family business. Photo: Forbes
Ownership transfer in successful family businesses is a big deal. Founders are typically anxious about who leads the businesses upon their exit. Having the nextgeners (the next-in-line of inheritance, particularly those who will inherit significant wealth) who are the right fit makes the transfer of ownership a lot easier.
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The reality check, however, revealed that these nextgeners may not be interested in leading the business. Many nexgeners ‘look’ nothing like they can fit into the founders’ shoes.
In many instances, nextgeners of successful business families have developed and passionately pursued everything but their family business, much to the disappointment of the patriarch/matriarch. They have found joy outside what their successful family has been known for. This could be because they have found the business ‘boring’, too far removed from their reality, or not inspiring and challenging enough for them to give it a second look. The question is, do these nextgeners need to fit-in before the succession plan of the family business can be successfully executed?
Some of these questions extend beyond just business leadership—they encompass concerns about who will guide the family’s charitable contributions, manage financial investments, and even steer the family itself. It’s natural to ponder these questions when considering the continuity of leadership in a family-run enterprise.
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However, amidst these questions, one crucial aspect often gets overlooked: the role of owners within the family enterprise. Many families tend to view ownership as a legal matter handled by corporate lawyers and estate planners. Yet, ownership is far more than just a legal aspect—it’s a multidimensional facet of succession planning that warrants thoughtful consideration from the family.
Ownership here implies the transfer and management of family assets, business interests, and wealth from the current generation to their heirs. This process involves not only the legal and financial aspects of transferring ownership but also the responsibilities and strategies for preserving and growing the family’s wealth across generations. Unlike the usual focus on the legal and financial aspects of ownership, howbeit, important aspects, our focus will be mostly on other ownership responsibilities, strategies and considerations.
So, when we find ourselves at a crossroads in succession planning, the real question we should be asking is: what roles can nextgeners play, whether or not they want to be directly involved in the business?
The family business succession plan should be designed to reflect these roles and actions. It should address three key components: Ownership Transfer, Leadership and Management Succession. Although these concepts are intertwined, they are distinct aspects that require careful consideration when planning. Let’s see how they work.
Ownership succession
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Transferring ownership of the family business to the next generation is a critical step in succession planning. Common methods include gifting shares, selling shares to family members at a fair market value, or establishing a family trust.
A phased approach can be beneficial, allowing the next generation to gain experience and demonstrate their capabilities while the patriarch or matriarch gradually relinquishes control. This fosters a smooth transition and builds confidence in the future leadership.
Family buy-sell agreements, outlining the process and terms for buying or selling ownership stakes within the family, are crucial to prevent conflict and ensure fairness among heirs.
Governance succession
As ownership changes hands, the family business may need to adjust its governance structure to reflect the new leadership. These could involve changes in: Board of Directors – to ensure it aligns with the updated ownership structure and leadership.
Independent Directors – to bring objectivity and specialised expertise to the table, enhancing the quality of decision-making for the business.
Establishing a Family Council – to provide a platform for open communication and conflict resolution among family members regarding ownership and business matters.
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This is an important aspect to consider as there can be no effective succession without the proper governance structure in place. More than transfer of wealth, rejigging the governance structure to reflect the direction of the new leadership will go a long way to enhance a successful succession process. Governance should accommodate the nextgeners and not be far removed from them. They should be considered in all aspects of succession.
Management succession
Identifying potential successors within the next generation is crucial. This should involve assessing their skills and experience, and providing mentorship opportunities to learn from seasoned company leaders.
Investing in management development programs equips the chosen successor with the necessary leadership and business acumen. These programs can cover areas like strategic planning, financial management, and effective communication.
Finally, defining clear roles and responsibilities for the patriarch, the successor, and other members of the management team during the transition period ensures a smooth handover of leadership.
It is important to emphasise how critical ownership succession is in a family business succession plan. The transition of ownership is not just a change in who holds the shares or titles, but a fundamental shift that can affect the company’s stability, strategic direction, and continuity. The nexgeners should always be in the larger picture from the onset so that more than transferring tangible assets and wealth, the core and soul of the family wealth is transferred to them alongside. Here are key reasons ownership succession is so important.
Continuity and stability
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Ownership succession ensures smooth business operation (i.e., business continuity) without disruptions caused by unclear or contested ownership. This stability is crucial for maintaining the confidence of stakeholders, including employees, customers, suppliers, and others. Additionally, proper ownership succession planning can prevent financial instability by avoiding situations where heirs might be forced to sell parts of the business to pay estate taxes or settle disputes.
Strategic direction and control
Transferring ownership within the family helps preserve the founding vision, mission, and values of the business. It ensures that the strategic direction set by the founders or current leaders is maintained, allowing the business to continue operating according to long-held principles. Secondly, clear ownership succession provides a defined structure for decision-making, preventing power struggles and ensuring that there is a recognised authority to make strategic decisions.
Legal and financial considerations
Careful planning of ownership succession can optimise tax implications, minimising the tax burden on both the business and the family. This is particularly important for large businesses where estate taxes can be significant, thus optimizing tax efficiency.
Also, well-documented ownership succession plans help prevent legal disputes among family members. Clear legal documentation ensures that all parties involved recognize and respect ownership transfers.
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Preservation of family wealth
Ensuring a smooth transition of ownership helps preserve the family’s wealth within the business. This includes not just financial assets but also intellectual property, brand value, and customer relationships. Furthermore, succession planning allows for fair and equitable distribution of ownership among heirs, which can help maintain family harmony and prevent conflicts.
Motivation and engagement of successors
When the next generation knows that they will have ownership stakes in the business, it can increase their commitment and engagement. Ownership provides a sense of responsibility and motivation to work towards the long-term success of the business.
Moreover, knowing they will inherit ownership can encourage successors to acquire the necessary skills and experience to manage the business effectively, further enhancing their engagement and readiness for leadership roles.
Risk management
Succession planning plays a crucial role in mitigating potential risks associated with the transition of ownership. This includes preparing for unforeseen circumstances such as the sudden death or incapacity of current owners. Furthermore, a well-thought-out ownership succession plan ensures that the business is ready for crises and can handle transitions smoothly without jeopardizing operations.
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Investor and market confidence
A clear and transparent ownership succession plan can enhance the confidence of investors, partners, and markets in the continuity and stability of the business. This can be crucial for maintaining stock prices, securing investments, and negotiating with partners.
Nigerian family businesses can learn from successful family businesses like the Ford Motor Company. For over a century, spanning more than 100 years, the Ford family’s structured ownership succession plan has allowed the company to remain under family control while professional management handles day-to-day operations. This means members of the Ford Family do not necessarily have to fit into the Ford production plan as long as they have been trained to become responsible owners of the business. They can outsource managerial and sometimes, board functions whilst retaining ownership. This long-term approach has contributed to the sustainability and resilience of the Ford Motor Company, serving as a testament to the effectiveness of strategic family ownership in business continuity and success.
We can thus infer that when planning a family business succession, it is important to consider Ownership, Leadership, and Management aspects. However, there should be a clear strategy around ownership succession to ensure continuity, stability, and strategic direction while preserving the family’s wealth and values. Whilts, the other leadership and management can be outsourced, ownership can’t.
The family wealth that will last must find the leverage that ownership gives, whether or not the nextgeners fit into their business model. In doing so, it will also address legal and financial complexities and help manage risks, ultimately securing the future of the family business.
Osikomaya wrote from the Meristem Family Office.
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