How can family governance facilitate family business transitions?

Even in families where everyone gets along, succession issues can give rise to situations where both the future of the business and the family relationships are put at stake. What measures can be taken to prevent this?

In brief :

• Succession in a family business involves multiple challenges, with financial, legal and tax aspects to manage. There are also financing needs, both for the transferors who exit and the transferees who enter into ownership.
• Furthermore, personal motivations and relationships between family members play an important role and will affect both the communication and the handling of the transition. These “softer” aspects require as much attention as the technical ones and the outcome of planning without consideration to the family dynamics will be as unsuitable as with no planning at all.
  
• Succession of a family business requires special attention. The interdependence between the family and the business, the overlapping of roles and responsibilities as well as often undefined principles for working or owning together need to be handled well so that these characteristics become advantages rather than disadvantages. 
  
• The process of formalizing the family governance leads to deeper reflection and helps both the family and the business to learn about the visions, expectations and motivations.
  
• Investing the time and energy to implement family governance helps the family to anticipate potential scenarios before they get challenging or personal. This also helps the business to maintain efficiency and it benefits from the agility of a family working or owning together.   

Why is succession a challenge?

Effective succession in a family business involves multiple challenges. There are of course financial, legal and tax aspects to consider, but there are also several other issues that families face, such as:

• Are there potential candidates within the family to take over, and are they interested?
• How can the choice between several candidates be made while keeping family harmony?
• Is the next generation ready to take over? Are they sufficiently informed, skilled, and experienced? Do they have a leadership profile?
• Is the senior generation prepared to step down and to relinquish control?
• Is there alignment on the long-term vision for the business and agreement on how to get there?
• What are the expectations regarding profit allocation of active and passive owners?
• Who should have the right to be a shareholder and on which conditions?
• What principles shall apply for share transfers if an owner wants to exit the shareholding?

Usually, these questions arise as part of a natural development, when the senior generation starts thinking of stepping down or when a member from the next generation asks to take a more important role in the business. Sometimes, they come as a direct consequence of another event, such as an external acquisition offer, a family member deciding to move abroad and wishing to leave the business. And sometimes they arise suddenly and unexpectedly, for example upon to an accident of a key person or an economic crisis that threatens the survival of the company.

What are the main challenges?

The two main reasons for unsuccessful transitions of a family business are lack of communication and lack of preparation.

Even in families where everyone seems to get along, succession can give rise to situations where both the future of the business and the family relationships are put at stake. Different views, expectations and hopes among the family members are not always openly discussed, and fear of the outcome can also play a role. This leads to uncertainty, anxiety and frustration, which can contribute to conflict or even resignation.

One of the main reasons is the mix and interdependence between the family and the business, when the family dynamics are confronted with the business dynamics, and the principles for working or owning together are not clearly established. Often, family members wear several “hats” (owner, manager and family member), each representing different interests. This can become a challenge, especially if the roles and responsibilities as well as the decision-making processes aren’t defined.

How to ensure a successful transition?

A successful succession requires time, resources and a specific focus on the inherent issues.

Prior to identifying and dealing with the business-related legal and financial aspects, the underlying values should be defined, and the relational dimensions considered.

It’s important to understand the different perspectives, motivations and needs among the family members. It should also be remembered that generational differences can be important when considering aspects such as “the definition of success” or “the purpose of wealth”.

Mutual understanding and support are necessary. It will pay off to create a safe space where “the elephant in the room” can be dealt with and conflict can be handled in a respectful and productive way.

Well-established processes for communication and decision-making as well as principles for different issues and situations should be established, such as policies for dividend distribution or for employment within the family business.

This structured and principle-based approach to deal with family-related issues is often referred to as “Family Governance.” Policies stipulating general principles help the family to professionally treat issues that could otherwise be seen as linked to a person, for example the possibilities for in-laws to have access to information. General criteria and a definitions of the profiles for certain roles in the business also help to separate factual needs from personal feelings.