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Transferring a family business. Managing an emotional process

Transferring a family business. Managing an emotional process

“the law of three generations.” The first generation builds the family business, the second continues it and the third destroys it
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Does this cliché always apply? Does it ignore the place of emotion, reason and good governance at the centre of business transmission projects?

 There is no easy answer. Implementing governance structures in family businesses can indeed be complicated. Emotions linked to family relationships can drive decisions, when objectivity would more often be required. These pitfalls can be a hindrance to managing a rational transference or divestment of a business. How can you avoid these pitfalls if you are the person in charge of organising these changes?

 Prepare for life after the transfer

 First of all, it is important to understand the psychological and emotional factors you will face when transferring your business. Passing on one’s business means losing the  status that comes naturally with hierarchical relationships in the familial and entrepreneurial context. Naming a successor means transitioning from holding a vital and rewarding role to one more in the background, where advice and counsel will no longer necessarily be followed. Finally, the company will cease to be an extension of your person, and you will have to reinvent yourself and seek new perspectives.

 To prepare for a smooth transition to your future life it is best to not to hide from this emotional reality as this could risk creating obstacles. Look ahead and decide now when you would be ready to sell your business, aside from any strategic and financial considerations. Then make sure that you and the buyer (whether they are within the family or not) share similar values and have an aligned vision of the company’s future. Encourage the baton to be passed to the next generation with tools such as appropriate articles of association, a shareholders’ agreement and a family charter. These strategies will help you to establish a long-term vision for the company based on strong foundations. They will also set the rules of power and individual conduct, the methods of arbitrating disputes, managing any conflicts, and more.

Keep a cool head when choosing your successor

As a mother or father running a business, there is a strong temptation to want to keep the business going by choosing a child as successor. But he or she must have the necessary skills to run the business. Otherwise, you risk imposing on your employees and shareholders a leader who lacks the appropriate legitimacy.

The situation becomes more complicated when there are several children in the family. You will need to manage a situation where some children will not be chosen for management positions, or might even be excluded from being shareholders. Managing expectations and accommodating reactions is an important process.

 It is possible that the family buyer you have chosen may not want to run the business as you would choose, and they may set their own conditions. You need to find common ground with them to ensure a smooth transition. You may also need to change the way you manage your business before you hand over the reins. The buyer’s qualifications and goodwill might not be enough if you do not give them practical guidance.

 Do not lose sight of the psychological aspect if the buyer is your child. Even with high quality governance tools in place, even as the sole leader of the family business, children will feel a responsibility towards their parents to succeed. This responsibility will be even greater if other family members are shareholders, members of the management team or employees.

 Talk to your banker

Discussions about the transfer of a business are too often centred on financing, legal, civil and tax aspects. Emotional issues are generally ignored, even though they can have a lasting impact on the future development of a company. Mismanaging this can even lead to its implosion.

There can be an important role for your banker, especially if he or she has been following your career path for many years. They will know your family, and can be of great help to you personally as well as financially. A knowledgeable outsider’s perspective can help head off feelings of jealousy, resentment and potential conflicts that arise easily in many families.

 To find out more, contact us