Successful handover to the next generation

In Switzerland, family business succession is the most common form of company handover, accounting for approximately 60 percent of such transactions. Family businesses differ from public companies and companies owned by the public sector in that they are majority-owned by a single family and this ownership spans generations. This also impacts the succession process.

Generally speaking, family business owners favor succession within the family, as the successors are also familiar with the company and have strong ties to the business and its employees. This generates trust and a sense of security within the workforce as well as among customers and suppliers. Succession solutions that see the business remain within the family mean that the wealth generated by the company is preserved for future generations. If the family members taking over the company already work within the business, this also simplifies the transfer of expertise and the company’s internal knowledge is preserved. Flexible financing solutions such as advance inheritance and special loans for family members make the transfer process easier and ensure continuity.

These advantages also come with a number of challenges. Succession processes within the family often take longer than is the case with other transfer options, such as a sale to management (a management buyout, MBO, or if sold to external parties, a management buy-in, MBI). As emotionally charged issues have to be clarified, including fairness and skills as well as the role and activities of the next generation, families are often guilty of putting off the topic for too long. In fact, disappointments arising from the handover of family-run businesses can have undesirable repercussions for years to come. To ensure this doesn’t happen, the topic of succession needs to be addressed in good time.

Another challenging aspect: a change in the company management always presents a unique opportunity to question the status quo and introduce new impetus. However, successors within the family have a tendency to persevere with existing structures for longer and to put off necessary changes. There is also the risk that the introduction of new ideas by the new generation may be met with irritation by their predecessors. If the owner handing on the business remains operationally active within the company, there is significant potential for conflict.

A family business is a generational project. To ensure successful succession and facilitate the transition between generations, a common statement of wishes covering values, goals, structures, rules and responsibilities can help. All of this can be captured in a family strategy.

A family strategy strengthens the financial and business interests of the family by defining clear objectives and guidelines. It also helps to prevent or resolve conflicts by creating mechanisms for better communication. The strategy promotes family cohesion, supports the development of the family members’ talents and simplifies the transfer of wealth as well as social and influential networks to the next generation.

In the case of larger families, in particular, established committees that provide a platform for family members to come together and discuss the family strategy can prove helpful. The family assembly acts like a parliament that guides the family. It can take various sizes and forms and is usually the largest governing body. The family constitution lays down the tasks of the family assembly and defines provisions on members, activities and meetings. The agenda for the meetings of the family assembly includes items such as the exchange of current information on the family business as a whole as well as on important company projects, the firm’s financial situation and family projects, for example in the area of philanthropy. The assembly also discusses the overall direction of the family business, steers the interests of the family and elects the members of the family council.

The family council is the most important decision-making body for all family matters. Its members are generally appointed or elected by the family assembly. The family council is tasked with implementing the provisions of the family constitution and family strategy, advising and deciding on family matters such as education and welfare and developing guiding principles for involvement in the family business. It acts as a link between the family and the family business and manages the budget for family activities.

When a generational change is pending, the conclusion of an FBO is often at the very top of the agenda. Here, articles of association lay out the rules for the purchase and sale of shares within the family shareholder group. These rules should be agreed upon at an early stage before any conflicts arise. Here are some of the key aspects that should be considered for an FBO:

1. Early planning and communication: on average, an FBO takes more than six years. Timely and open communication within the family is therefore crucial in order to avoid misunderstandings and conflicts. It is important to factor in everyone involved in the process at an early stage and to take account of their wishes and concerns.
2. Valuation of the business: an objective and professional valuation of the business is essential in order to determine a fair purchase price for the shares. The valuation can be conducted by external experts or auditors to ensure transparency.
3. Financing: the buyout can be financed using various means, for example through an advance inheritance, loans with special family conditions and external financing sources. It is important to find a financing solution that is acceptable and sustainable for all parties.
4. Articles of association and regulations: detailed articles of association that define the rules for the purchase and sale of shares within the family shareholder group are of great importance. These should be agreed upon at an early stage so as to establish clear guidelines and processes for future transactions.
5. Tax and inheritance law aspects: the tax and legal implications of an FBO should be analyzed carefully. This can be complex and may require support from tax advisors and lawyers in order to ensure that the buyout is optimally structured from a tax perspective and is legally secure.
6. Ensuring family harmony: the FBO process can be emotionally draining. It is therefore important to establish conflict resolution measures and ensure that all family members are treated equally. Neutral moderation can be helpful in easing tensions and maintaining family harmony.
7. Long-term perspective: an FBO should not only be viewed as a financial or legal act, but rather as a strategic decision that takes account of the long-term vision and values of the family and the business. It is important that the successors are well prepared and in a position to successfully shape the future of the business.
8. Support and further training: the family members taking over the company should be offered the required support and necessary further training to enable them to perform their role effectively. This may take the form of mentoring from experienced family members, external training courses or the involvement of external experts.

A family strategy doesn’t only provide guidance as to how the handover should take place, but rather also about what to do if the potential successors opt against taking over the company and would like to leave the family business. The remaining family members can pay off those wanting to leave by purchasing their shares in the company. Carefully thought-out exit rules are always helpful. They are agreed together by the family and are designed to be beneficial and fair for everyone involved. They contribute to avoiding damaging disputes and maintaining unity within the family. The division of assets such as real estate and operating companies can be complex. If the company is intent on preserving and increasing its wealth through investment, it may not be advisable to divide the assets between family members.

Often, but not always, an FBO is the best solution. The sale of the entire business or part thereof can sometimes be the only sensible and practical option if a family is unable to find common ground. Leaving the business behind is an important turning point and often goes hand in hand with strong emotions. If a family is unable to reach an agreement, however, selling may represent the best way to protect the assets and avoid possible disputes.