Intra-family business succession is the desired form of succession in many family businesses. In an interview with experts Ingo Claus on what company owners need to pay attention to when preparing for the generation change. At the same time, we talk about the cases in which a company sale is better than an intra-family company succession.
At what point should business owners start thinking about business succession and To initiate measures?
In our opinion, it is good to start thinking about the handover five years before it is planned and to work out a handover roadmap. This is because an entrepreneur often needs another two to three years to properly prepare his company for an upcoming generational change. It does not matter whether this takes place within or outside the family.
Plan alternative to intra-family business succession
If a succession within the family is planned, it is advisable to think about an external succession as an alternative solution: this often requires optimisations to make the company more valuable in the long term. In this way, a better price can be achieved in the event of a possible sale.
Which prerequisites are indispensable for handing over one’s own company to the next generation (or for initiating this process)? When does an intra-family business succession exclusively make sense?
An intra-family business succession only makes sense if it is wanted by all sides. This means, on the one hand, that the senior must be convinced in terms of content that the transferees can lead the company into a good future. Furthermore, he must be willing to hand over responsibility.
The juniors, for their part, must have the freedom to accept or reject the offer of a family-internal business succession. Freedom on both sides is the most important criterion for success. Only in this way can an intra-family business succession be successfully organised in the long term.
Decisions need freedom
In parallel, the parties involved should jointly work out a timetable that fixes milestones for the handover. Among other things, this can include giving the transferee a certain amount of time. During this time, he can find out whether he wants to continue the family business. Only then can an amicable decision be made between the parties and further milestones set. This includes, among other things, the preparation and qualification of the transferee as well as the timing of the transfer of responsibility in the business.
A transferor should also take the liberty to prefer another succession solution if agreements on preparation are not made on the part of the transferee.
On the other hand, under which general conditions should a different succession solution be considered?
If the business has a difficult economic outlook, I would always advise transferors to seek an extra-familial solution. The burden of continuing to run a business in a difficult economic situation or in a consistently declining economic market and industry environment should not be placed on children.
Avoid permanent financial obligations
In addition, strong contractual ties that entail long-term financial obligations for the generation taking over are problematic. I generally advise against pension models, as these place too great a burden on the transferee in economically tight times.
An intra-family business succession is also unsuitable if the next generation does not take over the company out of inner conviction and freedom. This also applies in the event that the transferors do not wish to withdraw from the day-to-day business.
What prerequisites should the next generation bring with them in order to become an adequate successor?
This depends very much on the company to be handed over: A software company has completely different requirements than a craft or production business. Nevertheless, a certain sales and management strength is certainly very important for most company successors.
How does a company boss optimally prepare for succession together with his junior? Please name only the most important points that you would recommend?
It is important that the junior staff can consciously ascertain what kind of job the transferor is doing through a temporary or already existing cooperation.
Schedule training time outside the company
From a systemic point of view, the influence of the transferor generation on the junior staff should be reduced, especially in the training phase: The juniors should prepare themselves outside the company for a possible intra-family business succession. This means that they should gain experience outside the company, the city or even abroad for as long as possible. The know-how learned during this time will be good for the company after a handover.
If the transferee still lacks competences a training plan clearly helps. The necessary need can be determined, for example, through coaching. After that, a timetable should be drawn up, the appropriate training offers sought out and the preparation begun.
How long does such a handover process take? How long should the senior stay in the company after the handover? Should such periods be clearly regulated and recorded in writing?
This is highly individual and always depends on the project. A handover process sometimes takes only a few months. In constructive handover processes, this process can sometimes take one, two or three years.
The advisory board as a steering instrument
It is not only in the case of a family-internal company succession that a transferee should use the networks, the knowledge and the market expertise of the transferee. However, this does not necessarily have to be in the form of a dual leadership. We recommend the instrument of an advisory board that meets regularly. Such an advisory board is a helpful and cost-effective instrument to discuss important issues outside the daily business.
In addition to the junior and senior members, the advisory board should also include one or two business friends. It also makes sense to have an advisor on the board who is experienced with family-internal transfers. In this way, he can help to recognise critical or perhaps also conflictual developments in the family’s interest and to react at an early stage. It is important that the milestones of the handover process are clearly regulated and recorded in writing.
How do you proceed if several children are to take over the company at the same time, on an equal footing?
A business transfer in equal parts is always a difficult solution. It makes decisions in the company more difficult and can thus endanger the future of the company. In principle, it is good if one of the children is given more responsibility. This leads to more clarity in business decisions and prevents tiring coordination processes in the company.
