COVID-19 amplified the importance of family business planning

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The COVID-19 pandemic has caused considerable uncertainty in the business landscape. Depending on the industry, a number of companies are in survival mode, pulling back and waiting for conditions to improve. The survival of those who have managed to function well and those who have not depends in large part on the business in which they find themselves.

Sectors such as travel and hospitality have been hit hard, while companies in sectors such as health and technology have fared much better. Digital business models thrive as traditional brick and mortar stores struggle.

Many forward-looking companies are seizing the opportunity to reinvent themselves, identifying new markets, products and ways to serve customers to prevail beyond the pandemic.

For the family business sector, the coronavirus has become an accelerator for dealing with difficult planning and decisions that might have been delayed before.

David Pace, left, and Anthony Pace

One of the most notable topics of discussion is succession. The pandemic has compressed the decision-making cycle of families. Traditionally, families have tended to be deliberative and thoughtful, taking their time in making decisions about their businesses. But in the new reality, businesses are quickly realizing that they need to act faster and become more agile. There is a new sense of urgency in how they are preparing for the future.

For family businesses that may have postponed or circumvented these key decisions, COVID-19 has put succession planning at the forefront.

Early and continuous planning and preparation is essential to the continued success of a family business. The COVID-19 pandemic has reinforced the importance of this notion more than ever.

Companies that downplayed the importance of thinking – and planning – ahead before the pandemic, have now realized that this is crucial to ensuring that their operations are transparent and that every stress caused by force majeure is minimized. .

A good place to start for family business owners is to look ahead to five to 10, if not 15 years, and think about what might happen if a plan is not in place to ensure the success of the business. business transition.

Planning for a successful business transition to the next generation is not something that can be accomplished overnight. The psychological and legal processes involved, as well as their implementation, should not be underestimated. Each of these factors contributes to the realization of the tailor-made plan necessary to take the business to the next level. Talking with the family and establishing strong family governance is crucial.

The fundamentals that must be observed in preparing a solid succession plan are diverse. To get started, family business owners should have done extensive estate planning, including a valid and up-to-date will that takes into account all of the business’s assets, ownership structure and transfer intent, as well as applicable tax considerations.

The establishment of family governance is an imperative step in the process. Having a process in place to formalize rules, responsibilities, and accountability is a must, especially when dealing with a running family business.

Through our experience as family business advisers at KPMG Malta, we have found that a growing number of family businesses are keenly interested in adopting fundamental governance structures and establishing a constitution. family. While in the past, family businesses often followed more informal processes and reflected standards set for many years, in the wake of the pandemic there has been an increased awareness of the importance of formalizing these policies and procedures as the family and business evolve.

Transfer the family business to the next generation

The accelerated planning cycle of a family business may also encompass the need to prepare the next generation to take control more quickly. This can include mentoring, coaching, and training the younger generation to prepare them for leadership roles in the business, assuming they are keen to follow in the footsteps of their elders.

If the younger generation is willing to take on managerial roles in the family business, they should be prepared by mentoring, coaching and training them.  Photo: shutterstock.comIf the younger generation is willing to take on managerial roles in the family business, they should be prepared by mentoring, coaching and training them. Photo: shutterstock.com

As the older generation prepares for the succession and handover of the family business to the next generation, the determining factor it faces is the willingness and willingness of the younger generation to take ownership and management of the business. the company.

While it was once assumed that the next generation would automatically take over the existing family business from their parents, this presumption is changing.

Several factors influence the transfer of the family business. One of the challenges is that the founders are living longer and don’t necessarily want to relinquish control of the business as soon as perhaps they did in previous generations.

When the next generation wants to take over the business, it can create family tensions between the founder who may hold on to the business longer and the millennial child or children who want to get into the business because they don’t expect to be there. when they are 70 years old.

Next-generation millennials who will inherit the business may also be less inclined to simply want to continue the original primary business. They may be more interested in diversifying into what they see as more innovative businesses such as tech.

In many cases, the millennial generation is better educated and has acquired a more global perspective. They may be less interested in the safe and secure employment of the family business and more excited about the prospect of starting their own business.

There are a growing number of family business owners who prefer to invest in new businesses rather than being tied only to continuing traditional family activities. Or, they may be interested in selling parts of the business to create cash flow so that they can invest in other things, which might better match their set of values, such as investing in sustainable and green businesses.

Where Millennials do take over the family business, our experience suggests that family businesses run by Millennials and GenXrs perform better and create a better environment for success.

Millennials are also interested in cultivating the right cultural and behavioral dynamics and they recognize that future business prosperity may depend on different talents within the business.

At KPMG Malta, we ensure that the experienced generation passing on their passions and hard work – their family business – to future leaders, is a process and experience that values ​​and takes into account the aspirations of both parties.

Anthony Pace is Partner, Head of Taxation, and David Pace is Partner and Head of Advice, both at KPMG in Malta.

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