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Planning and regulating succession in family businesses – the expert discussion

October 2018Text: Sabine Tjørnelund

Handing a company over to the next generation is not always easy. When is the right time? What qualifications should the successor(s) have? What role does the senior play? Many questions can and should be planned and settled well in advance. Tiding-Online spoke to an expert on succession concepts in family-owned businesses about what needs to be taken into account.

Family businesses are the backbone of the German economy. According to the “Stiftung Familienunternehmen”, around 90 percent of all companies in Germany are family businesses.* The majority are small and medium-sized enterprises, but there are also 200 billionaires in turnover among them. Most of them are firmly rooted in the region, many of them also internationally. This makes the economic structure in Germany different from many other countries and is also a reason for its strength.

Family businesses are not successful per se. However, their strength lies in their structure and corporate philosophy: as a rule, they act in a committed, responsible and sustainable manner. For most people, the goal is not short-term profit maximisation, but economic and sustainable management. Most of them want to hand over their company to the next generation.

This is not an easy process for many company owners especially as they are handing over the work of their lifetime. This step is also connected with far-reaching life changes. For this reason a handover is often postponed too long. Organised and early planning of the handover offers new opportunities for all sides, prepares the company better for future challenges and helps to avoid family conflicts.

But what needs to be considered when planning a company handover? What are the core issues and cruxes that are best defined and clarified at an early stage? Why may it make sense to get professional support in this process?

Tiding-Online spoke with Dr Karin Ebel, a certified expert for the development of owner strategies and succession concepts in family businesses.**

What is special about handing over a family business to the next generation?

Dr Karin Ebel:
Handing over leadership to the next generation is usually just as difficult as handing it over to third parties. Due to the close family ties, however, some company owners believe that the handover to the next generation will gradually take place of its own accord. You do not create a plan or a concrete timeframe for how the transfer is to take place. Often there is also the lack of a clear profile of the requirements and qualifications needed to successfully manage the company in the future. The parents assume that the son, daughter or children will manage it. In addition, it is more difficult in the family to express and accept expectations or criticism. Everyone has their own ideas and plans which can lead to disappointments due to a lack of communication among each other.

On the other hand, family ties are also a particular strength and a good basis for continuing the company pursuing specific goals and values that are not primarily or exclusively profit-oriented. Most successful family businesses are characterised by sustainable management, responsibility for employees and family members as well as adherence to certain values.

If you accompany and advise a family during the handover of a business, you often first draw up a family constitution. What is this anyway?
A family constitution creates clarity for the future as an owner family. The current and future shareholders as well as any other family members are included.

Together they determine what they expect from the company, what they give to the company and how they position themselves as the owner family in order to be able to make decisions in the future. The family constitution defines goals and values for the company and the family; it is, so to speak, the foundation of a family business.

The family constitution consists of six parts: 1) Membership – who can be a member? 2) Self-conception: What are our values and goals? 3) Owner business model: How do we measure success; how much risk are we willing to take?  4) Corporate governance: Requirements for leadership and control, rights and duties of shareholders 5) Family governance: How do we deal with each other? What does a shareholder need to know? What can we do to strengthen cohesion? 6) Roles: Who takes over which task?

The jointly developed family constitution is an incredibly strong basis from which everything can be derived. As a successor I will know which professional and personal requirements I have to provide for the management. I also know what I can decide alone as a managing director and where I have to consult the shareholders or possibly an advisory board. This creates a lot of clarity and is the basis for a successful handover and thus for the continued existence of the company in the hands of the family.

And what happens after a family constitution has been drawn up?
On this basis it is now possible to plan what the actual handover should look like in concrete terms on a timeline. For example, when and which tasks does the senior give up, when does the junior take over, what does he/she still have to learn etc.? It is very important to formulate at an early stage – preferably before the children choose their profession – the requirements to be met by managing directors, advisory boards and shareholders. That way there is plenty of time for them to orientate themselves. As a family, you should take great care to decide on a matter and not to attach it to individual persons.

As far as management succession is concerned, family membership alone is not enough; I must have the necessary professional and personal qualifications for this position. This principle makes a handover clearer for all those concerned. If, for example, you have a very technology-driven company, it usually makes sense for the managing director to be able to argue at eye level with head designers, mechanical engineers or developers and understand what is being talked about.

Classical questions are also: Can the successor join the company directly after his/her vocational training or should he/she still gain external experience? Does he/she need to have experience abroad? There are no generally valid answers to these questions. Each owner family must clarify what is important and meaningful for their business. This also applies, among other things, to presence at the company location. As a rule, family businesses are not located in a metropolis, but rather in rural areas. It is a good idea to settle at an early stage whether the junior has to live near the premises? Does the family have an exemplary function in the region and should therefore live there?

The answer to all these questions is not right or wrong, it should only be clearly regulated well in advance. The biggest problem in family businesses is non-communication. Everyone sees things differently and believes that the others know what they think and want. We are a family!  Disappointments are inevitable. A handover must be planned in good time and, of course, continuously adapted. However, the main concept must be clear. I can only advise entrepreneurs to talk to each other at an early stage and maintain communication with one another.

Encourage the children to develop professionally freely. At the same time, however, make it clear to them that the path to the business is subject to clear requirements that have been jointly defined by the owner family in the family constitution.

There is no successor regulation that suits everyone and there is not only one solution. But what is important is to

  • create clarity
  • be transparent
  • stay in conversation with each other

Thank you for the interview.

*This includes owner managed companies and family controlled companies.
**Dr Karin Ebel has been a partner of Peter May Family Business Consulting in Bonn for many years. The lawyer and tax consultant is also a member of advisory boards of family businesses and a sought-after speaker at congresses and events for entrepreneurs at home and abroad.

Core questions of the succession process that should be clarified:

  • Which successor model can be considered for us?
  • How is the decision on leadership succession made?
  • What should a development plan look like and which stations make sense?
  • What is the right starting position for the successor?
  • Which exit plan applies to the senior?
  • Who will assume which role in the future (father/mother, daughter/son or daughters/sons)?
  • How should the shares be distributed among the next generation?
  • What rules do we need for dealing with each other and with conflicts?
  • What communication is recommended inside and outside the company?

Further information can be found here

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