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Family Business Review
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DOI: 10.1111/j.1741-6248.1999.00171.x
1999 12: 171 Family Business Review
Rik Donckels and Johan Lambrecht
Family Business Research in the Western World?
The Re-emergence of Family-Based Enterprises in East Central Europe: What Can Be Learned from

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Introduction
In this paper, we concentrate on the specific char-
acteristics of family businesses as they have been
identified in research projects in the Western
world. To do so, we try to give an adequate an-
swer to four questions: Is there a specific type of
behavior in family businesses? Are there specific
barriers to professionalization in family busi-
nesses? How can the specific barriers be ex-
plained? And finally, can we make concrete sug-
gestions for family businesses?
It is our firm conviction that the answers to
these questions can be very instructive to people
involved in family businesses in east central Eu-
rope. The answers can provide owners with some
tools that can help in the re-emergence of family
businesses. This is extremely important, since the
development of the owner-managed organization
can be a major key to successfully negotiating the
transition in east central Europe (Gibb, 1993).
In addition, it is likely that most of the emerging
small- to medium-sized enterprises (SMEs) in
The Re-emergence of Family-Based
Enterprises in East Central Europe:
What Can Be Learned from Family
Business Research in the Western World?
Rik Donckels, Johan Lambrecht
We examine to what extent lessons can be drawn from the experiences of family businesses in the
Western world toward the re-emerging entrepreneurship in east central Europe. We conclude that
often, as it does in the West, the family forms the basis for the creation of new business initiatives in
this region. It is evident that research concerning family businesses in the West can lead to particu-
larly relevant insights. The three characteristics that almost always affect every family business
constitute the cornerstone for the future success.
east central Europe will begin to share the be-
havior characteristics of owner-managed firms in
the West.
Where appropriate and possible, we refer to
research results in east central Europe. However,
it should be kept in mind, as Todorov and Kolarov
(1995) state, that the number of studies from east
central Europe is still small. In addition, the num-
ber of securely founded family businesses with
long-term aspirations is, for obvious reasons,
rather limited (Romn, 1997).
Is There a Specific Type of
Behavior in Family Businesses?
Economies in east central Europe are essentially
growth-oriented, and family businesses continue
to increase their role within these economies
(Pistrui, Welsch, & Roberts, 1995).
In Romania, for example, entrepreneurs ap-
pear to have definite, well-defined expansion
plans for the future (Pistrui, Welsch, & Roberts,
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172
1997). In Poland, Zapalska (1997) finds that 60%
of the growing firms are in the commercializa-
tion growth stage. This means that although
these are growth firms with the capability of pro-
ducing and selling, they are still in the process of
establishing their positions in the marketplace.
Therefore, we concentrate first on the growth
issue in family businesses and then look at some
other crucial management functions. Finally, we
formulate some general remarks on succession
in family businesses. Succession will certainly
begin to be a hot issue in the future for family
businesses in east central Europe.
Growth
Coping with Growth. Donckels and Hoebeke
(1992) study both growth and its consequences
in an inquiry conducted among 1,030 managing
directors of Belgian businesses with less than 100
employees. It is evident that the growth of an
enterprise can be measured in various ways. The
Donckels and Hoebeke research shows that 85%
of the respondents automatically associated
growth with sales turnover. Therefore, this is the
concept of growth that we use for the rest of this
section. We measure the size of the enterprises
on the basis of the number of employees.
Does Growth Really Matter? No less than
89% of the respondents believe that growth is a
crucial objective for their business.
However, Table 1 shows that both the experi-
ence and the expectations of growth are clearly
correlated to the size of the enterprise: The non-
growers are significantly more concentrated in
the class of the smallest companies.
This finding contradicts the so-called Law of
Gibrat, according to which growth is a purely
stochastic process (Gibrat, 1931; Hay & Morris,
1991).
However, we have discovered that the phe-
nomenon of growth has been linked to more fac-
tors than just size. From Table 2, we learn that
whether or not the business is owned by a family
also makes a difference, since family-owned busi-
nesses are slightly less growth-oriented.
Table 3 shows that one of the main reasons
for growth may be that most family businesses
insist on keeping their family character: They
want ownership and management to stay within
the family.
Is this phenomenon typical for Belgium? Cer-
tainly not. Various recent studies in other coun-
tries have come to similar conclusions. We refer
to the results of a study by Dunn and Hughes
(1995) performed in Scotland and Northern Ire-
land. These results are summarized in Table 4.
In a study on Italian family businesses,
Corbetta (1995) states that:
Entrepreneur-owners also seem to fear the
changes imposed by listing; among these fears
are less freedom in the management of the firm
and of corporate setups, and the modification of
the roles and functions of the governing bodies.
Fears also originate from a still insufficient mana-
gerial culture among the entrepreneurs; the wide-
spread conception of the enterprise as a personal
possession not to be shared with others; and a
communication gap that the external operators
in charge of promoting policies of opening up
the shareholders equity still have not been able
to bridge. These fears are deeply rooted in Italys
Table 1: Growth and Size of the Enterprise (N = 1, 030)
Number of employees (row %)
1 - 9 10 - 49 50 - 99
Effective growth in the last three years Yes 31.7 41.6 27.3
No 42.6 34.7 22.7
Expected growth in the next three years Yes 31.2 40.3 28.5
No 41.8 39.0 19.2
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culture, and will change only with a slow learn-
ing process that must benefit from positive ex-
periences of collaboration between family and
nonfamily partners that have favored the devel-
opment and growth of the firm.
A particularly interesting study by Gallo
(1995) of large-scale family businesses in Spain
addresses the problems of growth. Gallo sum-
marizes the main causes of growth-connected dif-
ficulties as reluctance to take major economic
risks; a prejudice against association with third
parties in ownership; difficulties in incorporat-
ing new directors; problems with organizational
changes; and financial pressures.
