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Transitioning Between Generations
The family business is often the basis of a family’s wealth. It
generates the funds that feed and clothe two or three generations
concurrently, and can also be something that is a source of pride and to
which all family members have a deep emotional attachment.
When the owner thinks about retiring or is unable to continue managing
the business for some other reason it is only natural that another
family member would be their first choice of successor. Although it is
certainly possible to transfer ownership from one family member to
another it’s not as simple as it may seem at first and requires planning
to ensure it happens smoothly.
Unfortunately the majority of
business ownership transfers aren’t well-planned; more than half of all
businesses transferred to the second generation fail in the first three
years after the new owner takes over, and fewer than one out of five of
those that do survive will make it into the third generation. What these
failures can mean to a family might be all the difference between wealth
and poverty.
One of the most important considerations is the impact of a transfer of
ownership on the non-family members in the business. The outgoing owner
has for some time been the leader of the business and there are usually
personal relationships in place that need to be taken into account. An
abrupt change of ownership can irreparably damage these important
linkages.
There are numerous other issues related to a transfer of ownership –
from legal and taxation issues to the fundamental need to transfer
knowledge about running the business, and they will all be easier to
deal with if the transfer happens gradually in an orderly way over a
period of time rather than simply ‘happening’.
Set the Date Ahead of Time
The beginning of the process requires a date to be set for the transfer
of ownership. This is a ‘working’ date and need not be absolute,
although it will be the date around which transfer plans are made.
It could be the owner’s 65th birthday, or the date an anniversary is
reached, such as the owner’s fortieth year at the head of the
enterprise. The date should allow a period of years rather than months
for the transfer to take place.
Choosing a Successor
The same principles should be applied as if the successor were being
chosen from a group of applicants for the post, even if all members of
the group are related. Unfortunately the dynamics of a family often mean
that the wrong person is chosen to succeed an outgoing owner at the helm
of the family business, and that can also mean the end of the business.
Be honest when analyzing the strengths and weaknesses of family members
as potential successors. Separate issues of family loyalties and
emotional attachments from the selection process and base the choice on
a candidate’s business acumen and management abilities.
Some of the questions that might need resolution are:
- How committed is this person to the business itself?
- Do they have the management skills required?
- Is their business experience sufficient to run the enterprise?
- Will they do more than just administer the business; can they develop
it?
- Are they really the best person for the job or should someone outside
the family be employed by the family to run the business?
Preparing the Successor to Take Over
When the successor has been chosen they must be objectively analyzed to
identify areas of weakness or lack of knowledge so these deficiencies
can be rectified in time for them to assume control of the enterprise.
This might take years to accomplish, which is another reason to set the
owner’s departure date well ahead of time.
If a specific educational pathway is required this might require three
or four years of study, in which case details like who pays for the
education and who will pay for the costs of things like accommodation
and meals needs to be determined. Coaching may be required as an adjunct
to formal study, and these costs may be met by the business.
It could also be a wise idea for the designated successor to work in the
business for a period of time after all their educational and
up-skilling needs have been met, to give them ‘hands-on’ experience and
to familiarize them with the day-to-day responsibilities of the role.
Owner’s Realization of Value from the Business
The outgoing owner of the business will probably want to fund their
retirement from the transfer of the business, just as they would if they
were to sell it to someone outside the family. The manner in which this
can be done without affecting the cash position of the business should
be worked out well before the owner’s departure.
Set up a Family ‘Board’
If there are several members of the family involved with the business it
can be helpful to set up a family board that meets regularly and shares
information about the transition while it is being planned. This can
smooth over any disappointments or feelings of being disadvantaged that
can always arise within families choosing a person to head the family
business.
It’s recommended that records be taken at all meetings and circulated
shortly after each meeting so that no disputes can arise at a later date
about what was said or decided.
Taxation and Estate Planning
The departure of the owner and handover of the business to the next
generation will have taxation implications for all those involved.
Because the business usually forms part of the owner’s estate there will
also be estate planning considerations.
These areas are usually highly complex and need the attention of
specialists with local experience and a good knowledge of all applicable
legislation. Advice should be obtained during the process of planning
the succession.
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