Business Closures as a Key to Future Success in Private Care Sector

Noora Sievänen, Researcher Anneli Hujala, Senior Researcher Sari Rissanen, Professor Hannu Littunen, Professor University of Eastern Finland, Department of Health and Social Management/Department of Social Sciences Address correspondence to: Noora Sievänen, University of Eastern Finland, PO Box 1627, FI-70211 Kuopio, Finland. E-mail: [email protected] ________________________________________ Abstract The aim of the paper is to consider how information on business closures could be utilized in order to enhance and support sustainable entrepreneurship and growth in the expanding private care sector. Lately there has been a considerable increase of entrepreneurial exits from this sector. The results of this preliminary study show that the business closures of care enterprises occur at diverse stages of entrepreneurship and that financial problems are not the main cause for such exits. In the future, it will be crucial to analyze the branch-specific features of business closures in the care sector by considering these closures in the frameworks of theoretical entrepreneurial models.

Keywords: business closure, private care sector, business success, entrepreneurial process __________________________________________

Background and Aim Business closures may be regarded as the other side of coin in successful entrepreneurship. However, the main focus of entrepreneurial research has been on the start-ups, growth orientation and success factors of enterprises. Business closures are an important part of the theoretical discussion concerning business performance, and thus one of the core questions of entrepreneurship research. In this article we focus on business closures in one specific growing business sector, private care, in order to add to the infor-

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mation on how to promote and support sustainable entrepreneurship and growth in this expanding business branch. In recent, private social care services in many countries have been considered a potential business area offering promising opportunities for small businesses, especially for female entrepreneurship. So far in Finland, the number of private care enterprises offering elderly care services has increased rapidly. However, small businesses have lately faced threatening challenges due to the public sector implementing complicated systems of competition and large global enterprises taking over the markets. The increased amount of business closures in the private care sector has called into question the future prospects of the private care sector. In order to enhance sustainable growth of care businesses, it is essential to scrutinize the reasons for entrepreneurial exits from this field. In this paper we first present some ideas on business closure as a concept and its connections to the phases of the entrepreneurial process and factors influencing business performance. We next introduce a summary of earlier research on business closures and thereafter present some empirical case examples of business closures of care enterprises in order to support these theoretical considerations. Discussion and arguments for a need of further in-depth studies about the research issue are presented in the last section of the paper. Briefly the aim of this paper is to consider how knowledge about business closures could be utilized in order to promote and support sustainable entrepreneurship and growth in the expanding private care sector. The specific research tasks are: 1) to describe and recap previous empirical and theoretical knowledge about the closures of small businesses;

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2) to consider empirical examples of business closures in the care sector in the light of these empirical and theoretical considerations.

Theoretical Background: Business Closure as Part of Entrepreneurial Process Numerous definitions have been proposed in the literature for the phenomena of closing a business. According to Politis & Gabrielsson (2009) the issue of business closures can be applied to businesses that have closed down or ceased to exist for any reason. Business failure is used to describe a business falling short of its goals or becoming insolvent, thus necessitating involuntary termination or discontinuation of the business (see also Stokes & Blackburn 2002). Entrepreneurs may also exit a firm that continues operations, for example when an entrepreneur sells the firm to another owner who carries on the business. This is conceptualized as an entrepreneurial exit (Wennberg et al. 2010). Like the other terms, term exit is also used in other meanings. It may refer to a shift to narrower markets or a change in production (Siegfried & Evans 1994). In this study business closure is used in the broad sense to refer shutting down the business, selling it on or totally changing the business concept. Thus, in the present paper we use the concepts of business failure and entrepreneurial exit as synonyms for business closure. In the following, we review some very well known models of entrepreneurial process, paying attention to how the business closure is or is not represented as part of these models. We believe that these models could be a useful framework to enhance the understanding of business closures because these models capture the essence of entrepreneurship from diverse perspectives. The earliest entrepreneurial models outline the life cycle of enterprises by describing the phases of the entrepreneurial process, although the main focus of the models was