To safeguard the businesses chances of sur-
vival and to maintain their dynamism, Gallo
(1995) formulates two suggestions: Develop the
businesses ability to adapt to changes in the en-
Table 2: Growth and Family Ownership (Relative Frequencies) (N = 1,030)
Family-owned Non-family-owned
businesses businesses
Effective growth in the last three years 74 79
Expected growth in the next three years 71 81
Table 3: Growing SMEs and the Preservation of Family Character
(Relative Frequencies) (N = 100, belonging to the sample of 1,030)
Retain ownership
Yes No Total
Retain management Yes 65 0 65
No 15 20 35
Total 80 20 100
Table 4: Controlling the Family Firm: Preferences and Practices
Scotland (%) Northern Ireland (%)
Yes No Yes No
Ownership
Would consider equity finance 40 60 47 53
Family open to discussion of non-family shareholding 55 45 66 34
Wish ownership to remain entirely in family 73 27 62 38
Foresee family relinquishing control in near future 29 71 41 59
Management
Senior management drawn from family-owning firm 89 11 68 32
Employment for family members a main objective 30 70 15 85
Wish to see family retain present level of
management responsibility 82 18 72 28
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vironment and increase the level of reliability for
all interested parties, such as shareholders, di-
rectors, employees, clients, and suppliers.
According to Gallo (1995), families can imple-
ment this second suggestion by maintaining a
clear economic rationale, which will enable them
to face the pitfalls that frequently appear, such as
confusing ownership with management ability,
or postponing succession; by being sufficiently
prepared, in advance, for succession, and dedi-
cating the necessary resources for generational
changes; by clearly stating the rules governing
the relationship between the business and the
family (and Gallo notes that these rules, rather
than hindering the necessary adaptation of the
business, should promote it by conserving the
strength of each family member); and by report-
ing their actions in a complete, prudent and truth-
ful manner, demonstrating their intention and
capacity to accurately comply with the previous
points
The findings of the cited studies, which come
from several Western European countries, are
highly relevant for the future of the family busi-
nesses in east central Europe. For example, re-
search in Romania shows that 94% of the 400
enterprises surveyed had at least one family mem-
ber as an investor in the business, and 9% had at
least one family member working full-time in the
enterprise (Pistrui, Welsch, & Roberts, 1995).
Studies performed in Poland indicate the extraor-
dinary significance of using the founders own
funds (77.4%) and those of family and friends
(20.3%) for the establishment and early devel-
opment of private businesses (Arendarski,
Mroczkowski, & Sood, 1994). Research also finds
that undercapitalization is the most critical prob-
lem that affects the growth prospects of owner-
managers.
As Erutku and Valle (1997) state, most en-
trepreneurs draw on their immediate families as
a source of cheap capital and labor. Todorov and
Kolarov (1995) observe that in Bulgaria, only a
very small number of owners of an enterprise are
willing to share in the duties and responsibilities
of management.
Crucial Management Functions
Let us return to Belgium. Using four databases
comprising 4,000 respondents, we compared
family and non-family businesses (we define a
family business as one in which the majority of
the shares are in the hands of one family, and in
which the general management of the business
also belongs to the same family). The statistically
significant differences are summarized in
Donckels and Aerts (1993):
Strategic Behavior. Family businesses differ
from non-family businesses in having less clear
answers to the question of where the business
should be heading in the next three years, and
less often have anything written down on this
subject. Family businesses are less willing to take
serious business/economic risks. They believe
that growth is a less important objective, although
this does not prevent them being well aware of
the negative consequences of remaining small.
They are less active internationally (for instance,
this is expressed by the fact that the share of ex-
ports in their total turnover is significantly
smaller) and follow a more traditional market
approach.
Personnel Affairs. The typical description of
family businesses indicates there is a greater sta-
bility factor in the field of employment. As a rule,
family enterprises are not forerunners when it
comes to creating employment, but neither do
they lay off easily. This fact is probably connected
to the usually very strong personal ties family
businesses have with their employees. In family
businesses the managing director takes a larger
personal involvement but makes less use of es-
tablished procedures and rules (selection crite-
ria, remuneration systems, career planning). Del-
egation is clearly more difficult in family busi-
nesses, and consequently the employees have
fewer opportunities to be genuinely involved at
management level.
Financial Policies and Financing. A very deli-
cate subject, which also gives rise to two typical
characteristics of family businesses: In family
businesses, the heads of SMEs are far more per-
sonally involved with the finances than those in
non-family businesses (because its about their
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own money, of course!). Second, family busi-
nesses strongly prefer external financing to the
inclusion of non-family shareholders.
View of the Outside World. There are also
typical differences. For example, doing business
with large enterprises is much more difficult for
family businesses than for non-family SMEs. The
heads of family SMEs play a much more impor-
tant role personally in contacts with the custom-
ers and pay less attention to training, advice, and
gathering information from outside sources. In
family SMEs, institutionalized social consultation
(e.g., a works council) appears to be much more
of a barrier to expansion than it is to non-family
owned SMEs.
2. Many of these findings correspond to the
conclusions of other research. For example, the
European STRATOS project, which studied the
behavior of 1,132 industrial SMEs in eight coun-
tries (Austria, Belgium, Finland, France, the
Netherlands, Switzerland, the United Kingdom,
and the former West Germany), concluded that
family SMEs export less, are less involved with
supplying, and collaborate less with other com-
panies. They are less open to capital injection
from new partners and participation by or credit
from public authorities. They pay more atten-
tion to cash reserves and are significantly more
likely to keep the profits inside the business
(Donckels & Frhlich, 1991).
A study by Harris, Martinez, and Ward (1994)
of the literature concerning strategic behavior in
family businesses shows that the element of fam-
ily business affects strategy formulation and
implementation. Some of the important charac-
teristics of family businesses that influence strat-
egy are the businesss inward orientation. There
is great importance attached to family harmony,
employee care and loyalty, long-term commit-
ment, and generations of leadership. The family
business shows slower growth and less participa-
tion in global markets; it is less capital-intensive
and has lower costs; and its board has a heavy
influence on the implementation of planning.
As a last element of comparison, we cite the
Interstratos research project. This project con-
cerns a longitudinal study on the international-
ization strategies of SMEs in eight European
countries.
