Many businesses and SMEs in Malta are family run. Along the years, several have grown from a simple one-person operation initially offering a trade or focused on selling products, to larger more complex group of company-style operation. For many years, these businesses survived applying business rules stemming from family tradition and loyalty. For the owners and their children, it was frequently difficult to separate family from business.
Along the years, some businesses grew substantially, engaged employees, moved to larger premises, and expanded their operations both locally and internationally. In short, the business became more complex to manage.
“This milestone event in a family business can be a make or break for the business, as well as for the family.” CMG Consulta
When the original founders of the business get to the point of handing over control and decision making of the business some businesses struggle. This milestone event in a family business can be a make or break for the business, as well as for the family. There are a multitude of issues and consequences to be considered here however, experience shows us, that many are overlooked. This article covers the following succession planning aspects that need to be considered:
Legal and regulatory;
Separation of Ownership and Management;
Authority & Decision Making;
Transition of Power;
Legal and Regulatory
In considering succession, the first and most obvious points to be tackled are the legal and regulatory points where endless discussions take place with accountants and lawyers to structure the shareholding of the company in a way that benefits the parents and the children and that is beneficial from a tax perspective. New clauses are added to the memorandum and articles and private agreements are entered into to ensure that the parents, or current owners, feel protected by the transfer.
These aspects to succession are very important of course and it is crucial for them to be done and done well. They protect the various parties from a legal perspective, they facilitate a clear definition of ownership and duties and they ensure that the ‘rules of the game’ are clear for all to abide by therefore trying to reduce squabbling and disagreement in future. While important, however, these aspects to succession are simply points where families are scratching the surface of the real issues and consequences that they will face.
Separation of Ownership and Management
When family businesses start to grow, the owners tend to be responsible for the management of the operation. With the recruitment of employees and situations where multiple family members own the business, the process of managing the actual business tends to get more challenging. If one had to consider the detail here, ownership is about being shareholders, owning the actual business and manifesting a degree of control over where the business is heading. Management, on the other hand, is about the smooth running of the operation.
“In considering succession, owners need to make a clear separation in the design of the organisation between the ownership and the management.” CMG Consulta
These two roles, ownership, and management are distinct yet in a growing business they tend to be carried out by the same person or people. In considering succession, owners need to make a clear separation in the design of the organisation between the ownership and the management. Ownership would typically remain in the family; however, for management roles individuals should be selected for their qualities and aptitudes to carry out the role of running the business. Owners can carry out management roles however this separation also opens the door to have external employees who are recruited specifically to manage the company for the owners.
In considering these roles there are many complex issues and personal issues to navigate. Each business is unique, and each family is unique, and this uniqueness needs to be carefully considered when planning the way forward for a business. One case that comes to mind is that of a business owned by three cousins. Some children were employed in the business, some others pursued their own individual professional career. Some children wanted to be involved in the business, others were not really interested in being involved in the business. The owners were close to retirement and wanted to keep the business within family rather than sell it out. However, there were too many different ideas and too many parties, trying to take over all control. Following a period of discussion and analysis, it was agreed that the best way forward to keep the harmony between all parties and to ensure a smooth running of the business, was to create a management structure that was not populated by family members. This way the three cousins, as owners, could deal with the management structure independently and none of them ever felt that one had a closer tie to the structure than another. This tweak was exactly what this specific business required, and it delivered results. As always, however, each business and family could require different approaches.
Authority and Decision Making
When transitioning a business between parents and children, it is crucial to consider the reality that, most probably, the business has been structured around the current owner where many things are dependent on the owner’s knowledge, skills, contacts, and decision-making. This is one of the key factors that contributes to owners feeling stretched, overwhelmed, and unable to take a holiday without being interrupted.
One example that comes to mind was of a business owner we were working with who kept getting interrupted in a meeting we were having. It was interesting, however, to understand the nature of these interruptions. The first ‘urgent’ interruption was from a staff member asking for assistance with a customer who was on the phone. The next interruption, related to a staff member asking for advice on how to handle a very large proposal that was being sent to a prospect. The final interruption came from a staff member who asked the owner for advice on the canteen coffee machine replacement. In this case, the owner was being asked for input on a €1m proposal and concurrently input on a €100 coffee machine.