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on the early stages of venturing (e.g. Bhave 1994; Sarasvathy 2001). For example, Brockner et al. (1994) studied the entrepreneurial process extensively as stages from idea generation to growth and decline phases. Business closures in these models are referred as a “death” or “mortality” of business (e.g. Dodge & Robbins 1992; Ven & Poole 1995). DeTienne (2010) recently included entrepreneurial exit into the entrepreneurial process. Entrepreneurial exit is seen as process by which the founders of privately held firms leave the firm they helped to create; thereby removing themselves, in varying degree, from the primary ownership and decision-making structure of the firm to pursue another opportunity (e.g. job opportunity, education, other new venture). In this model entrepreneurial exit may occur at any time during the entrepreneurial process: the exit could occur before the firm is even founded and conversely, the entrepreneur may not consider exit until late in his or her life. Another, widely used approach is to define the factors influencing entrepreneurial performance. For instance, according to Shane (2003) all entrepreneurial actions are influenced by individual, industry and institution level factors. In Shane‟s model individual level factors can be divided into psychological (e.g. motivation and cognition) and demographic factors (e.g. education, career experience, age). The environmental context of entrepreneurship can be seen to include industry level business environment and institutional environment with its dimensions of economic, political and sociocultural spheres. These preceding elements linked to the entrepreneurial process affect an individual‟s desire and chances to discover and her decision to exploit opportunities. Shane (2003) also includes in his model an entrepreneurial opportunity execution phase conceptualized as a process of resource assembly, organizational design and strategy. Individual and environmental level factors are seen also to affect this phase of the process. Individual and environmental level factors are claimed to influence the entre-

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preneurial process by Bygrave (1989) when analyzing the entrepreneurship paradigm even though the elements are not exposed in detail. To conclude, our attempt here is to use both the models of entrepreneurial processes and the factors influencing entrepreneurial performance as a framework to analyze entrepreneurial exits. Our assumption is that these two perspectives could be used as a “window” to understand business closures. In addition, the theoretical and empirical knowledge of business closures is still insufficient in different branches and our purpose is to add to the existing knowledge for future model creation in business closure cases.

Research on Business Closures The dynamic performances of companies after their entry into markets, as well as their failures, have generated a large body of literature. Much of the early research of business closures was conducted in the field of business economics, where some patterns have emerged from the statistics as an explanation for business closure. The most widely accepted explanations for business closures are connected with the age and size of the firm as well as the industry which the firm operates in (Nucci 1999; Stokes & Blackburn 2002). In earlier research on business closures, three main elements of explanations can be identified. The first explanation incorporates a personality-based perspective, such as management and owner-manager‟s competency or personality characteristics (Davidsson and Henrekson, 2002; Box, 2008). The second main explanation recognizes firms‟ attributes such as their age, size or industry affiliation. The third explanation acknowledges the environmental conditions of firms such as macroeconomic variations and institutional conditions (Box, 2008). The regional environment of a start-up may also have a decisive impact on a firm‟s survival/non-survival (e.g. Littunen et al 1998). In

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the following we present some recent studies concerning the determinants affecting business closures. Individual level determinants such as gender, age and prior experience have been examined in several studies as presented in Table 1. Probability of female-owned businesses to fail is higher than male-owned businesses (Arribas & Vila 2007, Stafford et al 2010). According to Praag (2003) entrepreneurs‟ age had a positive influence on firm survival and Wenneberg et al. (2010) found that age had a positive influence on the probability of selling the business on successfully. Such findings regarding entrepreneurs‟ age may have some connection with the other study results showing earlier work experience and specific knowledge of the industry to be important in avoiding business failure because individuals‟ experience can be generally thought to increase over time (Praag 2003; Arribas & Vila 2007; Stafford et al 2010). However Wennberg et al. (2010) also found that age was positively associated with sales (harvest or distress) rather than continuation and both forms of liquidation when investigating different exit routes. Their interpretation was that age does not necessarily influence the ability of an entrepreneur, but rather their willingness to exit. Interestingly, general education was no significant to business success (Praag 2003; Arribas & Vila 2007; Stafford et al. 2010) and neither was specific training in entrepreneurship and management (Arribas & Vila 2007). Firm specific factors can also explain business survival and failure. Several studies state that firm size and age reduce the likelihood of business failure. According to Geroski (2010) the bigger the firm is when starting a business the greater is the likelihood that the business will survive. Importance of business size was supported by other similar study results covering time series of 10 years (Strotmann 2006; Esteve-Pérez et al. 2010; Carreira & Teixeira, 2011), a birth cohort study (Box 2008) and a study concern-