In a comparison beween family and non-fam-
ily businesses, Donckels and Aerts (1998) con-
clude that fewer family businesses feature as play-
ers on the international scene. Non-family busi-
nesses are the ones that call the tune when it
comes to import, export, branch and/or produc-
tion plants abroad, obtaining licenses from and
giving licences to foreign companies, and setting
up joint ventures with foreign companies. For
their import, export, branch and/or production
plants abroad, non-family businesses underline
more strongly the importance of high-quality
staff and management. Family businesses are sig-
nificantly more concerned with their reputation
in import and export. Clearly, innovation is given
far more attention by non-family businesses than
by family businesses.
When we interpret these findings, we note
that in most family businesses, most of the man-
agers have only limited international experience.
They are not very integrative and resist the
incorporation of international activities due to
the novelty it involves (Gallo & Sveen, 1991).
Some Remarks About Succession
In an article that surveys scientific research on
succession, Handler (1994) draws on no less than
108 articles by 82 writers. The researchers ques-
tions and output were impressive indeed. An in-
depth analysis of their work reveals that succes-
sion revolves around three main themes: Succes-
sion as a dynamic process, the role of the
founder(s) or retirer(s), and the point of view of
the successor(s)
We briefly examine each of these three points
and illustrate them with material taken from our
own experience as researchers and consultants.
Succession as a Dynamic Process. Except in
the case of a dramatic event, when emergency
succession arrangements have to be made, hand-
ing on the business to the next generation does
not need to occur overnight. Time plays a very
important role in succession, even if it is only
because the head of the company gets older while
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the impatience among those of the next genera-
tion increases.
We have learned from research and experi-
ence that it often takes a long time before the
subject of succession is raised. In Belgium, for
example, research indicates that two thirds of the
1,000 SMEs surveyed had not made any prepa-
rations for succession (Donckels & Hoebeke,
1989). Only in 18.2% of the Belgian cases stud-
ied was the successor known. These figures are
significant, since one third of the Belgian respon-
dents were older than 50 and half were at least
45 years old.
A study of 35 family businesses in the north-
east of England suggests that only about a quar-
ter had selected a successor to the present chief
executive officer (Kirby & Lee, 1996). About 42%
of these English family businesses had no cur-
rent plans whatsoever for the transfer of control.
The study found no correlation between the size
or age of the enterprise and their succession
preparations.
According to another survey conducted in
more than 20 countries (Austria, Belgium,
Canada, Denmark, Finland, France, Germany,
Greece, Indonesia, Ireland, Italy, Malaysia, Nor-
way, the Netherlands, the Philippines, Portugal,
Spain, Sweden, Switzerland, the United King-
dom, and the United States), only 25% of the
family businesses had formal rules for the next
generations entry into management (Wagen,
1995). The study showed that informal rules ex-
isted in 47% of the family businesses, and that
38% did not have any rules at all.
We also noticed that the process of succes-
sion often stalls at the first step. It is discussed
once, but the bull of succession is never grabbed
firmly by the horns. Working toward succession
is often met by much resistance.
It becomes clear that arranging for a succes-
sor takes time. This is mainly because so many
people are involved, each with their own views,
objectives, and interests. Each person should al-
ways bear in mind that they must seek some form
of compromise. Like any other compromise, what
family-business owners must devise is a solution
they can live with, not necessarily one they can
be enthusiastic about. Making succession ar-
rangements means that they should be willing
and able to practice the art of possibility.
We have learned much about succession from
the views of 1,000 Belgian heads of SMEs
(Donckels & Hoebeke, 1989). We asked them
about the major objectives that they wished to
achieve at the end of the succession process, and
what problems they saw as being part of that pro-
cess.
Of their three most important objectives, the
first is to ensure the continuity of the enterprise.
Next, they wish to make a fair arrangement for
all the children. Third, they want to keep own-
ership and management within the family.
They named four succession problems: esti-
mating the value of the enterprise, financing the
take-over, making legal and fiscal arrangements,
and coping with emotions.
We have strong reservations about the order
of points in the second list. The fact that emo-
tions only came fourth was probably the result
of what the psychologists refer to as a process of
suppression. Our experience as consultants shows
that family businesses can often be dangerous
emotional minefields. If someone does not suc-
ceed in clearing that minefield, then the efforts
made in other areas may blow up.
The Role of the Founder(s) or Retirer(s).
Many consultants consider the founders and
retirers as being identical. In fact, this is often
incorrect, because there is one specific point on
which a retiring founder differs considerably from
a retirer who did not actually found the com-
pany. This is an identification with the company,
i.e., the company being central to the life of the
founder. Observation shows that this identifica-
tion is almost always weaker among non-found-
ing retirers. This phenomenon can be called a
cooling off of family patterns. Corbetta (1995)
describes it as follows:
The founder(s) identify completely with
the business they began and, in the case
of more than one person, are bound by
strong ties of affection, even when con-
flicts arise. With the passing of genera-
tions it is natural for these affective or
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affinity ties to slacken; the strong iden-
tification with the business weakens.
This does not mean the retirers do not iden-
tify with the company, only that the degree to
which they do so tends to be less pronounced. It
seems clear that the more the retirer identifies
with the business, the greater the difficulty in
handing it over.
Another important question posed by retirers
is, What am I going to do afterwards? Outside
the business I have nothing, no hobbies or social
life. The company has always been my passion.
Im really afraid that Im going to fall into a very
deep hole.
Because their task in the context of succes-
sion is such a delicate one, we take this opportu-
nity to give retirers a helping hand. The follow-
ing suggestions might serve as points of refer-
ence for the future retirers of newly emerging
family businesses in east central Europe:
Consider your succession arrangements as the
most important investment in your life. What
these arrangements involve is taking the right
steps to make sure that what you have worked so
hard to build with your own hands can live on.
Never assume that you have to arrange it all
yourself. At difficult moments, it might be advis-
able to use a facilitator who could help the pro-
cess along by indirectly contacting the parties
involved. Such a person must be someone who is
accepted by all those involved and whose abso-
lute priority is the continuation of the company.
Research shows that this person is often the
businesss accountant or banker.
Succession is a subject that needs to be dis-
cussed in confidence. In addition, each succes-
sion situation is unique, not only because of the
individual characteristics of the business, but es-
pecially because of the various individuals in-
volved.
