Family Business Planning and COVID-19 – Corporate Law and Company Law

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The COVID-19 pandemic has caused considerable uncertainty in the business landscape. According to the sector, a number of companies have been in survival mode, hunkering down and waiting for conditions to improve. The survival of those who have managed to function well and those who have not, depends to a large extent on the business in which they find themselves.

Sectors such as travel and hospitality have been extremely affected, while companies in sectors such as healthcare and technology have fared much better. Digital business models are thriving while traditional stores are struggling. 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 to deal with difficult planning and decisions that could have been postponed before. One of the most notable topics of discussion is succession. The pandemic has tightened the decision-making cycle for families. Traditionally, families tend to be deliberative and thoughtful, taking their time in making decisions about their businesses. But in the new reality, companies are quickly realizing that they need to act faster and become more agile. There is a new sense of urgency about how they prepare for the future.

For family businesses that may have postponed or circumvented these key decisions, COVID-19 has brought succession planning to the fore.

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

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

A good starting point for family business owners is to think ahead for a period of five to ten or even fifteen years, and what could possibly ensue if a plan is not in place to business transition. Planning for a successful transition from a business to the next generation cannot be accomplished overnight. The psychological and legal processes involved, as well as their implementation, should not be underestimated. Each of these factors contributes to achieving the tailored plan needed to take the business to the next level. It is crucial to talk with the family and establish strong family governance.

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

The establishment of family governance is an imperative step in the process. Setting up a process to formalize the rules, responsibilities and accountability is essential, especially when it comes to a family business in operation.

Through our experience as family business advisors at KPMG Malta, we have seen that an increasing number of family businesses are taking a keen interest in adopting fundamental governance structures and establishing a family constitution. . While in the past family businesses have often followed more informal processes and reflected norms established over 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.

Passing the family business on to the next generation

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

As the older generation prepares for succession and the transfer of the family business to the next generation, the determining factor they face is the will and readiness of the younger generation to assume ownership and direction of the company. While it used to be assumed that the next generation would automatically take over the existing family business from their parents, this assumption is now changing.

Several factors influence the transfer of the family business. One of the challenges is that founders are living longer and don’t necessarily want to give up control of the company 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 cling to the business longer and the millennial child or children who want to get into the business because that they don’t expect to be there. when they are in their sixties.

Next-generation millennials who will inherit the business may also be less inclined to simply want to continue the original core business. They may be more interested in branching out into what they see as more innovative businesses such as technology. In many cases, millennials are better educated and have 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. More and more family business owners prefer to invest in new businesses rather than being solely tied to the continuation of traditional family businesses. Or, they may be interested in selling parts of the business to create cash so they can invest in other things, which might better align with their set of values, such as investing in green and sustainable projects. .

Where millennials do indeed take over the family business, our experience suggests that family businesses run by millennials and GenXrs actually achieve higher performance 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 having different talents in the business. At KPMG Malta, we ensure that the experienced generation passes on their passions and hard work – their family business – to future leaders, a process and experience that values ​​and takes into account the aspirations of both parties.

Originally published November 2021

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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