm prior to MBO/I fundamentally affects the type and level of involvement which key individuals have in the firm and with each other. This in turn will influence the balance of information between individuals and the trust and relationship between them. Figure 1 also highlights the interdependence of information sharing with trust and the relationship. These in turn influence the negotiation behavior adopted through the ownership transfer process, which affects deal outcomes and subsequent satisfaction with outcomes and continuing involvement in the firm. Satisfaction with the outcome on both sides (i.e., a win-win situation) may depend on the nature of the negotiating behavior. Satisfaction may be greatest either where co-ordinating behaviors exist (i.e., LOCKS), or where one side adopts command behavior and the other side co-operates (i.e., BOXES and DISPENSERS). However, where command behavior is adopted but negotiations break down, one side is likely to be dissatisfied with the outcome (i.e., FILMPACKS and TROLLEYS). When command behavior is adopted, satisfaction with the outcome appears to depend on the relationship and trust between the MBO team and vendor. Lack of satisfaction with the outcome for both parties (i.e., a win-lose situation) seems more likely where negotiating behavior is competitive with low levels of trust. Winners tended to have greater knowledge of the firm and its prospects and/or knowledge and experience of the MBO/I process.
Evidence from the eight selected cases indicates that the family firm MBO/I process does not always run smoothly. Knowledge of the firm and the level and type of involvement pre- and post-deal are found to be crucial in determining whether a party considered the deal to have been successful and / or the price fair. Parties with greater involvement in the firm prior to the deal, take the opportunity to use information asymmetries to their own advantage. There was no evidence that high levels of trust or good relationships between vendors and purchasers mitigated information asymmetries. However, information flowed more freely under these circumstances. The role of trust is clearly an important aspect of the family MBO process.
Family firm owners should note that there may be marked differences in their level of involvement in the firm following the deal. Where the deal process had been co-operative throughout, previous owners tended to have a continuing role within the firm and vice versa. Where negotiations had been competitive, the former family firm owner was not involved in the firm following the MBO/I. Firms where previous owners did not have any involvement tended to have an increased number of problems and worse performance following the MBO/I. Presented evidence suggests that MBO/Is can be a viable alternative to family succession. However, the success (and perceived fairness) of the deal hinges on good relationships and equal information between vendors and purchasers. In the best cases, relationships between the parties remained close and, following the MBO, former family owners were able to take an ambassadorial role, and the firm maintained its culture and identity.
The highlighting of the problems in negotiating family firm MBO/Is has implications for advisers to MBO/Is who may consider that this source of deal is more straightforward than divestment and public to private cases involving auction processes. Advisers need to be aware that different negotiating skills may be required according to the source of deal. Appreciation of the informational asymmetries involved in negotiating divestment MBOs may be transferable to family firm cases, but perhaps greater efforts need to be made in identifying the nature of the informational asymmetries in the latter. The cases highlighted some of the potential pitfalls, which should be brought to the attention of family firms considering the possibility of a MBO/I. Current and potential owners need to be aware of the importance of having full, accurate information on the firm and the MBO/I process. The cases showed that this was most at risk where decisions were made under pressure. Potential owners should beware of allowing loyalty and commitment to the family firm or its owners to cloud their judgement.
Future studies should test to what extent the behaviors observed in the presented cases can be generalized to the population of family firm MBO/Is. A wider representative sample should be employed to test the presented propositions. Longitudinal case studies would provide additional insights into how decisions are made, where attitudes and relationships change and the factors that influence them. Examination of individual cases throughout the deal process would reveal detailed information on negotiation behavior, the development or breakdown of relationships and trust, and satisfaction with outcomes. Although this paper has focused on the transfer of family firm ownership to MBO/Is, future studies might explore these issues theoretically and empirically in a comparative context. First, there is a need to compare the issues examined here with those that may arise in negotiating the sale of a family owned firm to a strategic purchaser. Second, there is a need to compare these issues involving MBO/Is of family firms with those relating to other sources of buyouts such as divestments, public to privates, public sector privatizations and receiverships / bankruptcies.
1. Despite a recent increase, secondary management buyouts and buyins still account for a small minority of this form of transaction in the UK (CMBOR, 2001).
CONTACT: Carole Howorth, UNIEI, Nottingham University Business School, Jubilee Campus, Wollaton Road, Nottingham, NG8 1BB, UK; (T) +44 115 951 5266; carole.howorth@nottingham.ac.uk
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