8.2 Strategy of inter-generation transfer

Inter-generation transfer belongs to the key and most risky periods in family businesses – e.g. transfer from the first to the second generation is successfully achieved only in 25 % of businesses (Neubauer and Lank, 1998; Barach and Ganitsky, 1995; Handler, 1994; Ward, 1987).

Even though it is a complicated process, in which there closely intermingles the business management and strategy with a number of issues related to the values, interests, and relations among the particular family members, as well as the interests of employees and external partners, it is important that this process is systematically managed (Jinks, Leedy and Teal, 2001).

Koiranen and Karlsson (2002) recommend a practical planning of inter-generation transfer on three different levels, which should assure a complete and successful realization of the transfer:

1.       Transferring OWNERSHIP (shares) of the business.
2.       Transferring MANAGEMENT of the business – managerial authorities and responsibilities.
3.       All this keeping in mind the necessity of consensus and FAMILY HARMONY.

Within the inter-generation transfer of a business it is also necessary to make several key, and often difficult, decisions:

• If there are more possible owners in the next generation, it is necessary to decide to whom and in what share the ownership will be transferred, or if and how to pay-out some family members.
• When to transfer the ownership.
• How to transfer the ownership  (Koiranen, Karlsson, 2002), namely regarding the minimization of the tax burden – combinations of the following options are often used:

• • Gift or hereditament (with or without a testament).
  • Selling the firm or its parts to particular members of the next generation.
  • Issue of new shares for the members of the coming generation.
  • Merger with another firm (e.g. one owned by the member of the next generation).
  • Division of the firm, and transfer of the parts to different members of the next generation – sometimes it is also possible to establish a new division of the firm in order to get ready for this way of transfer, which can be done later.
  • Pay-out of the previous generation etc.
• Who of the family members will overtake what management positions in the firm.
• Which management positions (taken by others than family members) to transfer to whom (crucial is specifically a transfer of those positions related to the overall strategic aiming of the firm) and when (Koiranen, Karlsson, 2002).

Practical recommendations for managing the inter-generation transfer for the retiring generation (Koiranen, Karlsson, 2002):

• Together, within the family, discuss and decide whether to continue the family business in the next generation. It must be really open discussions and the atmosphere in which all interested members can safely and freely express their views of the future.
• Consider also whether your family is willing or able to undergo a long and demanding period of intergenerational transfer.
• Create an inter-generational transfer plan – this should be sufficiently specific and stable (see the points above), but not too rigid.
• Consider also other interest groups (key partners, suppliers, customers, family members who are not directly involved in the business, but are affected etc.) even get them also ready for future changes.
• Try to reach an agreement of the main actors of the current and the new generation on the key issues of intergenerational transfer.
• Formulate an inspiring vision for the future of the family business, and clearly specify the position of each family member (both, the retiring and the new generation) in this vision (withdrawal of the original generation should be implemented gradually, through a successive change of positions and roles, and creating new roles for the outgoing generation – for example positions in the advisory bodies etc.).
• Select the successors and prepare them for their future role with sufficient advance. This is necessary not only to gain knowledge and experience, but also to ensure that a new successor to the company builds a strong relation and responsibility – so called Psychological ownership.
• Create an environment, which will support the members of the new generation in building their own authority and identity. Do not “crush” their own solutions, let them be different than you yourself.
• Formulate a testament, and get all involved parties acquainted with it yourselves. Its contents can be changed, if situation requires, but you should be ready for unexpected...
• Ensure that all interested family members know, what are their rights, duties and responsibilities in the process of intergenerational transfer. If not, there will be chaos in the organization, and a member of staff or competitors may abuse your vulnerability during the process of intergenerational transfer.
• Support your successors in being entrepreneurial – do not discourage them from being active.
• Respect other interests and personal features of your kids, not only their entrepreneurship.
• Make sure that the key successor has the ability to be a good, responsible owner. It is essential to have a personal integrity, education / knowledge and experience, leadership skills, and responsibility. Start the transfer at a time when both, you and the company, are doing well.
• Start the succession discussion with a potential successor with a sufficient advance. Be realistic, when choosing the successor, do not succumb to emotions.
• When transferring the firm, do not just transfer the position and its name, but really also the authority and responsibility associated with it. Respect the decisions that your successor does in his position.
• Believe in your successor, do not underestimate him/her. Nobody is irreplaceable.
• When transferring, reserve time for yourselves, find other joys than just the firm.
• Allow yourselves to be satisfied with what you have built.
• Selling a firm is not a failure or an insult of your children. Sometimes it is the optimal solution. But it should be discussed within the whole family.

Practical advice for the coming generation (Koiranen, Karlsson, 2002)

• Realize that family business is not just work, but a whole (often very demanding) life style. Therefore consider very carefully, whether you want it to be such.
• Be honest to yourself – do not agree with solutions or decisions you cannot cope with, or which are in a conflict with your opinions.
• Feel own responsibility for your education and personal development.
• If possible, acquire a sufficiently long work experience also outside your family business.
• Be patient, sometimes it takes long before you find a good solution.
• Remember that solution is only good if it is accepted by everyone, who is concerned, or at least by majority.
• Consult your problems or concerns about the intergenerational transfer or your functioning within the family business with someone else. Often you find that your problems are not unique and others have to cope with them as well.
• Respect, what your parents achieved – they had to put a lot of effort in it. Do not humiliate what they have achieved, be proud to the achievements of your parents.
• Be realistic, do not become megalomaniacal.
• Be yourselves. You do not have to, and cannot be an exact copy of your parents.