Do you know the law of three generations? The first generation builds the family business, the second continues it and the third destroys it. But is it really that simple? Does this cliché apply even though it fails to put emotions, reason and good governance at the centre of transmission projects?
There is no easy answer. Implementing governance in family businesses can indeed be complicated, as emotions linked to family ties tend to drive decisions where more objectivity is needed. These pitfalls can be a hindrance to the rational transfer or divestment of a business. How can you avoid them if you are the transferring manager?
First of all, it is important to understand the psychological and emotional factors you will face when transferring your business. Passing on one’s business means losing a status that is naturally attributed, based on hierarchical relations and affirmed by the familial and entrepreneurial context. Naming a successor means transitioning from a vital and rewarding role to one more in the background, where advice and counsel will no longer necessarily be followed. Finally, the company will no longer be an extension of yourself as it was before. You will have to reinvent yourself and seek out a new perspective.
To anticipate your future life smoothly, the best solution is not to hide from this emotional reality which risks creating obstacles to the transmission. Look ahead and decide now when you will be ready to sell your business, aside from any strategic and economic considerations. Then make sure that you and the buyer, whether they are within the family or not, share the same values and the same vision of the company’s future. Encourage the passing of the baton to the new generation, whether it is the second or third, by providing yourself with long-term tools such as appropriate articles of association, a shareholders’ agreement and a family charter. These strategies will help you to establish a long-term vision of the company based on strong values and will set the rules of power and individual conduct, the methods of arbitration and conflict management, etc.
As a mother or father running a business, there is a strong temptation to want to keep the business going by choosing your child as successor. But he or she must have the necessary skills to run the business; otherwise, you risk imposing on your employees and shareholders a leader who lacks the appropriate legitimacy.
The situation becomes more complicated when there are several children in the family. What are you going to say to your children who will not be elected to the management of the company or who will even be excluded from shareholding? What might their reactions be and what do you envisage as a quid pro quo for this sidelining?
Secondly, the family buyer you have chosen may not necessarily want to run the business as you intended and may set their own conditions. It is up to you to find common ground with them to ensure a smooth transition. You may also need to change the way you manage your business before you hand over the reins. The buyer’s qualifications and goodwill will not be enough if you do not give him or her practical guidance in becoming an entrepreneur, too.
Do not lose sight of the psychological aspect if the buyer is your child. Even with the best governance tools in place, even as the sole leader of the family business, children will always feel a responsibility towards their parents to succeed. This responsibility will be even greater if other family members are shareholders, members of the management or employees.
Discussions about the transfer of a business are too often centred on the financing arrangements and the legal, civil and tax aspects. Emotional issues are generally dismissed even though they can have a lasting impact on the development of a company, or even lead to its implosion. In this respect, your banker, especially if he or she has been following your career path from the beginning and knows some of your family members, can be of great help to you--and not only in purely financial matters. A knowledgeable outsider’s perspective can help resolve the jealousy, resentment and potential conflicts that exist in many families.
The bank is naturally a key partner, alongside specialist advisors, when it comes to financing the transfer or takeover of a business while ensuring that it continues to grow.
Whether they are commercial, craft or industrial - SMEs, 70% of which are family businesses, are an essential component of the Luxembourg economy. However, the question of their transmission is becoming increasingly important. In the next ten years, many owners and managers will have reached retirement age, but few have really anticipated the end of their activities. Here are the key points to watch out for as an owner or manager of a family business.