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ing family businesses (Stafford 2010). Connected to firm performance, managerial decisions and financial situation may explain survival. Wennberg et al. (2010) found a failure-avoidance strategy focused on reducing costs or investing additional equity can reduce the likelihood of business failure. For example, entrepreneurs reducing business costs by taking an outside job lowered the probability of low performance business exits. Also environmental and industry-specific factors affect business closures (see Table 1). According to Carreira & Teixeira (2011) and Strotmann (2006), favorable demand market conditions measured by industry growth and size increase survivability of the business. On the other hand firm survival in the industries with high entry rates can also reduce survival prospect because of the competition and excessive crowding in markets. According to Geroski (2010) firms that are born during the years when many other firms are also entering the industry are much less likely to survive. Consistently many industries with low entry rates also have low exit rates (Nyström 2007). Institutional environment factors such as economic growth and stable economic conditions influence to business survival, too. According to several studies economic growth measured by gross domestic product (GDP) decreased the probability of business closures (Carreira & Teixeira 2010; Geroski 2010; Box 2008).

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Table 1. Determinants of Business Closures Article Carreira & Teixeira 2011

Keywords

Empirical data

Variables

Results

Exit pattern, firm survival, Portugal, pre-exit performance, productivity

1900 Portuguese manufacturing firms covering a 10-year period.

Productivity, firm size and age, market conditions

Esteve-Pérez et al 2010

Exit, liquidation, acquisition, competing-risks hazards model

Geroski 2010

Survival, new firms, founding conditions, entrepreneurship

Spanish manufacturing firms during 1990–2000, excluding firms with less than ten employees. 118,000 Portuguese start-ups over the period 1983–1993.

Firm characteristics, firm performance, firm strategic factors, technological intensity of the industry. Firm size, human capital and environmental variables

Stafford et al 2010

Family business, family firm, business owning family, disaster resiliency, family business sustainability, family business survival, duration analysis Entrepreneurial exit, prospect theory, human capital

523 firms with complete information in 1997 and survival information in 2000 or 2007 in U.S.

Firm age, external disruptions, environmental uncertainty, business and owner characteristics and variables concerning the family.

Both low and high productivity firms exit, however a higher productivity level reduces the probability of exit. Large firms are less likely than smaller firms to shut down. Favorable demand market conditions have a positive impact on the probability of survival. Firm strategic factors of R&D activities and advertising expenditure, lower the risk of liquidation but do not have effect on acquisition. Firm characteristics age, size and labor productivity are found to have different effects on the risk of liquidation and acquisition. Founding conditions have long-lasting effects upon firm survival. Factors such as firm size, human capital, industries entry rates, and GDP growth in the early years of entrepreneurship seem to have relatively long-lived effects on survival. Nine variables were significantly related to long-term survival of family businesses: economic vulnerability of rural counties, family income derived from business, hiring temporary help when needed, business size, being homebased, viewing the business as a way of life, gender of business owner, owner‟s business experience, and customer-focused control practices.

1735 Swedish firms in the knowledge intensive sector owned by a single firm founder.

Firm death , firm survival, firm size, firm age, cohort, environment, macroeconomic conditions Entry, exit, industrial sectors, panel data

2 152 Swedish firms in seven birth cohorts founded between 18991950. Entry and exit rates of 47 industries during 1997– 2001 in Sweden.

Exit variables: continuation, harvest sale, distress sale, harvest liquidation and distress liquidation. Firm and owner specific characteristics. Firm size and age, line of business. Macroeconomic variables.

Arribas & Vila 2007

Entrepreneurship, human capital, survival time, hazard models

237 Spanish service industry companies founded 2000 or 2004.

Strotmann 2006

Hazard rate, new-firm survival, exit, entry, duration analysis, entrepreneurship -

2605 manufacturing firms founded in 1981 and operating 1994 in Germany. 145 self-employed males who were self-employed during 1985-1989 period in U.S.

Wennberg et al 2010

8 Box 2008

Nyström 2007

Praag 2003

Industry-specific variables: profitability, growth rate, capital intensity, scale economies and concentration. Socio-demographic variables: gender, age, marital status, children and education. Business partners, prior experience, relatives‟ background. Start-up size and firm age, industry-specific variables, regional environment as degree of regional agglomeration. Entrepreneur-specific variables, financing, line of business, unemployment rate and business failure rate.

The human capital variables predicted the choice of exit routes. Age had a positive effect on the probability of making a harvest sale and distress sale. As a failure-avoidance strategy the cost reduction (taking an outside job) was the most effective. Firms generally displayed higher hazard rates at young age, and small firms moreover displayed higher hazards than large firms. A clear connection between institutional conditions and survival ability was found. Macroeconomic conditions influenced the survival ability of firms. The traditional determinants of entry and exit are better suited for explaining entry than exit. Industry-specific effects explain many of the inter-industrial differences in entry and exit rates. Gender, previous work experience in the same activity or as the entrepreneur and the number of business partners has positive influence to business survival. However, neither general education nor specific training in entrepreneurship and management, guarantees better survival prospects. The risk of failure increases after start-up, peaks after one or two years and decreases steadily thereafter. The risk of death is higher for small firm, in highly agglomerated regions and industries with concentrated markets, poorer demand conditions, lower price-cost margins and high threshold. The business hazard varies with age, within-industry and within-occupation experience. Business failure rate of the industry have negative influence on survival in the early stages of entrepreneurship.

Care Entrepreneurship as a Context of the Study On the European level, those countries with a Nordic welfare state model have generally been the last to increase private care services. The public sector or non-forprofit organizations, not enterprises have been the main providers of services. Nowadays in Finland, it is estimated that more than 20 per cent of care services are provided by private enterprises. Nevertheless, most of the enterprises have fewer than ten employees and are owned by middle-aged women with authoritative experience of social and health care (Rissanen & Sinkkonen 2005, Rissanen et al. 2010). One reason for the growth in the number of the private enterprises is that at the Finnish national and local policy level, private services have become accepted solutions to meeting the increasing need for services. Municipalities or other public service providers have not had sufficient opportunity to increase their own service provision, and tendering processes have taken place. In addition, the national economic policy has accepted social care services as a potential business area supported and emphasized as a future activity. However, the competitors for such small-scale family businesses have been seen in the large international enterprises or those enterprises owned by national or international voluntary organizations if the family business does not take the challenge of growth seriously. Thus, the care branch is a natural area of entrepreneurship for women even if the service structure orientation leans more towards the private sector. Women‟s role in entrepreneurship has lately been emphasized and considerable progress has been made in research with respect to their start-up motivation (e.g. Orhan & Scott 2001), but not business closures. The educational background of care entrepreneurs (e.g. nurses), for instance, does not commonly include business or management oriented education. For instance, the study by Sankelo & Åkerblad (2008) shows that about half of the nurse

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entrepreneurs had considerable development needs in their managerial roles. These development needs in management issues may also be assumed to have some effect on the success of entrepreneurs in the care branch.

