The COVID-19 pandemic has caused considerable uncertainty across the business landscape. Depending on the sector, a number of businesses have been in survival mode, hunkering down and waiting for conditions to improve. The survival of those who managed to operate smoothly and those who did not, depends to a great extent on the business they are in.
Sectors such as travel and hospitality have been hugely affected, while businesses in sectors such as healthcare and technology have fared much better. Digital business models are thriving as traditional brick and mortar stores struggle. Many forward-looking businesses are seizing the opportunity to reinvent themselves, identifying new markets, products and ways to serve customers to prevail beyond the pandemic.
For the family business sector, the coronavirus has become an accelerator for confronting difficult planning and decisions that may have been deferred before. One of the most notable areas for discussion is succession. The pandemic has squeezed the decision-making cycle for families. Traditionally, families have tended to be deliberative and reflective, taking their time in making decisions with respect to their businesses. But in the new reality, businesses are fast realizing that they need to act more quickly and become more agile. There is a new sense of urgency about how they prepare for the future.
For family businesses that may have been postponing or skirting these key decisions, COVID-19 has moved succession planning up to the front burner.
Early and ongoing planning and preparation are critical for the continued success of a family business. The COVID-19 pandemic has truly bolstered the importance of this notion more than ever.
Businesses that downplayed the importance of thinking – and planning – ahead prior to the pandemic, have now realised that this is crucial to ensure that their operation is seamless, and every strain caused by any force majeure is minimised.
A good starting point for family business owners is to think ahead for a period of five to ten possibly fifteen years and what could potentially ensue if a plan is not in place to transition the business. Planning for successfully transitioning a business to the next generation is not something that can be accomplished overnight. One must not underestimate the psychological and legal processes involved, as well as the implementation thereof. Each of these factors contribute towards achieving the necessary tailor-made plan required in order to take the business to the next level. Discussing with the family and establishing robust family governance is crucial.
The fundamentals that need to be observed in preparation of a robust succession plan are various. To commence with, family business owners need to have done thorough estate planning, including a valid, up-to-date will that takes into account all of the business assets, ownership structure and transfer intent, as well as applicable tax considerations.
Establishing family governance is an imperative step in the process. Putting a process in place to formalise rules, responsibilities and accountability is a must, especially when an operating family business is at stake.
Through our experience as family business advisors at KPMG Malta, we have noted that there is a growing number of family businesses taking a keen interest in adopting foundational governance structures and in establishing a family constitution. Whilst in the past family businesses have often followed more informal processes and mirrored norms established over many years, following the pandemic there has been an increased awareness of the importance of formalising these policies and procedures as the family and business evolves.
Transferring the family business to the next generation
The accelerated planning cycle of a family business can also encompass a need to more rapidly prepare the next generation to assume control. This can include mentoring, coaching and training the younger generation to prepare them for taking on executive roles in the business, assuming they have the appetite for following in their family elders’ footsteps.
As the older generation prepares for succession and transferring the family business to the next generation, the determining factor they face is the willingness and the readiness of the younger generation to assume ownership and leadership of the business. Whereas it may have once been assumed that the next generation would automatically take over the existing family business from their parents, that presumption is changing.
There are a number of factors that are impacting the transfer of the family business. One of the challenges is that the founders are living longer and don’t necessarily want to relinquish control of the business as early perhaps as they did in previous generations. Where the next generation wants to take over the business, this can create family tension between the founder who may be hanging onto the business longer and the millennial child or children who are keen to get moving with business because they don’t expect to be there when they are in their seventies.
Next generation millennials who stand to inherit the business may also be less inclined to just want to carry on the original core business. They may be more interested in diversifying into what they consider to be more innovative businesses such as technology. In many instances, the millennial generation is better educated and has acquired a more global perspective. They may be less interested in the safe, secure employment of the family business and more excited by the prospect of launching their own business. There is an increasing number of family business owners who would prefer investing in new start-ups rather than being tied solely to carrying on the traditional family activities. Or, they may be interested in selling parts of the business to create liquidity so they can invest in other things, which might better align with their value set, such as investing in sustainable, green endeavours.
Where millennials do, indeed, take over the family business, our experience suggests that family businesses run by millennials and GenXrs actually achieve superior performance and create a better environment for success.
Millennials are also interested in cultivating the right cultural and behavioural dynamics and they recognise that the future prosperity of business may depend on different talent into the business. At KPMG Malta, we ensure that the experienced generation passing on their passions and hard work – their family business – onto future leaders, is a process and experience that values and takes into account the aspirations of both parties.