Family businesses are a major contributor to the Maltese economy. Ninety five out of 100 private business enterprises in Malta are classified as microenterprises, many of which are considered to be family-owned businesses. Running a family business is not an easy task. Besides everyday exertions of running the business, the majority of family businesses share a common concern to leave a solid legacy for their future generations.
One cannot ignore the fact that the number of thriving family business transitions to the second generation is low and diminishes drastically with transitions to the third generation. It is not surprising that the English say ‘shirtsleeves to shirtsleeves in three generations’, the Chinese say ‘wealth never survives three generations’ and the Portuguese say ‘rich father, noble son and poor grandson’. It is very clear that the moment of transition can make or break the family business’s continuity and future success.
But how can a successful business owner ensure that future generations in the family enjoy the fortunes and satisfaction of guarding and developing their family business? The key is thinking ahead and setting up a clear and unequivocal succession plan catering for a smooth and business-friendly transition. It is not a matter of ‘one size fits all’ solutions. Every family business has its own specific characteristics. A successful family business succession plan builds on insight derived from best practices.
The number of thriving family business transitions to the second generation is low and diminishes drastically with transitions to the third generation
It is never too early to decide about a good plan for management succession. A place in the family business should not be a birth right but the new generation family members should prove their worth in leading the family business. Allowing the children to study and develop a successful career outside the family business for a number of years ensures that they develop sufficient skill and expertise to be in a position to compete with non-family members for a vacancy in the family business.
The family member, if chosen, needs to prove his/her worth before advancing in the family business. This preserves the well-being of the business and also maintains the motivation of non-family managers who will work hard for the success of the business in view of equal opportunities.
The next step in the process is ownership succession. Moving on to the next generations, ownership may increasingly distance itself from management. While owners are mainly concerned with immediate reward by way of dividends, managers privilege business growth. A family charter can help bridge the gap between the expectations of the family members exiting the business and the desire of the new generation to grow the business further.
Having an open discussion and agreeing on dividend policies, share ownership, voting powers and remuneration packages, among other things, can prevent future conflict and deadlock situations which are detrimental to the business.
The final considerations that need to be taken into account are tax implications. No family business owner would like to think that upon his/her retirement or death, a good part of the wealth generated will be paid in taxes. Getting expert tax advice is key as some solutions are only tax efficient if prepared and implemented over many years.
Succession planning is one of the most important responsibilities of an entrepreneur who has created a family business. Delaying causes frustration to the next generation and hinders the growth of the business.
Family business owners should be both proactive about succession and transparent about the entire process, gathering expert advice in order to ensure a healthy transition and lasting continuity.
Anthony Pace is a partner, tax services, and Caroline Zammit Apap is a manager, tax services, at KPMG Malta.