If there really is to be an equal succession, I always recommend a clear, written separation of tasks and areas of responsibility.
Separate tasks and responsibilities
In this situation, too, it is advisable to skilfully accompany the juniors through an advisory board. In most cases, stable agreements can be reached within the family in the entrepreneurial sense. It can become critical if, in the case of an equal handover, children-in-law also come into the company and have a decisive influence on these decisions.
Synchronise articles of association and will
In these processes, the synchronisation between the will and the articles of association is particularly important. This is because company law always takes precedence over inheritance law. A lack of coordination between the provisions of the will and those of company law can considerably disturb family peace in the event of succession.
What are the psychological or communication problems between relatives that often arise when there is a change of generations? Do you have any tips on how to solve these conflicts or prevent them from arising in the first place?
This is most easily explained with a small model of the different levels of relationships. Members of entrepreneurial families are always members of the family, mostly also owners of the company and even work with it. From a communication point of view, there are completely different access channels, currencies and decision-making criteria.
Role changes cause conflicts
Let me illustrate this with an example: One is born into a family, the common currency is love, commitment and recognition, the essential decision criterion is the well-being of the family. One enters a company mostly through a contractual commitment, the essential currency is money followed by career goals and recognition. The essential decision criterion is the profitability of the company.
As a partner and owner, on the other hand, one often deals with related persons. The essential currency is the size of the shareholding. In addition, there is the authority and experience of the individual partners. The overall objective and thus the most important decision criterion is to secure the existence of the company and the shareholders.
The affiliation of an individual to these three systems is the cause of many communication problems.
Thus, there is also a permanent change of roles in the company. It is often unclear who is talking to whom or in which role is being sent and received: The father with the son or two equal partners in the company.
Moderated handover processes more successful
Contrary to the common saying, we therefore recommend: Talk is gold, silence is silver. A regular family jour fixe accompanied by a neutral moderator or mediator helps to professionalise communication.
I have read that mistakes in the handover from generation 1 to 2 can cause difficulties for the second and even third generation. What needs to be prepared at this stage to avoid long-term problems that are not currently anticipated?
This can be so and depends very much on the contractual construction. The clearer and more transparent the corresponding regulations are, the better this is for all generations.
Sensitive fine-tuning on both the factual and emotional levels is essential. In these sensitive processes, the support of an experienced and neutral facilitator is highly recommended.
What do family businesses in particular need to consider? How is it ensured that the junior enjoys the same trust among customers (and also among the workforce) as a competent successor as the senior? How do you secure the orders and customer relationships beyond the Company handover within the family out?
This again depends very much on the size of the company. It is always helpful if there is a second level of management and knowledge in the company.
Intra-family business succession is usually successful when decision-making authority is clearly transferred to the son or daughter and the communicated separation of duties is clearly lived. In this way, the senior signals respect and appreciation towards his successor.
Clear handover of responsibility
As long as a senior is still in the company, employees tend to bypass the successor(s) in decision-making and directly involve the ‘old man’. In this case, it should be made clear to the employee that the decision-making authority now clearly lies with the next generation.
When introducing a successor to the transferor’s network, personal connections should be established as early as possible. This requires attentive and early communication with the business partners.
Are there any other problems, challenges or special features that need to be taken into account in the case of succession within the family?
No. Each case is highly specific.
It is also important to know the most important stumbling blocks in the generation change. Therefore, register directly for our Basic webinar “The five biggest mistakes in generational change in family businesses”. on!
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FAQ
Strong contractual ties that entail long-term financial obligations for the generation of transferees are problematic. Pension models are not recommended, as they place too much of a burden on the transferee in economically tight times.
An intra-family business succession is also unsuitable if the next generation does not take over the company out of inner conviction and freedom. Likewise, if the transferors do not want to withdraw from the day-to-day business.
The senior should personally introduce the junior to the network as early as possible. In addition, a committee with one or two entrepreneur friends and an experienced advisor helps. This is a cost-effective solution and discusses important topics outside of day-to-day business. The accompaniment of an experienced moderator enables the improvement of communication. The clear transfer of responsibility prevents employees from continuing to turn to the old boss. In addition, the articles of association and the will must be synchronised. This is because company law always takes precedence over inheritance law.
Most successors need some sales and leadership skills. In addition, a temporary cooperation helps to get to know the work of the transferor. The training of the successor should take place outside the family business. This reduces the influence of the transferor in this important phase. The know-how learned will be good for the company.
