by Garvan Corkery

One of the characteristics by which academic literature defines a family business (and it’s a difficult thing to do, as the briefest survey will reveal) is that the owners want to keep the business in the family.

The statistics are not encouraging for owners: commonly quoted figures suggest that less than 30 per cent of family businesses are successfully passed on to the second generation, and only about 10 per cent make it on to the third. It’s a problem that’s been around for awhile: in medieval Europe, second sons could go into the church or on the crusades.

Today neither option seems to attract, and there is the added complication of daughters.

A family business is two things: first a business, and second a family asset. Both of these characteristics need to be borne in mind by the parent/owners. They want to distribute their assets fairly amongst their children. At the same time, they want to see the next generation take the helm in the business successfully.

Often, these two objectives conflict: the business may be the biggest family asset, so that it has to be shared out if each child is to get a fair slice of the cake; and yet, if the business is simply passed on to all the children equally - without any concern as to their suitability as owners or managers - it can quickly suffer and perhaps even fail.

It seems obvious that a family business must be looked at first as a business, and only then as an asset: if it ceases to be successful as a business, then it will also cease to be an asset.

Both generations need to keep this in mind when looking to the future.

The options available to the older generation might include:

• giving the business to the next generation equally,
• giving it to selected children with the right aptitude and experience,
• selling it to selected children, perhaps at a discount (yielding - immediately, or over time - proceeds which can be spent by the older generation or distributed among the children not involved in the business),
• a hybrid approach, involving the separation of ownership and management, passing ownership to all equally, with voting and management control going to selected children only,
• separating ownership from management, passing ownership to the next generation, and engaging professional management to run the business,
• selling the business outright to a non-family member (perhaps to some of the existing non-family managers, or to an outsider), and
• winding the business down, selling the fixed assets for cash in an orderly manner.

The best choice from among these options (and the other variants) will depend on the circumstances.

Important questions might include the following.

Is there room for a family successor?

If non-family managers are critical to the business, how will they react to a family succession?

If they leave, what goes with them?

Is there a potential successor?

Is there anyone in the next generation with the aptitude and the interest?

Given today’s higher levels of education, and the broader range of available career options, no assumptions can be made as to what children might want to do. And they can’t be forced into the business (or allowed to freeload). The formation of a successor is a lengthy process.

It should involve considerable outside experience, with an opportunity for the candidates to make (and learn from) their own mistakes and to develop independence and judgment.

Arguably, a family successor needs to be better than the norm to earn peer respect. How many family managers can the business accommodate? Will competition between family members be constructive or destructive? Might different businesses be identified and separated out, to accommodate more than one successor-manager?

How many family owners will the business support? What financial expectations might the successor family owners have?

Might the business ultimately collapse under the weight of an expanding pyramid of dependent families?

Time is important; so is communication.

If you have time, you can think about these kinds of questions, identify the options available to you, see to the proper formation of successors, restructure or separate-out businesses to suit your objectives, or maybe even prepare to sell up for a good price; and you will also have a chance to communicate.

Communication might first involve listening, to see what aptitudes the members of the next generation have, what they want to do, and what their expectations are (financially and otherwise).

Then a discussion might start to reconcile the various objectives, all with a view to achieving consensus on the path to be followed.

The process can be helped along by outsiders like lawyers and financial advisers, but it must be driven by the family.

Once the magical consensus has emerged, legal, tax and other professional advice will be needed to implement it.

However, these elements should only be added to the mix after the basic decisions have been made by the family: an arrangement born of a desire for tax-efficiency or an elegant legal structure may just not be what the family wants.

Garvan Corkery (garvan.corkery@rdj.ie) is a commercial lawyer and a partner at law firm Ronan Daly Jermyn.

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