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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 analysing 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 upskilling 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.

Article courtesy of RAN ONE: