Generation change in family businesses

Problems of generation change

Generation change in a company is the result of many years of work. The biggest challenge in this regard is that we not often talk about the inheritance of the second or third generations. Thus, there is not necessarily an example to be taken.

Whether it is inherited from parent to child or someone else takes over the company, it will continue to prosper if the overtaken is successful. In the event of failure, the business that has been built with years of work will cease to exist.
There is a serious chance of the latter even in Western Europe, a considerable proportion of family businesses die in it. (Especially in Hungary it is precisely because of the chain broken by communism that even more attention is needed.)

By reading this article, chances are you are still young enough for thinking about handing over the company. For easier planning, it’s already worth thinking about the future of your company when you might be “just” a one-man little start-up.

The importance of generation change at the level of the national economy

Generation change can also be a problem at the national level. As the SME sector employs about a third of the workforce and many will be affected by generation change almost simultaneously, a significant part of GDP production could be jeopardized. If these companies go out of business, jobs will be lost at the same time.
You could say those workers are going elsewhere to work. Some of them are certainly will, although they may fall out of production for a while until they are able to find another employer for themselves. The rest of them will go on forced rest for a longer period of time. Even if they are good professionals. After all, a relatively rapid generation change affecting lots of company can also affect the business of a neighbor who would hire them.

Economists like to analyze this in spreadsheets, and although I am an economist, I will spare you now 🙂

Instead of analyzing generation change, think about it

How many people do you employ directly or indirectly, and by the time you reach the point where the generation change will be current in your company, how many do you plan to employ? You can give them a job either through your orders or by employing them yourself.
If you are not an employer in a small town, imagine moving your employees side by side. If you had decided yesterday to stop, walk through this part of town to see how many streets they wouldn’t have to go to work today, how many bus stops would be left empty.

The current generation change is an important issue, as trust is at stake here. If it fails, many companies could go bankrupt in this, and so many jobs could be lost. If it succeeds, the business owner can leave it to the next generation to not only make a better living than as an employee, but to go beyond it.
In general, we are now learning how to leave more (or anything else) for posterity than a house or a piece of land.

Generation change within the family

If you’ve recently taken over your business from your parents, you’ve probably been raised so that you can take over it. I have seen examples of this in many places. The young man first just helps, then learns more and more.

This issue is more likely to arise if you either already have your own business and don’t want to take over a completely different one (why take over a manufacturing workshop if you just have a dental business) or don’t want to do have a business at all.

However, the most difficult question is about your resigning CEO.

The first question that arises is what you will do from then on.
What will be your role if you retire and pass the baton. How to resolve not to get involved in daily work over and over again. Believe it or not, this is a very difficult task. Letting go of many years of habit.
If it is not the child who takes over the management, the question is how to be a “good owner” of the company. That’s why many can’t let go of their business.

The second issue is livelihood.
So far, of course, you have taken salaries, dividends, and more from the company. This is now over. How can you live a decent life without burdening your children.
Since I hope you still have a few years, you can relatively easily put together a capital you can rely on. Contact us because you can still get in touch now. (Of course you can say no to it, but without info it’s hard to make a responsible decision.)

The main question is what the generation change will cost you

The first major issue is the speed of generation change

The taking over of the batton does not go overnight within the normal, planned framework. That is why it is necessary to start in time.
Statistics show that once you have the person to be a future executive (with whom you have agreed) there is an average of 5-7 more years before you can sit back completely. During all this he learns everything, and of course he must be accepted by both employees and customers. The latter is sometimes not as easy as you think.

If you are already resigning, or for some reason you are unable to carry out your duties and your company is left without an actual manager for years, then there is no longer a company that can be taken over. So if you don’t think in time, the cost of this question is very simple: it will cost your entire company, even the work of a lifetime may sink.
Think about it, if you didn’t go in tomorrow for months or years, what would end up with your company? The same question applies to the subject of inheritance.

The second issue is the evaluation of the company

Maybe you’re still young. Let’s say 35-40 years old. You’ve been an entrepreneur for 5-10 years, so you don’t feel so burning about the issue of generation change yet.
You make a good living from the wealth your company produces. You may not be rich (yet), but you may not complaining.
Let’s say you live in a “typical” entrepreneurial life:

You ask for an invoice for everything, to account for even the drill you bought for Christmas.
You go to dinner on company money (and then the accountant looks at you ugly, but it doesn’t matter).
With the car maintained by the company, you go everywhere, even on vacation.
The company is in the basement, garage, outbuilding of your family house. This way, you can also cleverly beautify the overhead from company money. (Because you bathe at work, so you don’t have to go home and bath again, and you only wipe out your entrepreneurial bottom on the toilet, never the private one.)

So you’re actually doing it because of your lifestyle. Like so many. It works, too, until the first bump on the road.

Problem with generation change in relation to the valuability of your company

There are a total of two problems with this being, as far as the subject of evaluation is concerned:

1. From the moment you decide to get out, your company is specifically invaluable, unsaleable, unmarketable. Who would want to buy a company so they can take it all, but the car stays and they have to solve the problem of lifting a few hundred pounds of stationary production machine out the tiny door without knocking down the wall.
Because you sell without a home and a place of business (being your own house anyway). Plus, skeletons are popping out of the financial records. In the event of a possible tragedy, this is the guaranteed bankruptcy. By the time the heirs dismantle this, you have already reincarnated.

2. If you even solve the question of evaluation, not its growth. Think about what would happen to your company if you always worked in the area and district you are in right now. Even if you see that you are either growing or the now tiny competition outpacing you.

To understand what I mean: let’s say you’re traveling in rural tourism. The boundary of your area is the boundary of the village. Either you don’t want to move further, growing out the village, or you just can’t because of the above. If you decide that for whatever reason, but you no longer want to live in that village that closed you in, then to whom do you hand it over? If the bookkeeping is wrong, everything will converge, you won’t even be able to find an executive to carry on, which you may have had 40 years of work by then.

Closing remarks

I know that the average novice entrepreneur taxpayer would simply run into serious difficulties if he paid all the tax burden with penny accuracy and on a daily basis. It is simply not lifelike to expect this from everyone. It’s also true that with depreciation, you can “get out” a few things from accounting, bleaching it a bit. But you can’t apply this method to everything if you’re too intertwined.

But it can be a realistic expectation, in addition to the tax burden and “bleaching”, to see through your own company what that decision entails. Sit down with your accountant and get a clear picture of what you have. The preparation for the generation change can also be realized by leveling up. Plan what that would mean.

Questions:

How do you prepare your own company for the (once due) generation change?
In your company, how do you ensure that private and corporate assets are properly separated?
Have you seen an example of generation change in your immediate environment (either successful or unsuccessful)?

Contact us to analyze your company, plan your exit strategy, and with it, plan for a generation change. Feel free to ask, you know, it’s cheaper to have a lot of questions before making a decision than even a single one in retrospect.