Business transfers: When emotions play a role

Family companies are often handed down to the next generation, but even this kind of procedure requires planning. Throughout the process, possibly the most significant factor is open dialogue to ensure that family members are always kept up-to-date and involved, and able to ask in-depth questions about the long-term plans.

Takeovers within a family are rarely free from emotions. Parents may have established a clear opinion of the talents of each of their children and how well-suited they are to managing the family business. This perspective may not fully match their children’s own goals and ambitions. This can lead to problems.

Disclose your intentions

In any case, the best approach is for each party to honestly express their standpoint and to disclose their intentions. This makes it easier to come to a joint decision as to whether it makes sense to choose a successor from within the family or whether an outsider should be brought on board. Choosing a successor from within the family could ensure a high degree of trust and loyalty that outsiders will struggle to achieve, but in many cases such an approach significantly restricts the number of suitable candidates.

For an entrepreneur, ownership and management of the company go hand-in-hand, but it doesn’t have to stay that way forever.

For an entrepreneur, ownership and management of the company go hand-in-hand, but it doesn’t have to stay that way forever. During the long-term planning process, it makes a lot of sense to consider management of the company and the economic return separately.

Before considering a handover, the company accounts for the last three to five years must be available and accessible for anyone who is to be involved in the future management of the company. This also applies to forecasts and budgets. High-quality budgets and forecasts facilitate a smooth handover to the successors.

The tax consequences of the company transfer should not be underestimated – in particular, everyone involved should consider the inheritance tax implications. Based on a general rule of thumb, 70% of all wealthy families lose their assets in the second generation, and 90% in the third, according to US asset management company Williams Group.

Reportedly, this is attributable to the fact that later generations often lack the same drive and discipline of the older generation, but inheritance tax certainly plays a role too. There are tax exemptions for family businesses in many countries, but you must take advice to ensure that the company is properly structured to take advantage of these.

A divorce can also invalidate a carefully planned succession.

Divorce

Another aspect requiring consideration is divorce – something that can invalidate any carefully planned succession. If a shareholder has to sell part or all of their stake as part of a divorce settlement, there is the risk of potentially hostile parties becoming part of the ownership structure. This can cause problems if the long-term interests of the company are not the priority of these holders and/or are not of importance.

It is generally advisable to get a business lawyer or notary and your personal bank adviser or auditor involved in planning the takeover. They may also be able to provide support in dealing with family members.

As a final piece of advice, always insist on confidentiality and discretion, even in an internal process. Business succession planning is a lengthy and complicated process as it is. Additional disruption from trickling out incomplete or distorted information is totally counterproductive.

If you’d like to find out more, take a look at our Special feature: “Transferring a business”.