Case Study Design The empirical data on care business failures were collected as a case study by semi-structured interviews during summer 2010 in Finland. This sub-study was part of a project entitled Constructing Well-being in Elderly Care 2009–2012 (funded by the Academy of Finland) and a project entitled Development of the Welfare Business in Northern Savo (2010-2011), (funded by the European Social Fund), both co-ordinated by the University of Eastern Finland. Altogether seven care entrepreneurs were interviewed. Three of the enterprises offered residential home care services; four offered home care services. Six of the business owners were female and one male. Two of the entrepreneurs were self-employed, others employed on average eight employees. At the time of entrepreneurial exit the enterprises had functioned for 2–16 years. The main themes of the interviews were factors affecting business closure and the participants‟ experiences of being an entrepreneur. The interviews lasted on average 80 minutes. The data were recorded, transcribed and analyzed using interpretative content analysis including some features of narrative analysis. The aim of the analysis was to create examples of „entrepreneurial stories‟ ending in business closures by recognizing what kind of critical moments and factors affected the decision to close down the business and at which phases of entrepreneurial process these critical factors emerged. Due to a restricted sample the results cannot be generalized. The results have to be considered critically because of the problems of reaching the target group. The interviewees may have more positive experiences of entrepreneurship than those who re-

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fused to participate in the study. The results of the study cannot be interpreted to reveal „the real truth‟ of entrepreneurial reality, while the interviewees‟ answers are naturally subjective and include rhetorical elements. However, we believe that the kind of qualitative data gathering and analysis methods used in this study produce interesting knowledge about business closures and give guidelines for further in-depth studies concerning the research issue.

Results in Brief In the following, we reflect the results of our case study about care business failures in the framework of entrepreneurial process models. First, we present some examples about the multi-level factors entrepreneurs stated in general as reasons for business closures as well as potential ways entrepreneurs claimed avoiding it. Next, we combine the level factor approach with the entrepreneurial process phase approach by presenting short stories of two care entrepreneurs and illustrate these stories through path-to-the-business-closure figures (Figures 1 and 2). The factors influencing business closures of the seven entrepreneurs in question were divided into individual, organizational and institutional level factors exploiting both Shane‟s (2003) and Bygrave‟s (1989) models of entrepreneurial process. The most common individual level factor was problems in the life situation in relation to entrepreneurship, such as motherhood, illness or age. Additionally, six of the seven interviewees reported exhaustion at work during the entrepreneurship. Related to this, entrepreneurs noted the importance of paying attention to wellbeing, e.g. to arranging a reasonable amount of free time. The most significant organizational level factor affecting business closures was weakness in business planning, which had led to a poor financial condition. Several

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entrepreneurs reported that their business planning was insufficient and should have been done more systematically. Poor business planning as well as lacking business skills are one of the most well-known factors affecting business success (Duchesneau & Gartner 1990; Brush et al 2009; Brinckmann et al. 2010; Lussier & Hababi 2010). Functional relationships with public sector actors appeared to be crucial to care enterprises (see Andrews & Kendall 2000). Lack of co-operation and/or dependency on the public sector were mentioned as the most general environmental macro-level factor influencing the closure. To make a business succeed, well-designed co-operation with municipal officials was highlighted by the interviewees. However, it is not only the entrepreneurs who should be supported to build partnerships with the public sector. According to the findings of the study the policy makers‟ attitudes to entrepreneurship also varied a great deal. For further in-depth studies, it would be important to scrutinize more closely in which phase of the entrepreneurial process the enterprises are confronted by diverse level critical factors affecting the business closure. In the following, in order to elucidate „the path-to-business-closure‟, we present two short stories of care entrepreneurs, including some extracts from interviews, and illustrate them in Figures 1 and 2.

1. Exhausted female entrepreneur:”I had to give up” The 31-year-old female entrepreneur, with her close relative as business partner, had a home help enterprise for elderly people which had got off to a good start. The entrepreneur had received entrepreneurial training where she got good advice on starting a business. Customers came through connections with public sector actors, and concrete co-operation with other entrepreneurs helped during busy times.

