Succession in the family business

Succession in the family business

Documenting the regulations offers advantages

Entrepreneurs often do not arrange the succession in their family business properly. A good preparation is necessary to avoid arguments and misunderstandings and it ensures the continuation of the enterprise.

What is a family business?

Researchers often have trouble designating the label ‘family business’. The exact definition has been altered and improved in the last couple of years. A much used description is the one from Roberto Floren, professor at the University Nyenroden (2002), In his view a company is a family business if, at the least, it meets the following two criteria:

More than 50% of the enterprise is owned by the family

A family has decisive influence on the company strategy or the succession decisions;

A majority of at least two members of the enterprise management are from a family;

In addition, Floren notes that  if a company has been founded less than 10 years ago, at least one family member of the president needs to be working in the enterprise or has partial ownership of the enterprise.

How do you determine the succession?

Transferring the daily management is not a simple task if you were in control for all those years and consider your business as the child that you raised. Emotions play a large part in saying goodbye. The new generation usually has its own ideas about the management and the goals of the company. This shows, for example, in the new style of management. The questions that you can ask yourself with the succession in management:

*Can or does one of the children or cousins want to take over the business?

*Does the intended successor have the right qualities?

*Is an outsider not better for the future of the business?

Do take emotions into account and watch out for family blindness. Ensure that the intended successor has the necessary qualities. Entrepreneurship is not heritable. And not unimportant: Do the ambitions of the intended successor lie within the company? It is very frustrating for both the parent and the child if the enterprise takes a free fall after the succession. And what do you do if you have more than one child working in the enterprise and all are, in principle, qualified successors?

Succession outside the family circle

Keep an open mind about possible successors outside the family circle. Within family businesses it is important that non-family members are offered fair responsibilities and chances that are in agreement with their abilities. Try, if necessary, to separate the succession in management and the succession in property. With the succession the legal regulation of the inheritance law and the law of matrimonial property will need to be taken into consideration.

Family business Statute

Giving control of your business to your children is not very simple. You can make this process run more smoothly by establishing a family business statute. Such a statute is the result of talks between the entrepreneur and the family. The aim of which is to make sure everyone is on the same page about important issues regarding the enterprise and the built-up capital. This is the foundation of the company’s continuation. Issues such as the wishes of the entrepreneur and the control- and capital structure of the enterprise are addressed in the statute. Every entrepreneur has his/her own views on these matters, but sometimes does not mention it in fear of possible conflicts within the family. These meetings can create clarity about the subject.

Guidance

If an entrepreneur establishes such a statute with his/her family, it is important to do so under the guidance of external person. When establishing the family business statute the potential conflicts are also named.  The older generation entrepreneurs is used to being able to use the built-up capital in the enterprise flexible in both the LLC and privately. The next generation, usually with divers preferences and interests, has not yet taken a stance in this matter.

Are conflicts still arising? The family business statute offers guidance

A judge will consider the original intent of the entrepreneur in conflicts. It is important to note that in this case some things will be tested. Throughout the years fiscal constructions are thought up or changes in the structure are implemented. The family business statute reveals what the original intent of the entrepreneur was. The chance is then much greater that the following generation will continue in that manner.

Make sure a third party advises you

By establishing a family business statute the intentions of the entrepreneurs are clearer. The agreements are made with the family. The most important goal is to avoid problems and disputes. This is easier under the guidance of a third party, they can make difficult subjects discussable. The wishes are enforced through official documents like a will. Finally, the agreements are tested on the developments within the family. The family business statute is the base of the harmonious continuation of the family business and the family relations.