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Article | 3-minute read

Six guiding points to pass on a family business

November 2021

One requirement in handing a business to children is transparency, explains Denise Kenyon-Rouvinez.

 

One of the most common questions related to family businesses is, “how can a successful business be passed on to the next generation?”. After all, the preservation of wealth and family legacy is paramount to those who have dedicated their lives to ensuring the success of their business.

It is for these reasons that many owners of family businesses begin planning the succession while the next generation are still very young.

Succession is a lengthy process. It can generate feelings of great anxiety and insecurity for both the older and younger generations, so it is essential that it is well thought out and meticulously planned.

In practice, it is advisable to prepare for an active succession period lasting between five and 10 years in order for it to be a comprehensive and thorough transition.

Important things to consider in a succession process

1. Communication

Family business owners and executives sometimes comment that the younger generation lacks drive. This is often a misinterpretation: younger family members are usually keen to become involved in the business, but are waiting for a sign from their elders. In the best cases of succession, the process is an ongoing partnership between the two generations, rather than a one-off transfer of power. Open communication is crucial to this partnership as it enables everyone to express themselves freely, thereby creating a solid foundation for trust and transparency.

2. Good planning

In order to avoid family disputes, family wealth and executive power within the family business should be distributed fairly – accounting for the competence of each individual – in a process fully explained to the younger generation. Good planning alongside sound communication will help all members of the family understand why certain decisions are being made and allow them to readily accept the outcome of the distribution.

3. A fair process

When important decisions are made in regards to the distribution of family wealth and executive influence within the family business, each family member will inevitably interpret them differently. What may be fair for some may appear unjust to others. The succession process should therefore incorporate clear and transparent rules, and these ought to be applied to everyone without exception.

4. Family agreement or constitution

A family constitution is a document that sets out the rules for relations between the family and the business. No two constitutions are alike. It is extremely important that family business stakeholders take sufficient time and consideration to draft this defining document so all its rules and regulations are clear and fair. By having each family member participate in the discussion process that defines the constitution, the family can reach a collective understanding and implement it effectively.

5. Role of the parents

It is the role of the parents to transmit a healthy business and instil their children with strong values and business acumen. But the outgoing generation often has a difficult time relinquishing their hold on the business they’ve loved and built over such a long time. Parents must find the courage and resolve to bequeath the family business to their children and to let go.

6. Role of the incoming generation

It is the responsibility of the incoming generation to show motivation and commitment to the business as well as to the family values. Once they take over the family business, they should dedicate themselves to nurturing and protecting the institution their family has built.

Denise H. Kenyon-Rouvinez is Wild Group Professor of Family Business at International Institute for Management Development Business School and Director of IMD Global Family Business Centre, in Lausanne.

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