Dependence on the owner is a reality that creeps into companies as they grow and develop and is often a symptom of micro-management. The owner starts the business by typically doing everything themselves then starts to build a team around them who can do tasks for the owner. Many times, these teams are built to help the owner achieve more work rather than to have the employees think and achieve work themselves. This is the essence of inadvertently engineering dependency into organisational processes and structures.
“Many times, these teams are built to help the owner achieve more work rather than to have the employees think and achieve work themselves. This is the essence of inadvertently engineering dependency into organisational processes and structures.” CMG Consulta
From a succession perspective, this unintentional dependence causes the owner to have absolute authority in employees and clients’ minds. Many times, this authority also exists in the minds of the children taking over the business where they frequently are inadvertently ‘submissive’ to the parent/owner and dependent on them for decision making. The additional consequence of this is that the children are then not seen as authoritative or decisive by the employees despite the owner/parent telling everyone that the child is now in control of the business.
We were recently called in by a family business where the owner had passed ownership to his two sons. This business was somehow faltering. Amongst several issues, it was identified that the transition of authority was not sufficiently planned. The consequence of this was that the employees were not able to see the children as their new bosses. They were not taking them seriously and behind their back they were contacting the retired father for guidance, before decisions were made. This situation would have been easier to handle had it been planned of course since now it had to be resolved by undoing acquired habits and perceptions. This leads us to another aspect of succession planning being the Transition of Power.
Transition of Power
Once an organisational structure, communication lines, responsibilities and processes are planned with succession in mind and once the children have been prepared for the process, it is important that a clear transition of power takes place. This is not an instantaneous switch-on/switch-off event but it is a planned process where authority, decision-making and power clearly moves from parent to children. This is a process where a lot of discipline is required, and clear communication must take place with all the stakeholders.
The planning aspects of a transition are the first typical stumbling block in transitioning power. In many situations we come across, we find that planning has not taken place. The family expects the world around them and all the stakeholders to automatically accept that power has transitioned and to act differently once this is done. There is frequently an expectation that everyone needs to automatically unlearn how they have interacted with the business and re-learn how to interact with the business overnight without being given clear direction or guidelines of what to do. This gives rise to a little confusion in the minds of stakeholders as well as to insecurity that things will not work out.
“The family expects the world around them and all the stakeholders to automatically accept that power has transitioned and to act differently once this is done.” CMG Consulta
Planning the transition beforehand is all about designing the structure and process, communicating this clearly to all stakeholders, ensuring that roles are taken up before the transition is announced and having all processes working before any transition of power is even announced. The actual transition should be a non-event. It should just happen automatically in the minds of stakeholders and they should not even need to think about the fact that the children are now in control. Employees and customers have enough to think about without needing to think about the business’ transition, so planning it out smoothly will make their lives much easier and it will rock the boat much less.
We have experienced many situations where a business transitioned between parent and children, yet the children ended up struggling to take over since employees kept referring to the parent for anything required and second-guessing the children or new owners. This creates bad blood between parent and children as well as between the siblings who took over. In our experience, the main reason for this is simply that while the legal and regulatory aspects of the transition were clearly planned with accountants and lawyers, the softer side of the transition was neglected.
The parent owners and the new-owner children also have a very strong disciplined role to play in a transition. It is important that they keep very close communication and that they respect the rules of the game that they themselves have set. However bureaucratic it might feel, they need to ensure that they play by the same rules that they have given. One example that comes to mind here is of an owner who retired and passed the business to his nephew. In the first few days, it was clear that employees were speaking to the nephew then immediately calling the retired father behind his back to verify things. The retired father obviously had a close working relationship with the employees and started to discuss things with them directly. This ended up completely undermining the new owner’s authority and reversing all progress made in the transition.
In family businesses there is frequently a discussion on nepotism versus meritocracy. People are given a role because they are family and not because they are competent. This discussion can cause great bitterness if not well managed. In a succession scenario, the owner who is moving out will be appointing a child to manage or take over the operation. Employees who have been in the business for years, who might be older than the child and who might feel that they have more experience than the child could be embittered by this situation as they could feel that their growth has been hampered. It is natural that the business ownership passes within the family of course however it is important for the survival of the business that the person managing the business is competent to do so. This resonates with the previous points on separation of ownership and management since, being an owner, does not necessarily quality one to manage the operation.
“Competence is not automatically acquired by simply being the owner’s child.” CMG Consulta
Competence is not automatically acquired by simply being the owner’s child. When a business is started, the founder typically has a vision, charisma, an idea, a drive and some special skills. These do not necessarily exist in each family member. This competence needs to be built up within the child over time. It is a process that needs to be planned and could involve formal training, on the job training, controlled exposure to different situations, coaching and mentoring. Despite the planning of the process, however, it is crucial that competence needs to be seen to be acquired. Unless customers, employees and other stakeholders see and believe that the new owner is competent to take over then they will not treat that person with the respect that the new owner deserves, and this will completely undermine the whole succession process.
Transitions of succession should not happen in a short time, but they should be planned. Planning the competence acquisition and making it visible are possibly some of the trickiest tasks to plan and handle in the transition. One very clear example we were called in to assist on was a situation where an owner of a mechanical/technical business passed it to his 2 children. The oldest was set to oversee the operation in a GM role while the younger was taking care of all engineering works. The two children had been employed with the company from a young age in different roles and they had started to work their way up the business from the very bottom. Most employees had worked with the children and had mentored them and ordered them about. The children had learnt a lot through time, they had also strengthened their formal education and they had working experiences outside the company. These achievements were never, however, spoken about and no one had planned on how to raise the children’s ‘profile’ with the employees. Therefore, the employees were now looking at their new ‘bosses’ as the kids they used to order around the shop floor a few years back…
The last piece of the jigsaw puzzle in getting a succession transition to work is the actual preparedness of the new and old owners for the transition to really take place. Here we are not referring to the planning, structure, processes, power transition and competence. What we refer to here is the mental preparedness that there is a new role, a new position, and a new stance that the players need to take. The new owners need to step up to their position and role while the old owner needs to fade into the background to give the children the opportunity to shine.
“The new owners need to step up to their position and role while the old owner needs to fade into the background to give the children the opportunity to shine.” CMG Consulta
The fact that the relationship between old owner and new owner is typically parent/child tends to add complexity to the transition. This characteristic of family businesses needs to be managed. A few months back we were pulled in to assess a business where the parent owner who was close to retiring was saying that her two children are taking over the business. The word on the shop floor, however, was that if the owner took a small break the business would grind to a halt. In our assessment it became clear that the new owners were technically competent to carry out the role. They had the experience and qualifications to make it all happen, yet they were not mentally prepared to take over. They were not stepping up to the role and acting like they were managing the business. Their mother was not seeing them manage so she was still taking over things and the employees read that message very clearly and kept referring to the mother rather than the children.
Being mentally prepared for the transition is not easy and takes time. The previous steps relating to planning the process in detail, considering all aspects and clearing communicating things are the foundations to help the old and new owners understand the process, assimilate it, and get comfortable with it. Many times, the new owners would require an external sounding board to discuss their feelings and to help them shape their ideas and validate them before acting. This external view can strengthen the new owners immensely and make them feel more confident and prepared to take over the role.
One interesting succession transition that we were involved in was where a father passed an import, distribution, and servicing business to his daughter. The daughter contacted us to assist in the transition. We worked through the transition with her and acted as her external advisors. The role that we played was to assist in analysing the business performance, discuss major decisions to be taken and explore possibilities and consequences and to help the new owner prepare for meetings with employees, major customers, and prospects. This background work helped the new owner feel more confident and prepared to take over the role. Following the transition, our relationship also transitioned into us staying on as advisors to the new owner. In all this process, however, the rest of the staff never met us or even knew of our existence and this served to strengthen the new owner’s position in the company since she was seen to be taking decisions and driving their implementation.
In conclusion, when considering a business succession from parents to children, it is crucial to consider more aspects than the legal and regulatory ones. A succession is not purely a paper exercise, but it deals with people who are the most complex and unpredictable element in the equation. Owners are people, employees are people and customers are people and all these can add to the complexity of the transition. CMG Consulta are in a strong position to assist businesses in planning succession transitions as well as in accompanying them through the implementation of these plans. Please do get in touch with us if you would like to know more.