6 pitfalls and solutions: Our guide for family-owned companies
When it comes to the Company succession in family businesses, the process can be complex and full of potential pitfalls. As the saying goes: Those who fail to plan, plan to fail’.
It is therefore important that families Consider all aspects of business successionto ensure a successful transition. In this article, we look at some of the most common problems that arise when transferring family businesses. And we provide you with possible solutions in our complex guide.
Table of contents
- 6 pitfalls and solutions: Our guide for family-owned companies
- How is the market for business successions developing?
- Strategic succession consulting: the key to success in family businesses
- 6 Common pitfalls in family business succession
- Organising the succession process: 5 steps and decisions in the transition phase
- Why do family entrepreneurs find it so difficult to change generations?
- Company succession through one’s own children
- What are the alternatives to a generation change within the family?
- What are the alternatives to a generation change within the family?
- Conclusion
- FAQ - Brief answers to important questions on the topic
How is the market for business successions developing?
We at KERN have developed its own nationwide follow-up study. We took a closer look at the age groups of the owners and the number of businesses in the German chamber districts.
The situation is more serious than we perceive in everyday life. From our point of view, those politically responsible have still not recognised the problems arising from the wave of business succession in family businesses and the resulting economic problems.
Due to the enormously high degree of smallness of the companies and structures, this creeping process is not particularly noticeable. More than 90 % of German companies have fewer than 25 employees. And if they disappear tomorrow, it will only be noticed years and years later. higher pace of corporate destruction really in the consequence. If the generational change in our family businesses does not succeed, our prosperity is threatened.
A solution approach
There is no such thing as the only solution that makes you happy. At KERN, we think a lot of the Principle of personal responsibility. If entrepreneurs really take the succession issue seriously and see it as the greatest entrepreneurial challenge par excellence, a large proportion of all succession issues in family businesses should be solvable.
But I have to want it and get involved. With time, too, because business successions rarely succeed under pressure.
Strategic succession consulting: the key to success in family businesses
The importance of a strategic Succession advice cannot be overestimated, especially in the complexity of family businesses. This advice goes far beyond mere figures and contracts and deals intensively with the dynamics within the business family, the impending changes and the associated concerns in the family business.
Key points of succession counselling
- Understanding family and company dynamics: Consultants need to recognise and understand the unique situation of each family business. It’s about recognising the family relationships, the business challenges and the emotional aspects of succession.
- Development of a customised succession plan: A personalised plan tailored to the specific needs and goals of the business family is crucial. This includes clear succession regulations, responsibilities and a roadmap for the handover.
Conflict management and finding solutions: Conflicts often arise within the family that can complicate the handover process. Counselling should help to identify these conflicts and develop solutions.
Support from experts
Company succession is extremely complex. Here Legal, economic, tax and emotional issues be focussed. And every aspect is finely interwoven.
As a company owner, I can’t and don’t have to know everything myself, and I should Experts for this special field. Companions who have exactly this experience and, like on a demanding tour in the mountains, bring me safely to the destination as a mountain guide. Without crashing and ideally also without detours.
6 Common pitfalls in family business succession
From how the retiring management plans for retirement to how to deal with emotional issues, there are some common issues when it comes to succession in family businesses. Pitfalls that should be avoidedso that the transition goes smoothly.
1 Unclear succession plan
One of the most common pitfalls in family business succession is unclear succession planning. Without a Defined strategy for the handover of the company to new leadership, it can be difficult for families to ensure a smooth transition of ownership and management.
Unclear succession plans can lead to misunderstandings between family members, Poor decision-making and hostility among family members lead. It is important that family businesses create a clear plan that sets out who will take over the business, how they will perform their role and what responsibilities are involved. This requires open conversations and clarity about the needs of everyone involved in the process.
2 Lack of family involvement
Lack of family involvement is also a common problem scenario. Without the full commitment of all the family members involved, it can be difficult to Smooth succession planning and a successful transition from one generation to the next.
It is important that owners of family businesses ensure that key family members are involved as early as possible in decision-making and the Communication about succession planning be involved. This will help create an environment where everyone understands their role and responsibility in the process and can work together towards a successful outcome.
Or it becomes clear early on that a succession within the family will not be possible and the search for an external solution comes to the fore.
3 Lack of professional advice and expertise
One of the most common pitfalls in family business succession is the Lack of professional and objective advice and expertise. Succession planning requires an understanding of legal, financial, economic and tax issues as well as a clear plan for the future of the business.
Without access to professional counselling and expertise, families may not be able to properly address these issues or develop a viable succession plan. Emotional entanglements, overt or covert, add to the challenge for all involved.
In addition, due to inexperience and lack of understanding, families may not have the necessary resources to facilitate a successful transition. Professional counsellors who are not emotionally involved can help at this critical time. Provide invaluable assistance and provide valuable support to achieve the goals.
