An impending generation change bears above all in family-owned enterprises a high potential for conflicts. Hence, the first step when instigating a corporate succession should be a profound analysis of the strategic options and a clearly defined procedure.
In SMEs the management often consists of shareholders, i.e. representatives of the owning family, which means that a succession process must be faced on different levels. The formula for success is to openly discuss options and to actively involve both the family members and external management. A multigenerational management may in certain instances be beneficial and a stability factor. In other cases, a clear division between generations may be imperative.
If ownership will remain in the family, a core issue is the definition of the future decisionmakers. If various family branches are involved it might make sense to think of bundling shareholder rights or even of consolidating the overall shareholder structure. The larger the enterprise the more important the separation of the ownership sphere from the management. Strategic planning usually takes time and the assigning generation should consider that their successors will have other approaches, new ideas and different talents. The experience of external advisors will help bring objectivity to the discussion.
"Strategic planning usually takes time and the assigning generation should consider that their successors will have other approaches, new ideas and different talents. The experience of external advisors will help bring objectivity to the discussion."
Involving third parties
As an alternative or in addition to family participation, a solution comprising employees or third parties can also be considered, e.g. a management buy-out or a (partial) sale to appropriately specialised private equity investors. The establishment of a private foundation as a kind of neutral owner was a popular approach in the past decades. However, this structure has been shown to frequently prohibit innovation. An undertaking needs entrepreneurial personalities, dedication to the respective type of business and a readiness to take commercial risks. Lawyers, tax advisors and bankers may be highly renowned experts in their own field but are not always the perfect match for this profile of requirements.
If the succeeding generation is not ready or able to take over the family business, selling the company will sometimes be the best solution for both the family and the enterprise.
An understanding of the legal options can help with the decision-making process. Once a consensus with respect to the strategic approach has been reached, appropriate tools for the legal implementation must be found and possible limitations identified. Inheritance law can limit the range of options and even has the potential to jeopardise the company's existence. The statutory share of the estate that must be left to certain family members under mandatory law can impede the intended asset allocation. To avoid lengthy legal disputes amongst heirs it is strongly advisable to implement the desired legal succession in due time and to align a last will and testament, a marriage contract, possible waiver declarations of heirs and the articles of association of the respective company accordingly.
The thorough and early planning of a succession process and the active involvement of all generations is crucial. All arrangements should be under regular review to ensure the adaption to legal and commercial developments over the years. Seeking expert advice throughout the process will ensure that great businesses can successfully continue.