Distinguish between succession of ownership
and succession of management. Where succes-
sion of ownership is concerned, kinship gives all
the heirs the same rights of ownership, but this
is where the consequences of kinship should end.
In management succession, there is really only
one valid criterion, competence, in the broadest
possible sense of the term.
Keep in mind that succession in the company
is only one part of the overall inheritance ar-
rangements, but in most cases, it is usually the
most important and the most delicate part. Other
aspects of inheritance nevertheless play an essen-
tial role. For example, when compensations have
to be found outside the company for certain
members of the family.
Make sure that you always know exactly
where you will stand when the arrangements
have been finalized. Agreements should be put
on paper concerning two matters: First and fore-
most, there should be a clear arrangement about
your further involvement in the company. This
involvement should be described exactly and de-
fined efficiently.
To define your retirement, there are three
questions you must ask yourself: What will I, the
retirer, continue to do after retirement? Under
what/which plan will I continue to do this? How
long will I go on doing this?
But this is not where the story ends. There
can still be a very dangerous sting in the tail. This
brings us to the second area for which an agree-
ment is necessary, namely for financial security
for the duration of the retirees life.
The Successors Point of View. Now we con-
sider the second party in the matter, the one(s)
who take over the business. We would like to give
successors five suggestions:
Try to break the taboo on the succession. It
is not an easy task to raise the subject of suc-
cession. Bringing it up often provokes a reac-
tion from the older generation, as if you had
asked them to dig their own graves. Keep in
mind that many heads of SMEs do not have a
suitable alternative occupation. Lack of confi-
dence in the successor is another reason for
keeping quiet about it for a while. If you do
not succeed in opening up the issue of succes-
sion, try to do something about it through an
intermediary, for instance, the external accoun-
tant, the house banker, or a friendly entrepre-
neur. If this discussion is to be a success, this
person has to have the confidence of all the
parties directly concerned.
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Remember that kinship, as such, only gives
the right to ownership. It is often difficult to put
this idea into practice, but it must be done. Never
forget to write down ownership agreements
clearly on paper, make the appropriate number
of copies, and have all the parties sign all the cop-
ies, with one copy to each party. This will pre-
vent agreements from being disputed afterwards.
It is obvious that there is a lot to be settled. It
takes time.
Always remember that you attract attention
as a family member in the business. There is
nothing as stimulating as a family member who
pulls his weight, but nothing as dangerous and
disheartening as a family member who takes it
easy, for instance, by not respecting the regula-
tions himself and always being late. Negative ex-
amples have a negative snowball effect.
As a successor, you will have to exercise a cer-
tain authority within the company. Three ele-
ments will play an essential role in this: your per-
sonality, your competence, and the degree to
which you have proved yourself in the past.
Do not commit yourself before there is a sound
agreement on what the preceding generation is
going to continue doing after the succession. Keep
in mind that propositions such as I will remain
available as an advisor at all times and for any-
thing are dangerous.
Before you take over, ask yourself these ques-
tions: Do I really want to become an entrepre-
neur? This has to be a conscious choice, and
not something you do just because its in the fam-
ily tradition. Am I good entrepreneurial mate-
rial? Just because your father or mother did well
is no guarantee that you will be able to do well
too. Do I accept the implications of being an
entrepreneur? The term implications covers
many areas, such as taking risks, claiming atten-
tion, time management, dedication, income. And
finally, Does my social environment accept the
implications of my being an entrepreneur? By
this we mean your family or your partner. You
are never alone in taking on a business, and if
your immediate family is not behind you a thou-
sand percent, dont even start. You absolutely
must have the support of your environment.
Are There Specific Barriers to
Professionalization in Family
Businesses?
Before we discuss the barriers, we must empha-
size that the concept of professionalization cov-
ers a wide range of meanings. It concerns both
technical skills and the various functional man-
agement areas However, because of the nature
of the average SME, we emphasize
professionalization of management, because most
SMEs certainly have sufficient technical skills.
For that matter, these technical advantages are
often the essential cornerstone for the success of
the SME.
We distinguish four specific barriers:
Distorted Perceptions of Family Potential.We
are not talking about underrating the skills of
family members, but about overrating them.
What we mean by this can best be illustrated by
the following assertion by an SME expert: There
are two kinds of entrepreneurs, those who are
convinced that genius is hereditary, and those
who do not have children.
Let us be clear on this matter. Just because
the parents are successful in business does not
mean that their children will also be successful.
We realize that this is a delicate point. Still, we
think it is pertinent to emphasize this, because
some seem to find it very hard to accept this evi-
dent but harsh truth.
Sterile Environment for the Available Fam-
ily Potential. The key question here is, is the fam-
ily environment willing to provide sufficient op-
portunities for the expertise that the family mem-
bers have? Moreover, it is quite possible that non-
family members in the business will also try to
keep family expertise at a distance as much as they
can. That this certainly does not serve the inter-
ests of the business does not concern them at all.
Inadequate Structures. The term structures
might seem a little strong. In fact, we would like
to talk mainly about the inadequate organization
that afflicts many family SMEs, including: inac-
curate or non-existent organization charts that
lack lines of communication; the absence of clear
job descriptions, linked to a lack of clarity in the
evaluation and reporting systems; and the lack
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of structurally integrated times for evaluation and
consultation, using an established method of pre-
paring for the future on the basis of the past. This
latter point is painfully illustrated by the many
companies whose boards of directors only exist
on paper. Because their boards do not actually
function, these companies lack a vital lever to
professionalism. For example, research in Poland
indicates that most of the Polish owners (79%)
do not want to establish formal business controls
within their firms (Erutku & Valle, 1997).
Maladjusted Company Culture. Two elements
are essential in avoiding this:
First, there must be no professionalism with-
out openness.To insist on settling all important
business matters within the closed family circle
presents a serious impediment to professional
work. Openness to and involvement of all the
available expertise are two absolutely essential
conditions for attaining a maximum internal syn-
ergy. For that matter, let us never lose sight of
the fact that the word team can be an acronym
for Together Everybody Achieves More!
Second, there must be no professionalism with-
out an accounting system. To steer a company
safely past the shoals of economic events, there
must be a strong guideline. A set of sound account-
ing principles is an absolute necessity. Every busi-
ness should invest in a systematic follow-up, in
numbers, of what is happening in the company.
