How to transfer the family business to next generations?

Steps to successfully transfer family businesses, art collections and houses to a next generation are explained.

Timely and properly transferring family assets requires careful planning and training of successors and documenting the rights and obligations of all family members. This should be based on discussions between qualifying family members in which each express their wishes, worries, objectives and ambitions regarding the family and its joint assets.

How to transfer the family business to next generations?

Here the 4 key steps are described which allow for a successful transfer of family owned assets to succeeding generations.

Step 1; When to start the transfer process and who should be involved?

Experience shows that an early start with the inevitable transfer process substantially improves chances of a successful hand over to the next generation. The more involved members of the family are the better. It is essential that they take part on an equal footing and freely express their views. Some first key questions generally are: who is member of the family? Are in-laws –full- members? Are minors? And how about adopted children or those borne outside marriage? Once family- membership is agreed and clear, the next question is how to proceed and with whom?

Step 2; Identify who wants to succeed and what training is required?

Family-heads traditionally decide on their own who should succeed and when, rather than involving family members who can express their views and interests. The patriarch has the final say, but if he wants the transfer to go well and without future trouble, then advance truly open talks between family-members telling what they would want and expect, will certainly help. For this involving an independent, experienced outsider can be the key. He should start by interviewing all eligible members. Then based on his findings he moderates discussions between family members to agree on the best successor(s). If there are more candidates then each should present their qualities and plans to the family deciding the best candidate. Thereafter a plan to train the potential successor should be adopted, while also the other members should be educated for their role as stakeholder.

But what if no one wants to succeed or has the capacity to do so? Then a non-family member will have to run the family business if it is not sold. To enable that to go well I recommend reading the articles dealing with family governance and family charters. Such documents should allow for outsiders to run the business adequately, while family members can enjoy (financial) rights and accept obligations and limitations. These documents should also cover subsequent generations and possibilities for them to be(come) executive, and their necessary qualifications.

Step 3; What rights and obligations should the successor and the other family members have?

Many family businesses fail after a transfer to the 2nd generation and most do not survive a transfer to the 3rd generation! This is because family businesses are generally started by entrepreneurial people who build their business on inspired plans and inspiration. At that stage there are few strict rules and limitations. Profits are applied for the business and with the business grow the experience and know-how of the creator. The founder is often convinced that his children are unable to succeed until they are quite old. A late transfer limits the chances of success!

When kids are finishing school, time has come to start the transfer process by first agreeing and laying down a clear, fair and transparent foundation for the future of the business (or other substantial joint property). Also the rights of all –agreed!- family members now and in future should be fixed, while the candidate-successor should start an intense training. A committee of wise outsiders can both help to overview the training and protect the position of other future stakeholders as well as the business. So the process must start when the kids are relatively young. It must include discussions on and documenting of rights and obligations of all concerned allowing for a strong business that can be run without undue interference but with informed family members who receive a reasonable, pre-determined income from the joint property.

Step 4; when should the transfer actually take place and how?

People do not live forever, but experience shows that owners of significant family assets can wait very long with handing over. Most of the time transfers take place upon the execution of a will, the contents of which are frequently a –bad- surprise to the family. Clearly earlier and pre-discussed documentation helps considerably and heads of families should not be afraid to open up on this. It is in fact their prime responsibility to ensure that both their business and his family are ready for the transfer of both the power and the legal title. Structures should be in place to separate power from the legal rights of all stakeholders (see a.o. articles on Foundations and (voting trusts).

There are ways for the older generation to make a transfer so that they can turn the wheel back if things do not work out as planned. However when that route is followed, the step to actually hand over should be taken when the younger generation can do so without undue interference from the elder, but with the possibility to benefit from their experience and knowledge. The new generation will do things differently but not necessarily badly. Also the family constitution should allow for some flexibility and adaptability.

Before the transfer takes place some organisation, committees or boards should be in place so that all members of the family are informed and have an agreed level of influence. Qualifying members of families should be on such boards probably together with 1 or more trusted outsiders who can protect all interests and help resolving potential differences of opinion by acting as mediator or arbitrator.

Conclusion:

It is never easy to hand and to take over but good preparation, transparent documentation and fair treatment of all, is essential!

Most –successful- people find it increasingly difficult to let go and yet some day, they must! It is relatively easy if there is only 1 child, but when there are more, it is important to start the succession process soon. The successor must be identified and all concerned should be happy with the choice. Then training should start and also the laying down in discussions of the rules, rights and obligations in the family. Such family documentation works best when it is based on broad family-wide discussions so that everyone feels contributor to what must be a fair piece. That will help the successor to run the business well while all others are getting the right information and their fair share out of the successfully transferred family business.