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“Well it was good in that there began to be a really nice number of clients and the turnover began to grow so that in the second year we immediately trebled it and did even better this year.” The critical points of the entrepreneurial process (Figure 1): The first year was tough economically (1). After the first year came a divorce (2). The business partner was too close a relative, which did not work well in an organizational sense (3). The business partner fell into a depression (4). The final stroke happened after three years of operation: Exhaustion of the entrepreneur herself became too much because of haste, lack of free time and excessive responsibility for clients (5). “It sounds foolish that you start thinking about packing up but it was just that the business partner (close relative) got depression and before as well. And I thought about it good and long and it just felt that I hadn’t the strength.. I had to pack up.” “And it’s annoying that just as it was becoming well known, just when things started rolling and the money started comingin just then I had to stop.” The entrepreneur closed down her business and went to work for another small business in the care sector. Anyway, she felt that the final decision was good. “So that I couldn’t keep a grip on it. So it was a good solution [closing down].”

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Figure 1. Path to the business closure – case 1

2. Mother of small children leaves the rat race:”If somebody pays us the going rate for this, why would we not seize it?” The female entrepreneur had an enterprise producing sheltered accommodation services for elderly people and rehabilitating mental patients. Her husband worked as a business partner. Both had professional knowledge about the branch. The critical points of the entrepreneurial process (Figure 2): The couple‟s children were very small when the business was started (1). It soon emerged that the husband was not suited to work as care entrepreneur who has to do nursing work, too (2). Personnel administration took too much time (3). One year before the closure, a big firm inquired if they would be willing to sell the business (4). Later, this was a kind of push factor towards selling. The entrepreneur became exhausted (5). The alternatives were either to hire a managing director or to sell up. Big challenges regarding future investments for new facilities affected the decision (6). The final decision: The enterprise was merged with a big international company after operating eight years.

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“I was waiting for our second child and my daughter was half years old when we opened. Taking it all into consideration well I thought it’s not worth it at this point in my life. Maybe we should give up? That mother should be around.“ “At the time of selling everything was OK, we were nicely on the plus side. Well. It’s worth selling a company when it’s doing well. In practice.” This entrepreneurial story, too, had a happy end in a personal sense. The entrepreneur continued as an employee in the parent company which had bought her business. After some time, as an employee, it was easy for her to go on a leave of absence. Entrepreneurship may be a choice in the future, too. “Oh yes, I was left with a good feeling about being in business, the energy and that. It’s not dead and buried. The children will grow and me along with them.”

Figure 2. Path to the business closure – case 2

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Conclusions The findings of this study indicate that reflecting on business failures is a source of useful knowledge for the development of care enterprises. Entrepreneurs seem to be aware of multi-level factors affecting business closures and recognize that many of them could be avoided by developing entrepreneurs‟ management and business skills. It is noteworthy that financial problems were not the main reason for entrepreneurial exits (see Head 2003; Bates 2005). Instead, at least in this small data presented here, individual level factors turned out to be the most important factor. The importance of business planning, including individual level dimensions, should be emphasized both in education and consultancy given to care entrepreneurs. Multiple determinants are used to explain the business survival and the probability of failure such as industry-specific variables, the initial characteristics of the firm, the firm‟s strategic variables, the personal characteristics of the entrepreneur and her prior experience and social capital as well as the entrepreneur‟s ethnic origin and nationality and geographical and spatial considerations (Arribas & Vila 2007). In the future, it will be crucial to study the sector-specific reasons for and consequences of care business failures in greater detail in order to ensure the existence of small businesses in the branch. The factors affecting business closures in the private care sector may confront the enterprise in different phases of the entrepreneurial process. The qualitative research method where entrepreneurs openly reflect on the phases of their entrepreneurship and the reasons for business closures may reveal important details and make explicit the tacit knowledge entrepreneurs have about closures. Further, this kind of knowledge may be refined to branch-specific feedback knowledge that helps other entrepreneurs to avoid the same pitfalls.

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Entrepreneurial exits are an important part of the discourse of entrepreneurial success and, thus, should be at the core of entrepreneurial research. Gimeno et al. (1997) argued that a main reason for the lack of systematic research progress is that exit has remained an underspecified variable. To date, the literature has not made a sufficient distinction between different exit routes (Wennberg et al. 2010). Studying business closures is not only looking backwards: it may also be a way back to the future success.

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