Regrettably, we see that many SMEs do not give a
high priority to such investments.We suggest an
attitude adjustment in this area.
How Can the Specific Character of
Family Business Be Explained?
Dyer (1994) concludes that those who specialize
in describing and explaining how businesses work
did not begin to pay attention to family businesses
until quite recently. Dyers explanation is that clas-
sical ideas about family businesses are overloaded
with negative prejudice. Family businesses were
considered devoid of all rationality, exhibited ram-
pant nepotism, and were founded on pure emo-
tion. In short, family businesses are not worth
studying!
However, a certain amount of change has oc-
curred recently. The academic world has come
to the conclusion, to its surprise and of course
with much delay, that family enterprises can in
fact be an exciting subject for research.They also
realize that when confronted with the complex-
ity of family enterprises, only a multidisciplinary
approach would suffice for studying and under-
standing the phenomenon.
Therefore, we examine the following themes:
a complex subject, strong and weak points, three
forms of logic in family businesses.
A Complex Subject. Where does this complex-
ity come from? First, of course, it stems from
the fact that the subject is a business. It goes with-
out saying that doing business nowadays is much
more complex than it was a couple of decades
ago.
When we focus on SMEs, we confront sev-
eral characteristics inherent to their limited size.
These include restricted means (human re-
sources, finances, market possibilities), a specific
form of organization that often has its own ap-
proach to management, an inadequate concern
for long-term policies, a vulnerability toward a
number of factors in the immediate environment
(the government, financial institutions, interest
groups, etc.), and so on. However, what we wish
to emphasize is the family character of most
SMEs.
The complexity of doing business applies a
fortiori for economics in transition. This com-
plexity is illustrated by a study in Poland, in which
it appears that emerging entrepreneurial firms
in Poland experience more diverse problems than
do firms in the West (Zapalska, 1997). The most
important constraints on private-sector develop-
ment are an inability to raise outside capital, eco-
nomic problems, the lack of aid for small busi-
nesses, state and local taxes, and recruiting and
retaining properly qualified and responsible
workers.
Strong and Weak Points: I n Search of the
Underlying Motif. Large-scale research by
Donckels (1996) on the strong and weak points
of 1,000 family businesses shows that most heads
of SMEs stress the following:
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Strong Points:
Knowledge and experience: Basic knowledge and
know-how handed down from generation to gen-
eration, starting in very early youth:
I was born right here among these biscuits.
My brothers and I were born with sawdust
between our toes.
Ive been maneuvring between pots and
pans ever since I could crawl.
In a study in Bulgaria, the entrepreneurs also
referred to the experience of the owner/manage-
ment team as a main reason for business success
(Todorov & Kolarov, 1995). Family businesses
in Poland considered as the most important suc-
cess factor high quality, which deals of course with
knowledge and experience (Welsch, Hills, & Hoy,
1995). Finally, in the Ukraine, background, pro-
fessional skills, former professional links, and
knowledge were cited as success levers (Isakova,
1997).
The personal and financial efforts made for
the company: Typical comments are:
You dont count your hours in a family business.
You have to be able to put everything at
stake for the business.
Members of the same family can easily help
each other out.
Family business owners in Poland (in their
1995 study, Welsch, Hills, and Hoy define fam-
ily business as one in which a minimum one fam-
ily member is employed full-time) say they de-
vote more than 65 hours per week to the busi-
ness. In the Czech Republic, an entrepreneur and
his family reported that they worked 12 to 18
hours a day with no time off on weekends
(Bencek & Zemplinerov, 1995).
The owners are often the only people who can
shoulder the burden of the small private busi-
ness. The reason is that workers lack identifica-
tion with their jobs and work environment.
Workers are not accustomed to cooperating pro-
fessionally in an informal way, and refuse to take
risks, initiative, or personal responsibility in their
work. The most damaging legacy of the com-
munist past is the devastation of the workers
morale. In Hungary, a survey among 33 entre-
preneurs showed that the average entrepreneur
works 54 hours per week in the business (Iles &
Clarkson, 1996).
Speed in decision-making: Comments include:
We are never slowed down by cumbersome
structures in which various recommenda-
tions are needed before arriving at a deci-
sion.
If need be, we can come to a decision dur-
ing afternoon tea on Sunday.
We know each other inside out. And we
know whats important for each of us. This
undeniably speeds up the decision-making
process.
Weak Points:
Company knowledge is lacking in certain areas:
Comments include:
As a family we cannot handle the situation
without the help of specialists.
We are all good technically, but we are weak
as far as the companys finances are con-
cerned.
Everything has become so complex nowa-
days. Take environmental legislation for
example, or product liability. Thats really
not our area; we need others to help us out
there.
For example, Erutku and Valle (1997) find
that Polish entrepreneurs lack marketing know-
how and are not sufficiently aware of the role
that marketing can play in a business develop-
ment strategy. One reason given to explain this
behavior is that aggressive marketing may sym-
bolize going public, breaching the historical
dictate that entrepreneurs operate unobtrusively.
Polish family businesses also rank marketing as
first among desired services (Welsch, Hills, &
Hoy, 1995).
Family conflicts in the business. Comments
include:
The succession arrangements are the hard-
est for me.
My mother hoped she could have had me
around for longer and trained me more.
In the beginning, I used to think I was
smarter than my father.
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Conflicts between family and business in-
terests. Comments include:
Some of the family want to milk the busi-
ness.
At each annual meeting the tension between
the active and sleeping partners runs really
high.
It is a pity though, that they cant see that
whats good for the business is also good for
the family.
What can we conclude from all this? That the
human factor continually pops up everywhere.
But saying this does not mean that we intend to
jump on the fashionable bandwagon of human
resources management (HRM). Our conclusion
has been forced on us by the SMEs themselves.
A family business is a microcosm in which the
main elements are people.
Moreoverand this must also be further
explained from two distinct points of view
it would be incorrect to assume that only fam-
ily members play leading roles. Key positions
in many SMEs are often held by outsiders.
