Learning point # 1: Thinking of succession ahead of time does not cause one’s death. But it can avoid a lot of conflicts.
Learning point # 2: Is there such a thing as “the perfect solution”?
Option 1: Unequal distribution of shares – give shares to those who manage the business and other assets to those who are not involved.
|Ownership power linked to leadership power: easy decision-making process for business leaders||Need other assets or debt to compensate family members who do not receive shares, deprives the company of the cash used for compensation|
|Financial reward of personal efforts||Risk of feelings of unfairness: what happens if the value of the assets/family business evolves in a dramatically different manner?|
|Those who don’t work in the business don’t bear the risks||What happens if the “most talented” person is born in a non-owning branch of the family? Some branches may feel “left out” in the future.|
Option 2: Equal distribution of shares – give equal shares to all, regardless of whether or not they work in the business.
|Easy allocation of assets. No need for other assets or debts||Shared ownership can destroy the family: need for communication and family policies to ensure proper interaction between the family and business: family and business governance|
|Shared ownership can strengthen family ties, providing the right governance is in place||Reflection needed on remuneration of business leaders and shareholders|
|Larger talent pool in future generations|
|No ill feelings if the value of the different assets evolve differently|
It’s a matter of family culture and involvement of those who will live with the new distribution of ownership. The consequences of a choice will span over generations.
Learning point # 3: More options exist and may often be overlooked. Splitting the business to allocate different units to family members – this option is close to the unequal distribution of shares (children are given different assets; ownership and management are linked). “Family buy-out” – where a number of family members buy the shares of others.
Learning point # 4: No surprise! If the will is different from what the children expect, it can create a lot of turmoil… and it will be too late to change it.
Learning point # 5: The process is at least as important as the result. In fact, the process can lead to better decisions and better motivation. The essence of Fair Process is to engage those concerned (in this case, Thomas’ children) and to discuss different options with them. Once the decision is taken, it has to be clearly communicated and followed.
The five principles of Fair Process in family business:
Learning point # 6: Starting to think about succession early (in one’s 50s) is easier because the emotional implications are still sufficiently far away. Also, succession can take many years, because it means that the successors have to find their role, and it can entail the evolution of the whole governance system. Last, but not least, early donations can avoid heavy taxes.
Learning point # 7: Check the legal and fiscal environment – depending on the country, the law may impose a certain distribution of the inheritance to the children and spouse, with a limited amount of free allocation. Also, taxes can put at stake the whole succession scheme if not addressed in time. Technical advice is crucial, but tax considerations should not impede following a “Fair Process”.