Just the ‘translation’ and ‘interpreting’ in a family in this process is of utmost importance.
4 Do not define clear areas of responsibility
One of the most common pitfalls in business succession is omission, Define clear areas of responsibility. Without clearly defined responsibilities and expectations, it can be difficult for family members to know exactly what each person needs to do to ensure the success of the business.
And if the family doesn’t understand it, how will the employees be able to understand it?
This lack of clarity can lead to confusion and ultimately to a Breakdown of communication between family members which in turn can lead to deepening disputes over roles and responsibilities. It also increases the risk of important tasks not being done or being done incorrectly.
And when employees leave the company in frustration because of so much ambiguity, the damage is already greater in advance.
5 Unrealistic expectations
Not infrequently, unrealistic expectations regarding the transition from one generation to the next are also a contentious issue. For example, they expect A smooth and timely transition, while in reality it can take several years to implement a successful succession plan.
In addition, the family members may have different ideas about how the business should be managed and what role each individual should play in the new structurewhich can lead to differences of opinion and disagreements.
Finally, family members may not understand their own roles and responsibilities within the business or do not have enough experienceto run it effectively, which can be difficult for owners and managers.
If you take the time to set realistic expectations about the roles of managers and owners, and develop a comprehensive succession plan, you can make the Successfully managing the transition of a family business.
6 No preparation for retirement
Without a suitable plan, even the senior boss may face problems after the generation change. The Retirement plans must be carefully preparedto ensure that, for example, adequate financial security is guaranteed for Senior and the family in the years to come. At the same time, this security must not overburden the financial performance of the enterprise.
Furthermore, it is important to potential tax effects must be taken into account, associated with retirement and estate planning, as well as other factors such as liquidity management and asset distribution. Neglecting even one of these aspects can lead to a failure of the business succession and leave behind costly mistakes that could have been avoided with proper planning.
Organising the succession process: 5 steps and decisions in the transition phase
Now that the challenges and pitfalls of succession in family businesses have been highlighted, it is essential to take a detailed look at the organisation of the succession process itself. This process is more than just a formal handover; it requires careful planning, clear communication and strategic decisions.
Important steps in the succession process
- Inventory and objectives: Firstly, the current state of the company and its position in the market should be analysed in detail. At the same time, the objectives for the succession must be clearly defined. What should be achieved with the succession? Is it about maintaining the family business, expansion or strategic reorientation?
- Selection of successors: A critical step is the selection of a suitable successor. This can include members of the business family or external candidates for a Management buy-in. The decision should be based on skills, vision for the company and willingness to take over.
- Development of a transition plan: A detailed plan for the transition must be developed. This includes timelines, the handover of responsibilities and how the transition phase will be organised. A gradual transition can help to ensure the stability of the company.
- Legal and financial aspects: All legal and financial aspects of the succession must be carefully planned. This includes Company valuationstax issues and the drafting of purchase or transfer agreements.
- Guidance and support during the transition: Throughout the transition, it is important that both the transferor and the transferee receive support. This can be provided by internal consultants or external experts.
Fictitious example
Let’s imagine that a family business in the manufacturing sector is planning to hand over to the second generation. The current CEO, a founding member, wants to retire and his daughter is to take over the company. She has fresh ideas but needs support in taking over the management responsibilities. A structured transition plan that includes coaching for the daughter as well as a gradual reduction of the current CEO’s responsibilities could be ideal.
Why do family entrepreneurs find it so difficult to change generations?
Basically, there are three reasons why transferors find it so difficult to let go:
- The entrepreneur lacks a vision or a goal for the time after. This would be the decisive motivation for this important step. What should I look forward to and why should I let go if nothing is ‘waiting’ for me?
- Many company leaders also feel that they themselves are being called into question with the handover. And it doesn’t matter whether you sell the company or hand it over to the next generation.
- Lack of or incomplete precautionary measures. Owners of smaller businesses in particular have difficulties in making a living as a result.
The principle of personal responsibility
Anyone who has worked responsibly in their ’system’ day in and day out for many years, even decades. company rarely takes the time early on to Time for these weighty questions.
From our point of view, however, it is precisely Principle of personal responsibility, which is lived out entrepreneurially in everyday life. However, it is often forgotten for the very private planning of life. Sounds a bit unusual, but it is really hard for senior entrepreneurs. It’s like learning something new. To look at something unknown. Even if it is myself.
We recommend that every donor take a break from everyday life for 1-2 days and ask themselves questions in their own silence.
- What gives me lasting pleasure today and in the future?
- What could be the meaning of my succession solution?
- Who am I when I am no longer an entrepreneur and what am I looking forward to?
- And what do I have to do to achieve these goals?