Second, we assert that it would be a mistake
to assume that family members should by defi-
nition play the major parts in the management
and daily running of a company. As we men-
tioned earlier, competence should be the ba-
sic criterion, but in a family business, compe-
tence is not sufficient. The competent family
member not only has to be recognized, but
the head of the SME should also consistently
act on this knowledge and place this person
in an appropriate position of responsibility.
Emotional factors often prevent direct action.
A motivated, third-generation potential succes-
sor expressed his concern on this matter, saying,
Can we combine what I want and what I
am capable of with what would be accept-
able for the other members of the family?
This is an important question, and we would
like to insist that the second part in particular
should not be overlooked.
Three Forms of Logic in Family Businesses.
All we have discussed so far allows us to clearly
state that three forms of logic are often interwo-
ven in family business:
The logic of business economics. This approach
gives absolute priority to company interests. The
interests of the family and of each individual are
considered subordinate on principle. In this ap-
proach, the handbook on economics is applied
to the letter.
The logic of family. This form of logic can
imply that family interests can supersede what is
important for the company. This can result in a
milk-cow situation with all its consequences.
It can also be understood in a second sense,
where role patterns in the family are carried over
to the business. This can involve, for example, a
kind of primogeniture. In this sense, the eldest
are destined to run the family business in the fu-
ture, whatever their level of competence or ca-
pability might be.
The third logic concerns agreements made
within the family. Examples of this are:
My brother and I each have two children,
but we have already agreed that only one
from each family will join the business.
In our family we hold strictly to the agree-
ment that none of the daughters or daugh-
ters-in-law can join the business.
The logic of emotion: We have repeatedly
noticed that emotions often win the day. In say-
ing this, we expose the most vulnerable side of
family business. Therefore it is little wonder that
a retirer was greatly concerned, and asked, Are
we really doing our children a favor by letting
them take over the business? Once again, this is
a very pertinent question and not an easy one to
answer.
Are There Concrete Suggestions
To Be Made?
In this section, we strongly emphasize the im-
portant role that can be played by a family
charter, and the possibilities of working with
outsiders.
Family Charter. We answer three questions:
What is a family charter? Why is it necessary?
What might its contents be?
What is a family charter? A family charter is
a document that defines the rights and obliga-
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tions of the family members who are directly or
indirectly involved with the family business.
This document is signed by all parties. It rep-
resents an important moral commitment of in-
dividuals toward both one another and toward
the business. To make the agreements and rules
legally enforceable, we recommend that the con-
tents of the family charter be incorporated into
the company statutes.
Why is a charter necessary? Let us start with
an example of a situation that we have witnessed
repeatedly. Quite often, serious problems arise
in family businesses because of incidents or mat-
ters that appear to be mere trifles to more objec-
tive outsiders. However, we must not lose sight
of the fact that these are often matters with a
heavy emotional charge, mortgaged by previous
events either within or outside the business, for
instance, in the family circle.
A well-considered family charter can help
to remove the many small fuses from the emo-
tional time-bomb. It is therefore important to
do preventive work: Prevention is better than
cure, and proactive behavior must be preferred
to reactive.
What might the charters contents be? We
believe it is important to give the family char-
ter a definite structure. The following is an ex-
ample of how this can be done, using a four-
part structure.
General principles. For example, these might
include the dicta that company interests must
overrule personal interests; that family members
must accept the implications of entrepreneurship,
such as dedication, the willingness to rotate jobs,
and the willingness to take additional education
and training; and that equality concerning kin-
ship does not necessarily imply equal involvement
in the business
Requirements for being actively involved in the
business as a member of the family might include,
for instance, the number of persons per branch
of the family, level of education, previous experi-
ence outside the family business. Family mem-
bers should accept the idea that no vacancies will
be created just because a member of the family
happens to enter the labor market, but that hir-
ing awill be exclusively the function of the needs
of the business.
Salaries will be determined on the basis of re-
sponsibility in the company, not on the basis of
kinship.
Conditions will be created which family mem-
bers must fulfill to be able to get a management
function.
Practical agreements. These might include
the establishment of salary and pay scale for
family members; the clear positioning of the
members of the family in the organization
chart, with clearly defined job descriptions and
reporting positions; the establishment of struc-
tured deliberation and systematic communica-
tion between the members of the family, and
of an evaluation procedure for family members
(preferably with an objectifying external input).
Fringe Benefits. The entrepreneur might ask
why we assign a separate heading to each of these
benefits. There are two reasons: First of all, this
is a very explosive matter, requiring special at-
tention precisely because it is so dangerous.
Moreover, business owners must make allowance
for the fact that silent partners quite often lay
claims to such benefits.
Examples:
The car problem. (Who gets a company
car? What type? When to replace? How
often can it be available for private use?)
The possibility that a business plays
banker for the rest of the family. (What
are the amounts that can be borrowed?
For what purposes? What is the interest?
Is there a due date for settlement?)
Purchase of products from the business.
(For whom? What is the discount? What
are the terms of payment?)
Rules for decision-making. A dangerous disease
that threatens many family businesses is the one
caused by the lack of decision procedures. On this
too, the family charter should include an agreement.
When there is no agreement, there is a double risk:
Decisions already taken may be questioned again
and again, or positions taken up earlier may be re-
tracted. As a consequence, the business inevitably
starts to drift. That is why it is so important that
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the family charter states the obligation of the fam-
ily members to strictly follow the rules for deci-
sion-making.
Working with Outsiders
We examine two forms of collaboration with
people who do not belong to the family, as mem-
bers of the board of directors on the one hand,
and as consultants on the other.
Non-Family Directors. We present two find-
ings that may at first sight seem extraordinary.
First, we find that in many Western European
SMEs, the boards of directors do not function at
all. Although most countries legally prescribe the
establishment of boards, boards often perform
poorly in their function as a leading and control-
ling force.
The composition of the board of directors
leads to a second striking discovery: The people
on the board are very often the same people who
run the business on a daily basis. If the directors
both lead and control themselves, this can present
a significant danger: Everything is kept within
the internal family circle, which usually leads to
a family-bound company blindness.
We recommend the introduction of an exter-
nal view into the board of directors. However,
research shows that doing this is not at all simple.
