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Succession of family businesses can be complex for owner-managers, incoming and outgoing. An effective transition requires a broad approach, with mindful structures and controls in place. Without these, complications can arise.
Transitioning in an organised way
If there are successors, the founder needs to anticipate the new management/ownership structures as they get ready to leave. Often, owners and managers can find taking themselves away from the business difficult. Ultimately, a transitional period is beneficial for the business and the new management. This should reflect the legally binding structure of the company's articles of association alongside a (non-binding) family charter. Fostering a collaborative partnership where the current management winds down towards retirement while the next management winds up can be helpful. Underlying economic interests do not need to change with the management, and a transitional period can help to maintain continuity of interests. The owner/manager needs to think about how control should gradually be handed over, and how this reflects the economic interests of the company. Adequate financial planning for this must form part of the transitional period.
The family needs to work together to achieve this. Rupert Murdoch's succession crisis led to a 3.3-billion-pound deal being struck and Murdoch's son Lachlan taking control.
Where this transfer to the successor cannot happen, an alternative structure needs to be found. This can be through an external management team taking over, the business being sold, and, in extreme cases, the business can be liquidated with its basic underlying assets. After his death, Giorgio Armani instructed that 15% of his company be sold off to preferred companies.
Succession crises
Handover is straightforward with one able and willing successor. There are complications where there are multiple heirs, with different skills, talents, and interests. Family businesses can grow quickly over time, meaning that there needs to be careful planning in place so that companies can thrive and grow. Deciding on a successor is important for the company to have forward momentum. The decision on who it is can be arbitrary, such as Murdoch's desire for his heir to share his politics.
Companies should examine how they want the business to grow. Some companies restrict shares to blood relatives only to prevent dilution, but this can close companies off to investment and growth. Other companies limit the owner/manager status specifically to certain family members, but this can result in disputes within the family.
Ultimately, succession needs to reflect how the company wants to grow and what's best for helping it grow. If in one generation blood relatives can solely possess shares, and another limits management to one relative, they can reflect different goals within the business.
How to manage a handover in an efficient way
Retirement is important to the outgoing owner, and they have several choices to ensure a happy retirement. The owner can build up money on a balance sheet so that a small restructure, which can be part of the transitional period, can provide an adequate retirement fund for the owner.
The transfer of shares from the outgoing manager to the incoming manager can be a gift, in the owner's lifetime or death. However, putting a price on the shares can help to show dedication to the business, with the potential incoming manager putting money on the line to acquire the business.
The handover should be based on a carefully thought-out, legally enforceable constitution. The articles of association are especially important here as they can help incoming management hit the ground running. They can reflect how the transfer of shares would work, where family members want to sell/buy shares for example. It could also hold a right of first refusal, so that shares remain within the family. It could also include a compulsory offer of shares back to the company to prevent them passing to non-family members due to divorce, death, or departure.
Balancing power and payouts
When a business changes hands, the interests of the shareholders need to be reflected. Where there is one single owner-shareholder, the interests are simpler compared to when there are two or more shareholders.
The company can create different classes of shares, with different rights and restrictions. For example, as part of the transitional period, the incoming management can be introduced as directors/shareholders/managers and the outgoing management can retain enhanced voting and veto rights so that they can maintain overall control during the period.
The company could put some of the shares in trust, so a neutral trustee can be in control and allow the next generation to benefit from them. This works for large families, where trusts can represent family branches rather than each member being a direct shareholder. Murdoch, with his new heir, dissolved the old Murdoch family trust with the goal of creating a new one which grants financial benefit to his youngest daughter.
Concluding Remarks
Legal advice should be sought to help make the transitional period as smooth as possible. Tax advice should be sought so that reliefs are available, and tax events are minimised, preventing disruption to the business. Furthermore, the transitional period should reflect the business' needs and be in place to allow incoming management to hit the ground running effectively.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