Company succession through one’s own children
Ideally, children should know and also be able to feel that a Taking over the parental farm can really be voluntary. I can, but I don’t have to. And there is no relationship drama between parents and children or even withdrawal of love. As a child, I am really free to decide whether I feel called to do so.
And the same is true for the parents, the people who hand over a company. Children must also make their contribution in their education and qualification so that the company receives the leadership personality it needs for the new future.
The enterprise that feeds everyone has requirements for future leadership. What qualities are needed in leadership? And is it then really the new generation that will successfully solve this task in the future?
Are the children prepared to align their education and qualifications with this?
And depending on their development, parents should then also have the freedom to decide differently if necessary and sell their business.
This is something that both sides have to accept.
When children do not want to, cannot or are not allowed to
A trend that, according to our estimates, is now Everyday life for a good 60 % of German family businesses is.
If it is certain that no solution is to be expected within a family in the generational transition, the Sale of the company is definitely a good alternative.
It doesn’t mean that something doesn’t work, but that the story can’t continue to be written in the respective family. However, there are many other individuals or companies who are certainly interested in an external succession solution. And behind them are usually other families, the majority of them.The middle class thus remains in family hands and the special culture of family businesses is transferred to a new family.
What are the alternatives to a generation change within the family?
In the company succession phase, family businesses face complex challenges that affect both business and personal aspects. Particularly when children do not have the opportunity or desire to take over the family business, specific difficulties arise that need to be addressed.
Emotional challenges and how to overcome them
- Letting go of life’s work: For many founders, the company is part of their identity. The emotional attachment can make it difficult to let go. This is where it can be helpful to seek external advice to ensure an objective view and make the transition process easier.
- Conflicts within the family: Tensions often arise when it comes to succession. Open communication and the involvement of all family members in the process are essential. Mediation by external advisors can provide support here.
Strategic solutions for succession planning
- Establishment of a transition team: An interdisciplinary team made up of internal and external experts can help to make the transition process efficient and smooth.
- Flexibility in succession planning: Not every business succession has to take place within the family. Options such as Management buy-outs or the sale of the company can be viable alternatives.
Preparing for the future
- Adaptation to change: Companies must constantly evolve in order to remain competitive. The new generation or external managers can bring a breath of fresh air and new perspectives.
- Planning financial security: Particularly when the senior manager retires, sound financial planning is important to ensure the financial security of both the senior manager and the company.
What are the alternatives to a generation change within the family?
There are basically two possibilities here:
- On the one hand, there is the Company sale to an external buyer to mention. These are often also family entrepreneurs. This preserves the family corporate culture.
- On the other hand, there is the chance of Sale to an employee, MBO (Management Buy Out) called.
Succession solutions with the employees of a company
A so-called Management Buy Out MBO often even makes succession easier. The executive knows the company and thus hardly needs any training. After all, the senior employees of the company in question know the entity from the FF and usually enjoy the trust of employees, customers and suppliers.…
Both sides, the transferor and the transferee, know what to expect and what is important.
At the same time the financing of a transaction also make such a solution particularly difficult.
Not every employee of a family business has the private means and can set up his or her own financing. If the transferor is not prepared to help, the internal succession in the business will not work.
Financing options
There are many different possibilities. We mention two models as very frequently chosen approaches:
- Part of the Purchase price is designated as a vendor loan and thus the transferor becomes a further financing partner of the transferee in addition to a bank.
- The shares are transferred step by step over the years. The successor can thus try to earn part of the financing himself. Of course, these models also have their risks. These must be weighed up against an external succession by outside buyers.
Conclusion
Succession in a family business is an important process that, due to the Complexity of the family dynamic can be a challenge.
Pitfalls include misaligned goals between generations, unclear roles and responsibilities, difficulties in transferring ownership and control, lack of communication and trust between family members, inadequate financial planning and a lack of legal structure.
With careful consideration and planning these pitfalls can be avoided and the transition to the next generation of leadership can be successful.
FAQ - Brief answers to important questions on the topic
Early planning, clarification of legal and financial aspects, the involvement of all relevant family members and employees and the definition of a clear handover plan are important. Consideration should also be given to whether and how the corporate culture and values should be preserved.
The handover includes valuing the company, developing a succession plan, selecting a successor, clarifying tax and legal issues and gradually handing over responsibilities. It is also important to consider the emotional component of the handover.
A family business is a company in which the majority of decision-making power lies in the hands of one family. Several family members are often active in the management of the company and there is a desire to pass the company on to the next generation.
Careful succession planning ensures the long-term viability and success of the company. It helps to minimise potential conflicts, avoid legal and financial problems and ensures a smooth transition.
Successful family businesses are often characterised by strong values, long-term orientation, close relationships with customers and employees and a high degree of adaptability. They combine professional management practices with the strengths of family cohesion.
An owner-managed family business is managed directly by one or more members of the family who also own the company. These companies are characterised by a close connection between company management and ownership.
