October 1, 2018
Mission – the successor: how not to fail the transferred business

Gediminas Laucius, Head of Tax and Legal Services at Lewben Group

What is the transfer of family business? No matter what process we imagine, it’s not just a decent family scene at the table, when the founder of the business, among champagne glasses of his family members, announces solemnly to whom of the successors he will pass the wheel of a prosperous company. Family business transfer is a multi-faceted, time-consuming process, and one of the most difficult parts of it – succession planning and preparation of heirs for business takeovers.

In general, as far as family business is concerned, many people assume that it automatically passes from the founders’ hands to the heirs, and thus from generation to generation. However, the objective truth is different from imagination: first, it is not easy for business founders to persuade heirs to take over the business. Global practice shows that heirs more often avoid the control of a business established by the older generation rather than are willing to do it.

Even the families who have grown up the world’s largest businesses do not eventually find business successors among their heirs. A family that has founded one of the world’s largest hotel chains – Marriott – in 1927 several years ago entrusted the post of the company head not to a family member. The former chief executive of Marriott International Inc. John Willard Billas, Marriott Jr., the son of the founder of this hotel chain, gave his post to Arne Sorenson in 2012. A. Sorenson became the first non-family Marriott business manager. Bill, who has reached the respective age, did not explain in detail why the company shows a non-family representative, but analysts saw a careful, consistent readiness for business transfer – the transition itself lasted for about three years, and A. Sorenson was the head grown by the company internally.

“We are still a family business. Arne respects it”, said Bill Marriot, as he made this move.

Thus, the Marriott family entrusted the company’s wheel for the new hands only when it was convinced that the new manager would continue to foster family values. The value principle is one of the most important pillars in terms of the transfer of family business – whether to heirs or other managers.

Global examples also indicate that it is extremely difficult to create a plan of succession in order for business to grow up in three generations. In Lithuania, such examples are not possible at all because the oldest businesses were founded just three decades ago, while in other parts of the world, success stories include examples, when business is passed over for five generations.

The sooner the business transfer is started, the more likely it is to succeed in developing a successful succession plan and preparing the heirs for their mission. A good succession plan must include financial, investment, legal, tax and educational aspects, and be tailor-made to the specific circumstances of the individual’s business and property.

Close oneself the business deviser involved in the plan implementation as early as possible in order to know the goals, values ​​and role of the deviser in this process. Such early preparation enables the heirs to purposefully prepare for the future takeover of a business, help to avoid disputes within the family, and ensures that the family members share the same vision and desire to achieve it.

The succession plan must be dynamic. Changing personal and regulatory circumstances, the composition of assets, and, finally, the geopolitical situation, the plan must change as well – in order to remain relevant and allow further pursuit of targets.

Sometimes people who do not directly deal with the issues of business transfer to the heirs are asking simple but completely reasonable questions. For example – if there are three heirs in the family, why to think much, instead of dividing the business evenly across all three?

However, let us suppose, for example, that the controlling stake in this business (81%) is concentrated in the hands of one person. It means that he has effective business control, can make solutions quickly and decisively, adapt to the changing market situation and customer needs. Now imagine this business is passed on to three heirs, about 27% of the business to each. It means different contexts, education, needs, ambitions, not to mention the influence of the heirs’ spouses, or even worse, disagreements between relatives. It may happen that after splitting control package, which previously provided effective management, the business will simply wilt.

I would like to emphasize that succession planning goes beyond the framework of one family. For a big company with 2,000-3,000 employees, it is difficult to transfer business, people can lose jobs, and the state can lose income. Thus, it may only seem at first glance that heirship is a family affair. In fact, the circle of those involved is very big. A big and successful business grows beyond the beginner, it becomes responsible for many other people, therefore, it must be able to separate oneself from sentiment, to look from a side, to maintain a sober mind – it is the only way only to successfully transfer the business.

As for the involvement of heirs, it is worth remembering that you will not be highly appreciated in your only yard. It means, it is not enough to point the finger to the heir, even if he does not resist to succession, and simply replace the table to the door of the business manager’s office. There is a so-called heirship school, the process of training, which involves everything from analysis of the heirs, to their expectations, strengths and weaknesses to their directing to a certain way. Business transferees must be able to get a good education, practical skills, and business like perceptions.

Prior to assignment of heirs to important business positions in a divested business, they should be given the opportunity to occupy different positions in different divisions, and thus to get a thorough understanding of the business. Competences and responsibilities should be phased out gradually to them.

It is especially useful to practice in international companies, and not just a short internship, but a normal job lasting 5-7 years. It is entirely natural that after graduating, their business transferee has worked in international structures until up to 30 years old, and then returning to apply his experience in the business that is being transferred to him. This is how the two generation synergy occurs: parents have established and grown the businesses, and children can promote it to a higher standard that complies with standards of good international practice.

By the way, in my opinion, there is a common mistake when a father or mother, though he transfers all business to heirs, still wants to continue to maintain an important position – it raises the confusion as to who is the real business manager, who bears the main responsibility.

However, what if the heirs feel not ready of taking over business, and do not have that ability? Well, first, these heirs are probably skills in other areas. Secondly, in this case, professional managers can be chosen to create a system that allows the heirs to obtain the economic benefits of the transferred assets in other ways, not by directly taking the business control. But this is a different broad topic.

For most family businesses, planning for succession is one of the biggest challenges. However, this process can also be a great opportunity to maximize the potential of business and create a multi-generational sustainable system that safeguards family values ​​and missions to pass on these values ​​to future generations.

The author of the comment – Gediminas Laucius, Head of Tax and Legal Services at Lewben Group

 

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