SUSTAINING GENERATIONAL TRANSFER OF FAMILY BUSINESSES

 

There is a famous cliché that best describes the generational challenge which family owned businesses face: the first generation builds, the second generation consolidates, and the third generation destroys. While family businesses are likely to survive the initial years, sustaining generational growth is a much more difficult feat to achieve.

 

According to the Global Family Business Index, a firm is classified as a family firm where a family controls more than 50% of the voting rights (for private companies) and at least 32% of the voting rights in public companies. In other words, these are companies where the decision making processes are controlled or influenced by a family or multiple generations of a family who may or may not directly manage the firm.

 

The family business model implies some obvious advantages; family ties are assumed to connote greater loyalty to the business. There is also the sense of belonging and comfort in the knowledge of the fact that the success of the business directly benefits each member and their immediate families and family members are more open to making sacrifices for the firm.

 

Blurring the lines between family and business relationships often attracts its own unique challenges, some of them so severe that they culminate in the destruction of the company itself. Several instances of companies separating or liquidating as a consequence of acrimonious family feuds. Other challenges of running a family business include hiring and retaining non-family employees, especially as the perception might arise with respect to an invisible ceiling some family owned businesses place on the career prospects of non family employees.

 

And as if the business, emotional, legal and technical issues weren’t thorny enough, consider this daunting fact: only about 30 per cent of family businesses survive into the second generation. Transition planning and the communication of the results of careful transition planning to stakeholders greatly improves the likelihood that the business will endure well beyond the leadership transition, delivering lasting value to the company.

 

Issues that may arise in the management and transition of family businesses include:

 

  1. Situations where one or all of the children develop financial problems or desire to sell their share in the family business for cash: This may be remedied through bespoke individualized powers of attorney or donation contracts including withdrawal rights, whereupon, given certain events such as bankruptcy of a shareholder, the ownership of the shares reverts to the founder or his duly appointed trustee.

 

  1. Situations where a founder may desire to restrict or prevent the transfer of shares to unrelated third parties: This may be handled through the insertion of clauses which restrict the transfer of shares to third parties.

 

Milton & Cross has an experienced team dedicated to helping family business owners develop and execute each step in their succession plan in order to ensure the whole process runs as smoothly and efficiently as possible. We invite you to explore how we can help you turn your business challenges into opportunities to create a legacy of success. We may be contacted directly on +2348036258312, or by email on : miltoncrosslexng@gmail.com.

 

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