7 minKeys to a successful succession
Businesses, especially family businesses, represent a significant part of Luxembourg's economic fabric. And because now is a time of transition from the baby boomer generation to the next, many of them will change hands by 2030.
Whether supporting the next generation in taking over the family business or preparing for its sale to a third party, the transfer needs to be carefully thought through. It requires meticulous planning and, above all, good communication between all the parties involved.
Business continuity: the first stage in the transfer process
Business continuity is a critical aspect of the life of any organisation, enabling it to face emergency situations or disruptions with a cool, calm and collected approach. It can also be the first step in a company's succession plan. Whereas succession is part of a medium- to long-term rationale, the aim of business continuity is to put in place measures to ensure the survival of the business in the short term. But in thinking about business continuity, entrepreneurs will find answers to some of the questions that will also arise in the course of the transfer. “With our clients, we approach business continuity from two angles,” explains Anne Goedert, Family Practice Adviser at Banque de Luxembourg. “On the one hand, we discuss the preparation for decision-making in the event of the temporary or permanent unavailability or death of the director or owner; and on the other, questions relating to the transfer of shares in the business in the event of death. The two strands are closely linked, but they need to be approached in different ways.”
We support the entrepreneur in drawing up a bespoke continuity plan, tailored to their business, the family and the entrepreneur's situationAnne Goedert
Where are important decisions taken and who could take them tomorrow?
It is essential to map the governance of the business. This will enable us to consider the possible appointment of a second director or the creation of a board to assist the teams in implementing the strategy on the ground. Who are the ideal candidates for these roles: other family members or long-standing employees? Has the time come to open up the governance of the business to outsiders, by delegating certain day-to-day management tasks to them or deploying their skills at board level? “We support the entrepreneur in drawing up a bespoke continuity plan, tailored to their business, the family and the entrepreneur's situation,” explains Anne Goedert.
Organising business continuity does not only mean planning it, but it’s also essential to talk about it, both within the business and among members of the entrepreneur's family. In the event of a disruption or emergency, it can be reassuring to know what the next steps are. “It's obviously a difficult subject, but in our experience it's very helpful to get all the stakeholders around the same table and involve them in business continuity planning,” concludes Anne Goedert.
Business assets vs. private wealth
How can I ensure that all my heirs receive a fair share? How can I guarantee the financial security of my spouse and/or minor children? What kind of owner does the business need to continue its development? These are some of the many questions that arise in transferring ownership of a business that entrepreneurs face in the context of business continuity, all of which will help them frame their thinking about the transfer of all aspects of their wealth.
In addition to these questions, it’s important to remember that Luxembourg’s Civil Code lays down rules for the distribution of business and family assets, which apply to every succession. Traditionally, it is the direct-line heirs, i.e. the children and surviving spouse, who inherit the deceased's assets. Anne Goedert clarifies this: “The Civil Code provides for a legal reserve for the children, whereby they must receive a minimum share of their parents' estate, determined by law and depending on the number of children in the estate.
Although from a legal point of view, the rules of succession are the same whether you are passing on a business or private wealth, tensions or even disagreements may arise between the heirs, depending on the nature of what is passed on.
“While it would appear to be easier to divide an estate made up of movable and immovable assets into different, more or less equitable, lots for distribution, a business that forms a cohesive unit is more difficult to divide between different heirs, especially when – as is often the case – the entrepreneur has concentrated all their private and professional assets in the business,” explains Anne Goedert. “If they are not interested in taking over the business, there is no compensation for children who are entitled to a reserve share.” These forced heirs may find themselves unwillingly having to embark together aboard the same boat, even though their individual personalities and aspirations are not necessarily aligned to steer the business in the right direction.
One of our main tasks is to facilitate communication between family members, to help them take a step back and sit round a table so that they understand each other's hopes and expectationsCharles Sunnen
Including the next generations
This makes it all the more important to include them, as early as possible, in any discussions, initially on business continuity then, in the medium and longer term, on the transfer of the entrepreneur's estate. Succession is an important step for an entrepreneur in that it marks the end of a chapter. But for the ‘next gen’, the rising generation in business families, there are multiple questions and challenges: Do I want to / must I / can I join the company? What is expected of me and will I be up to it? “While, on the outside, succession within the family might look easier to manage, it will come with its own set of problems. It’s not always easy to formulate the many questions that might arise within the family setting,” Charles Sunnen, Corporate and Liberal Professions Adviser at Banque de Luxembourg, points out.
Having space to express their desires – as well as their doubts – and listen to those of others (particularly the next generation) is the first step in building consensus on the various elements comprising the succession. With the dual aim of ensuring the long-term survival of the estate (and not least the business) and preserving family harmony, this kind of intergenerational communication that involves everyone concerned by the succession, is an opportunity to build a roadmap together that is tailored to the business and the individuals concerned. “One of our main tasks is to facilitate communication between family members, to help them take a step back and sit round a table so that they understand each other's hopes and expectations,” explains Charles Sunnen. For many, the time comes to make some initial decisions after school, university or an apprenticeship in business. Decisions that may take them closer to or alienate them from the family business. But at this age, the next generation is not necessarily clear about what it wants for the future, or simply has difficulty expressing it. “In order to offer these young people a framework for genuine exchange between peers who find themselves in a similar situation and are often asking the same questions, Banque de Luxembourg has been organising highly successful programmes for over 10 years now,” says Anne Goedert. The first programme is called the Académie d'Eté and brings together some 15 to 20 young people aged between 18 and 25 each year. Participants are invited to listen to their own music and become the actor of their choice, with particular attention paid to the dynamics often at play within a family business. “Each participant's contributions along with the direct experience of other entrepreneurs, both young and old, are a source of inspiration to move forward along one's own path,” adds Anne Goedert. Alongside the Académie d'Eté, Banque de Luxembourg also offers a Family Business Junior Executive Programme for young people aged 25 to 35 who have already joined the family business, with legitimacy as the central theme.
Establishing family governance
It is often useful to put things in writing and create a family charter. This document is a moral commitment on the part of the contributors and represents agreement on the values that drive the family, the rules for access to ownership of the business, the different roles that family members may play in it and the conditions that need to be met for this to happen. The charter is also the reference document for the governance to be put in place, at the level of both the business and the family.
By its very nature, a business brings together different interests: those of the business itself and those of its owners. A family business also needs the interests of the family to be taken into account (see diagram opposite). The aim of governance is to ensure that these different interests are constantly aligned.
For the family, governance ensures its interests are asserted and family harmony maintained. It creates an informal, cross-generational forum for discussion and facilitates the provision of information to family members, whatever their role in the business It also helps to pave the way for succession and, ultimately, shared decision-making in the interests of the business.
“Whatever form governance takes, the important thing is to adapt it to the company, its shareholders and the family, and to think about how it can evolve over time as each of these components changes,” concludes Anne Goedert.
The transfer of a business raises many questions that aren't always easy to address, and the answers require communication between the various stakeholders. In many cases, the involvement of a third party can help the entrepreneur and their family to distance themselves from the succession project, and help them to work together to reach a consensus on a tailor-made solution.
