Sudden succession in a family business
This was the headline of my recent social media post Linkedin on the topic of sudden succession in a family business. Sudden succession in a family business is a situation in which a family business is generally founded, owned and/or managed by a particular member(s) of the family of that family business, and that member(s) suddenly / unexpectedly ceases to be the person who makes decisions and determines the direction of the family company – generally as a result of their premature death.
Depending on the preparedness of the family business and its members for the consequences of such a sudden (and inevitable) generational change, we speak of:
(i) a family business for which the sudden change comes as a shock and may cause power struggles within the company, as well as a war for control of it, if the rules were not clearly established during the lifetime of the family member in charge, or
(ii) family businesses with properly established rules, an established structure (tax and legal) and, above all, separated family assets.
The rules I am referring to are not merely a simple list of points in the deceased family member’s notebook, or hastily signed “papers” without the necessary legal formalities, stating “what and how things will be when father is no longer here”, kept in a safe and whose authenticity is reasonably questionable.
On the contrary, they involve:
(i) overall preparedness of the family,
(ii) legal and tax structure and established rules for running the family business a
(iii) protection of family assets.
Imagine the following situation, quite common in family-owned companies.
A father and mother establish a company. They run it for years, it prospers, and even expands domestically and abroad. They have three children. The company grows and develops until …. the father tragically dies in a car accident.
He leaves behind four heirs:
- the mother, who founded the company, has her own share as well as a claim to inherit from her husband’s share
- the first (already adult) child manages the company strategically and commercially
- the second child handles the company’s finances for half of their working time, because they also have their own business activities and are still studying
- the third successor is a spoiled vagabond …and has absolutely nothing to do with the company apart from its name.
The family never addressed what would happen in the event of the death of one of the current owners – after all, he was the father and was supposed to be here forever. He held everything firmly together. He banged his fist on the table, and whatever he said went. But he is no longer here.
Instead, there are the heirs, who inherit part of the company through their father’s half without further ado. Somehow, they did not get around to making a will. So the law applies.
Yes, including those who work at the company, or work there part-time, and yes, even the vagabond. … And hell broke loose.
Is it fair? …the answer: it is the law.
What can be done?
Just as, when selling and buying a company, we address preparing the company for sale, the issue of generational change and sudden succession likewise falls directly within the sphere of tax and transaction law, with a specialization in family business.
In Slovakia, we have been gradually but surely building what is known as the SILVER GENERATION – founders who have gradually reached retirement age (and may not even have noticed it themselves). The goal of their many years and lifetime of work should not be the moral and actual disintegration of their family and the collapse of the family business that supports not only them but also dozens of other families.
Succession does not have to be sudden, however; I recommend that it be planned.
So that the family business built by the father (Generation 1), developed and protected for decades, can grow and expand under the son and daughter (G2), for the benefit of the grandsons, granddaughters and other family members (G3 and beyond).
And so that the family business and, above all, the family assets are not controlled by a family drama worthy of an Argentine telenovela, and do not face the consequences of ill-considered and poor decisions by new successors, succession litigation, deadlock (a situation in which decision-making at the general meeting is blocked), creditors, crisis and bankruptcy, protect the family assets, family business and family unity through properly established rules put in place in advance.
Generation 3 will thank you for it, and remember, these are the children you are doing it for – your children.
And therefore:
- Ensure the separation of family assets and the family business through family holding companies and foundation structures,
- Protect assets from creditors, bailiffs and problematic family members
- Have clear rules established for management and decision-making in the family business
- Pay attention to the contracts between you, the rules and compliance with them
- Seek qualified advice – a lawyer, tax adviser or family business expert.
We are here for you. skypalova@skylex.sk – write to me or arrange a consultation on the topic of: Family holdings, structures and protection of family assets.
JUDr. Zuzana Skýpalová, owner and attorney at SKYLEX
Acknowledgement
The idea for the post arose during recent conversations between me and the internationally recognised family business expert, Associate Professor Monika Krošláková Naďová from the Family Business Center, with whom we discussed the topic of succession in family companies and compared many examples from the legal environment and from the real-life practice of family businesses, and I would like to thank her for this.
In Slovakia, we have qualified people with extensive experience (with) the life of family businesses and the intergenerational transfer of capital – their experience encompasses the entire topic of family businesses, and they also use it to educate young successors and present family-business issues in a human and balanced way – I would like to draw attention and express my gratitude for the many years of work to Ms. Erika Matwij and her Institute of Family Business (IRB).