Schwartz and Barnes (1991) formulate the fol-
lowing conditions as the basis for a successful
introduction of outside directors:
There must be an honest desire on the part of
the CEO, and preferably of family members as
well, for an outside board with open communi-
cation.
There should be a selection process that seeks
and assures the choice of competent outsiders.
There must be realistic shared expectations
about the contributions that outside directors can
make.
Our own practical experience in Belgium in-
dicates that the choice of outside directors must
be based primarily on their competence and ex-
perience.
First of all, the directors must be people who
know very well what it means to do business and
whose past performance gives them the neces-
sary prestige in the eyes of the family. It is wrong
to begin with the assumption that directors must
be familiar with the sector of the business in
which they become a director.
There must be an attempt to reach a family
consensus concerning the individuals who are
taken on as outside directors. Good outside di-
rectors will never accept being considered the
mouthpiece of a part of the family or of one mem-
ber of the family in particular. For outside direc-
tors, the interests of the business are the only
acceptable point of departure. Please note that
we have been speaking of directors, that is, in
the plural. In our opinion, it is quite pointless
for a non-family member to join a board of di-
rectors that otherwise consists entirely of family
members. The outsider input must have a mini-
mum of critical mass.
The outside director must be a real director,
with the same rights and obligations as the fam-
ily member-director. Some family members have
a problem with this, especially when it concerns
accessibility to company information or decision-
making authority on the board of directors. On
the board, all directors must be on an absolutely
equal footing. There must not be any distinction
between family and non-family directors, except
on very rare, exceptional decisions. The dismissal
of a family member-director from the business is
an example of a very delicate matter to which
special rules apply.
It can be beneficial to have an outside direc-
tor to chair the board of directors. This increases
the chances of a more objective process. This
chairman then has a threefold responsibility:
drawing up the agenda; chairing the meeting,
taking care that it follows the agenda and that
everyone is given sufficient opportunity to state
their views; and seeing that the minutes are ac-
curately reported.
To function well, the first meeting must set
down internal regulations, establishing the rules
and decision procedures.
External Consultants. Jurists, fiscal experts,
business economists, psychologists, and therapists
have begun to see family businesses as a target
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group, but so far, family SMEs have only found
the way to such external support on a limited
basis.
This is certainly the case in east central Eu-
rope. In Romania, for example, researchers found
that the five main sources of advice were busi-
ness associate, spouse, partners, collaborator, and
closest friend (Pistrui, Welsch, & Roberts, 1995).
In Poland, too, entrepreneurs see no benefits and
large costs associated with assistance programs.
They prefer to rely on friends, relatives, and other
business owners to gather the information they
need (Erutku & Valle, 1997). Finally, in the
Ukraine, research indicates that even if entrepre-
neurs do know the business service providers,
they do not necessarily use their service (Klochko
& Isakova, 1996). Only one third of businesses
surveyed used the consulting service.
External consultants and family businesses
have difficulty working together, as there are a
number of pitfalls:
SME managers cite the following reasons for
not working with consultants (Ettinger, 1991):
All that costs far too much.
That kind of thing is good for large busi-
nesses, but not for SMEs.
The consultant knows nothing about my
sector. Besides, when l need advice, l can con-
sult my accountant.
Those things are usually so confidential that
we do not wish to put them to unknown third
parties.
I am quite willing, but the family will not
hear of it.
It will take too much time and besides, I
have heard a lot of negative stories about
consultants.
In the Ukraine, most small entrepreneurs do
not apply for assistance by consultants, partly
because of the very high prices (Klochko &
Isakova, 1996). For example, a one-hour consul-
tation with a lawyer costs anywhere from a few
dollars to US$200.
The practices of the consultants themselves
can be discouraging. Their approach and sales
methods are sometimes too aggressive. Many
consultants are neither able nor willing to adapt
to the ways of living and thinking, and to the ex-
perience of SME managers. Some consultants do
not fully realize that trust is of the utmost im-
portance. That is precisely why the enlistment
of younger colleagues is usually not valued in
SME circles. (In their 1996 study, Klochko and
Isakova show that this point is also valid for the
Ukraine. Service providers there are not small-
business oriented, because they have to serve
large solvent enterprises, joint ventures, banks,
and the like to survive and grow).
Consultants reports are usually too volumi-
nous and indigestible for SME managers. Fur-
thermore, after the consultant hands in the re-
port, the SME is usually left to its fate, because
there is no provision for following up the practi-
cal application in the field.
How do family SMEs respond to their expe-
rience of collaboration with consultants? We give
a Belgian and an American answer. An enquiry
among 900 Belgian managing directors yielded
the following opinions (Donckels, 1992):
Positive Experiences:
I am very satisfied with my external ad-
visers. When you ask a question, they dont
beat around the bush. My advisers really
know what theyre talking about.
I always work with the same people, so that
they know the firm through and through.
This greatly increases the value of their ad-
vice.
Thanks to talks with your adviser, you start
having a lot of new questions yourself. This
naturally leads to a better insight.
Negative Experiences:
My accountant knows a lot about accounts,
but he is clearly lacking when he has to give
me fiscal advice.
One does learn a bit, but the price you have
to pay for it is sometimes exaggerated.
Some advisers have a lack of commitment
to solving a problem in the short term. You
just cant accept this as an entrepreneur.
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SME heads themselves gave a number of tips
on the correct way to work with advisers:
I think it is dangerous when a
consultancy firm comes knocking on my door
with an offer, without commitments, to
analyse the company in order to increase pro-
ductivity and profitability. It is the entre-
preneur himself who should take the initia-
tive. It is best to talk to colleagues first, to
find out where you can get help. According
to me, you have to have a clear agreement
on the extent of the problem. On his side,
the adviser has to draw up a schedule and
put a price-tag on the project. Clear agree-
ments will give the best results here.
Good advice is only possible on condition
that the question is posed correctly. What is
it exactly you want to know as an entrepre-
neur? If necessary, the adviser himself must
be able to discover the right question.
An adviser must restrict himself to giv-
ing advice. Youre backing the wrong horse
if you assume that the adviser is also going
to do it for you. The decisions must be taken
by yourself as an entrepreneur. You have to
decide on what is feasible and what is not.
