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An important goal in the succession planning of medium-sized family-owned businesses is the optimal preservation of assets. Answering the following four questions helps in preparing for the process.
1. The 3 Ws: What should be transferred, when, and to whom?
There is no “perfect” age to start thinking about business succession. However, the older the senior entrepreneur, the higher the likelihood of a disorganized emergency succession due to illness or death.
A timeline specifying which assets should be transferred to whom and when has proven to be very helpful in practice.
The business owner should ideally plan backward and determine how many years they want to enjoy a well-deserved retirement, based on an average life expectancy of 78 or 83 years (for men and women, respectively).
2. Is there a successor to the business within the family?
If there is a suitable and willing successor within the entrepreneurial family, they should be brought into the business in a timely manner. Any siblings who may be entitled to a share should be compensated accordingly through asset transfers. As a general rule, the person who shoulders a higher risk should receive a larger share of the estate. A business valuation helps to realistically determine the company’s value and establish its share of the estate to be transferred.
Transferring equal shares of the business to all children can jeopardize the company’s very existence, as the fragmented ownership structure can significantly restrict the decision-making freedom of a (family) managing director. With such an arrangement—which may seem fair at first glance—entrepreneurs transferring ownership risk not only disputes among the successors but also significant financial loss for themselves and future generations.
3. Should an outside managing director lead the family business?
It is becoming increasingly common for families to be unable to find a suitable successor within the family. If the company is to remain family-owned, a suitable external managing director must be found in a timely manner and trained to take over the business. This requires careful planning and typically takes several months.
4. When is selling the company advisable?
Selling the company is always an option when neither handing it over to a successor within the family nor continuing operations under an outside manager is feasible.
Senior business owners should also prepare for this scenario well in advance, as an external business succession takes an average of two to five years.
Thorough preparation for the sale of the company often pays off in terms of the price that can be realized. In addition to a business valuation, a detailed prospectus answers many questions that a potential external successor might have about the company, its market position, and its financials.
A well-organized business succession takes time and expert knowledge
At the same time, attention should be paid to tax and legal issues. Any changes that may need to be made to the corporate and tax structure require time before they take effect. This is particularly true if certain assets (e.g., real estate) are to be separated from the business in a tax-optimized manner prior to the planned generational transition.
It is therefore advisable for business owners to begin planning their generational transition early on. Unlike other projects, business succession is a unique undertaking that, in some cases, can take several years to complete.
As a general rule, few generational transitions succeed on the first attempt. This may be due to objectively verifiable reasons—such as a failure to secure financing—or to communication problems within the family.
Specialized consultants can assist with all these issues, thereby reducing the time and financial costs involved and sparing the parties involved emotional stress.