When you work with several advisers,
you run the risk of being given contradic-
tory advice. It is better to work with only
one adviser for each branch of the business
for which you are seeking help.
It is the entrepreneur who leads the en-
terprise and succeeds, with the help of the
adviser. It is not the adviser who acciden-
tally meets an entrepreneur, who is respon-
sible for the success of the business. You as an
entrepreneur have to be made of the right
stuff. Alas, there are some who take things
too lightly and put the blame for their fail-
ure on the environment or on the adviser.
You have to be tough to succeed in business.
An adviser can be of help for certain prob-
lems, but on its own it is certainly not
enough.
Two studies in the United States, which we
summarize in Table 5, offer a concrete view on
the issues connected to consulting in family busi-
nesses (Upton, Vinton, Seaman, & Moore, 1993).
It is certainly no accident that succession and
the relation between family and business are top
of the list.
Concerning the collaboration with consult-
ants, we would like to add the following:
In family SMEs, the consultant is usually a
generalist who works very closely with the man-
aging director. It is impossible for the consultancy
to function well without a sound relationship of
trust. This confidence must be based on a high
degree of mutual openness:
The head of the SME must be willing to pro-
Table 5: Issues Confronting Family Business Practitioners
Study 1 (1990, N = 381) Study 2 (1991, N = 105)
-Succession planning -Leadership
-Interface of family and business -Interpersonal conflict
-Management effectiveness -Family/Business goal conflict
-Enhancing survival, regeneration and growth -Transfer of ownership
-Strategic planning -Delegation
-Roles and role transition -Tax planning
-Entry of new family members into business -Cash flow
-Diagnosis and change efforts -Undercapitalization
-Financial, trust and estate planning -Lack of customer demand
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vide all useful information, so that the consult-
ant can form as clear an idea of the situation as
possible.
The adviser should be completely candid in
giving his opinions: Playing hide-and-seek ben-
efits no one. Well-balanced advice can never be
based exclusively on what the managing director
says. All members of the family must be given
the opportunity to air their views. The consult-
ant must insist on this.
If a contract is concluded with a consultant,
then the following points must be kept in mind:
The objective of the assignment, the method
used, and the timing; agreements on fees and
expenses; the responsibilities of the consultant
(confidential treatment of information, no con-
flicts of interest, etc.; and the way in which the
report will be made available. The contract
should also stipulate if the consultant will be al-
lowed to use the firm as a reference to third par-
ties, the conditions of discharge of contract, and
concerning legal settlement in case of dispute.
Before we close, we present ten questions on
which to reflect, questions that every family busi-
ness should ask itself before hiring a consultant
(Ettinger, 1991):
1. Are there objective reasons for hiring a
consultant?
2. Have we stated clearly what our practi-
cal objectives are for taking this advice?
3. Will we be objective in our choice of the
consultant?
4. Are we really willing to change if it is
necessary?
5. Is it possible, and are we willing, to give
enough time to this consultant?
6. Have we convinced ourselves that we
cannot withhold any useful information
from the consultant?
7. Are our expectations realistic?
8. Are we willing to act?
9. Do we want to remain free?
10. Do we wish to work with a new partner
in our business?
Summary and Conclusion
In this article, we have explained the specific type
of behavior in family businesses. We have illus-
trated this by treating the topics of growth, cru-
cial management functions, and succession.
We have showed that the majority of family
businesses feel very strongly about growth, which
they define as an increase in sales turnover.
However, the majority also insists on keeping
ownership and management within the family. It
is reasonable to assume that this preference is as
valid in east central Europe as it is anywhere else.
Research in several central and Eastern European
countries shows that the immediate family is the
most important source of labor and capital for
the establishment and development of private
businesses. In Bulgaria, studies find that the ma-
jority of enterprise owners are not willing to
share the management. The analysis of crucial
management functions, such as strategic behav-
ior, personnel affairs, financial policies and fi-
nancing, and view of the outside world, show that
family businesses differ from non-family busi-
nesses.
We believe that succession will be a hot issue
for the future in Central and Eastern European
family businesses. We must remember first of all
that succession is a dynamic process. This means
that it often takes a long time before the subject
is raised, and that arranging for a successor takes
time. We have also pointed at the crucial role of
the founder(s) or retirer(s) and at the successors
point of view.
We explained the specific type of behavior in
family businesses, then mapped the specific bar-
riers to professionalization in family businesses.
These barriers pertain to the distorted percep-
tion of family potential, the sterile environment
for the available family potential, the inadequate
structures, and the maladjusted company culture.
Next, we studied how the specific character
of family businesses can be explained.
First, we noted that it is a complex subject,
which stems to a large extent from the fact that
doing business nowadays is much more complex
than before. This is a fortiori the case for econo-
mies in transition.
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Second, on the one hand, family businesses
have pronounced strong points, such as knowl-
edge and experience, personal and financial ef-
forts made for the company, and speed in deci-
sion making. These strong points have also been
observed in family businesses in east central Eu-
rope. On the other hand, family businesses have
their weak points. We refer to the lack of com-
pany knowledge in certain areas, such as market
knowledge for central and Eastern European
businesses, family conflicts in the business, and
conflicts between family and business interests.
It is clear that the specific character of family
businesses is defined by the interrelation of the
logic of business economics, the family logic, and
the logic of emotion.
Finally, we made concrete suggestions, giving
attention to the important role of a family char-
ter and to the possibilities of working with out-
siders.
To conclude, we would like to relate an eter-
nal truth. A royal prince once put the following
question to the Greek mathematician Pythagoras:
Is there not a slightly easier way for a prince to
learn this difficult mathematics? As can be ex-
pected from a mathematician, Pythagorass an-
swer was unequivocal and terse: There is no
royal way!
For family businesses, there is no royal way
leading to the next millennium. They will have
to work hard. If all those concerned are well aware
of that, then they stand a very good chance of
success.
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Rik Donckels is professor at the K. U. Brussels and honorary director of the Small Business Research Institute.
Johan Lambrecht is a former senior researcher at the Small Business Research Institute and employed by the
Artesia Bank.
Donckels, Lambrecht
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