Family Business Training - Session No.6

1. Succession Planning in Family Businesses
Silvan Mifsud, Chairperson Family Business Committee
THE MALTA CHAMBER
OF COMMERCE, ENTERPRISE
AND INDUSTRY

2. Succession needs hard work…..
Many family business owners seem
to have this “idealistic & romantic”
idea in mind, as they consider
exercising their right to transfer their
ownership to the next generation,
similar to the transfer of Power to
Simba in the epic animation film “The
Lion King”.
The idea is that one clear successor
will head the business, and the family
and other stakeholders will defer
unquestionably to the heir; and
respect across the generations and
family branches will be freely given.
It rarely if every works that way –
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3. Succession is a journey…..
……that needs a lot of work and commitment to give solid answers to the following
complex and difficult questions:-
- What do you want to do with the assets and business you worked so hard to
build?
- How do you plan to REALLY let go?
- What roles should the next generation play now and in the future?
- How should you develop the members of the next generation into those roles?
- Are the relationships between yourself and the next generation and the
relationships amongst the next generation, strong enough to work through
succession related decisions together?
So as I said Succession PLANNING is a journey….it is hardly a journey or hardly any planning
has been done if succession is tackled when the family business leader is on his way out.
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4. Transferringthe Business….WhatOptions?
In general there are three options for transferring the family business : sell the business, divide it, or
transition it as a whole to the next generation. The importance of this decision continues well beyond
the founder. Actions taken by each generation shape the family and business for decades.
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Sell to an outsider
You may have good reasons to sell. Perhaps your firm’s
competitive position makes the future look bleak as a
stand-alone business. You may have received a once-in-a-
lifetime offer that’s too good to refuse. You may have too
much conflict in the owner group. Your next generation
may have no interest in owning the business together.
One word of advice. Some sale transfers fail to happen. So
in the process you should continue running the business as
if you will always own it. Keep your sales discussions
restricted to the Owner and Board Rooms and don’t
distract the management team unnecessarily. You want the
business to stay healthy in the process of a sale, especially
if it ends up falling through.
Be ready to live with whatever the buyer does with the
business or transforms it in.
Divide among next-generation members
The second form of transfer is to divide the business
itself among the members of the next generation.
There are many ways to do this. But however you
do it, dividing ownership among your children
ensures that there is no shared family business to
pass down. Instead, each branch charts its own
course.
Partitioning a business can be a good way to
minimise conflict, but it is not without downsides.
For one, the effort and resources expended to split
the business could otherwise be used to grow the
company. Additionally, this approach is hard to
replicate when ownership changes.

5. Transferringthe Business….WhatOptions?
In general there are three options for transferring the family business : sell the business, divide it, or
transition it as a whole to the next generation. The importance of this decision continues well beyond
the founder. Actions taken by each generation shape the family and business for decades.
Putting your home in order - Helping family businesses reach new heights:
Transfer the entire business
The last option is to transfer the entire business down to the next generation.
As the present family business owner you need to plan and decide to make this transition
as a matter of course, but the decision should be deliberate, taking the alternatives into
account. As an owner, you control not only the decision whether to transfer (and to
whom) but also the process. Most obviously, you choose where the assets go, what
vehicles are used (trusts etc), and when they are passed down. Ownership also brings with
it the power to select the leadership of the Four Rooms (directly or indirectly), you also can
shape how various roles are handed off.

6. Common Problems with Transferringa Business
There are certain approaches to succession planning and transferring of a business that are likely to
fail. Here are some examples.
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A Present Leader that can’t let GO!
Family Business leaders that can’t let go,
that rule all aspects of their family business
with an iron fist. Their micromanagement
and tough behaviour, which led to family
business so far, is applied to the next
generation, which finds it impossible to
thrive under an iron-fisted senior leader.
Because of this oppressive behaviour, the
members of the next generation are
incapable of leading the business or are so
hurt by their previous experiences that they
have no interest in continuing the business.
Often, after a domineering family business
leadership – the next generation are likely
to they sell the family business.
No flexibility!
While Governance, structures, roles and
processes are important, it does not mean that if
these worked worked brilliantly well in one
generation, they cannot be modified for the next
generation.
With no level of flexibility, even when this is so
with good intentions, the senior generation can
set the younger generation up for failure by
maintaining rigid leadership roles without
allowing the younger group to consider their
own approach to leadership. Each generation
brings different interests and skills to
leadership—and the business itself may need
different leadership skills. It’s a mistake to
assume that what worked for one generation

7. When things get Stuck………
A family business and the eventual transfer of its ownership can become
stuck when owners disagree and therefore can’t prepare for a
generational transition.
A stuck family business becomes like a perpetual tug-of-war with equal
strength on both sides of the rope—nothing moves.
When a family business seems set or stuck, the only really way forward is
to shift it with the agreement of all owners. You need to find common
ground through conversations.
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8. Successful transfer of Business…..Aligning Interests
Owners can divide up their assets among their children according to the recipients’ degree of interest in the
business, with some children inheriting shares and others receiving outside assets. The same approach can
be applied to the business ownership: you can base how you divide ownership of the company on the
different interests of the next generation.
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Many owners want to maintain power until
late in life, but there are benefits to
distributing the economic value of your assets
before you formally hand over the reins. You
might start this distribution to begin engaging
the next generation in ownership. One way to
initiate this distribution is to pass down
economic interests to the next generation
while still retaining voting control. Some
family businesses split their ownership into
voting and nonvoting shares, then pass down
to the next generation more of the financial
benefits of ownership (via nonvoting shares)
while keeping control in the current
Others take the opposite approach. When
the current owners are ready to pass the risk
and equity appreciation down to the next
generation but want to maintain a source of
income to fund retirement, ensure a spouse is
taken care of, or donate to charity, you can
adopt a “cash up, equity down,” approach.
The current owners structure the transfer so
that they receive money over time while
passing down ownership. The transfer is
accomplished in a variety of ways, such as
pulling out the real estate from the company,
arranging directors’ fees for being on the
board, or having preferred shares behave

9. Tax Planning………
The details of tax planning lie outside the scope of these training sessions.
However for a successful transfer of assets, you will need to understand the
full suite of transfer tools and Tax implications of each.
Taxes are, of course, a significant issue for all businesses, but the role that
taxes play in a transfer cannot be under estimated.
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10. Core Ingredients of a SuccessfulSuccession Plan……
A good succession is often described as the passing of the baton in a relay race. This
helpful metaphor points to three aspects of the process—preparing the person currently
holding the baton, selecting who will take it and planning the handoff.
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Preparing the current leader
Gracefully shifting your powerful roles is a profound act of leadership, but the transition isn’t easy.
As a current-generation leader, you may know that the transition to the next generation is the
right thing to do, but you just can’t seem to let go. You wonder how to let go and how your
identity is (too) closely tied to the business. You may be feeling pushed by an impatient younger
generation. But you can handle a transition with grace if it’s thoughtfully planned and supported.
Well-prepared leaders create a glide path, a five- to ten-year plan to move away from the
business. Don’t expect to execute your glide path on your own. This is a major life change. You will
need the support of peers such as an advisory board, a single trusted adviser, or a coach. Your
spouse’s involvement and encouragement are essential.

11. Core Ingredients of a SuccessfulSuccession Plan……
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Selecting the Successor/s
One of the most challenging, and potentially contentious, aspects of a leadership
transition is deciding who is most qualified to take the reins. Choosing your
successor—without damaging the family—may be even more difficult than
planning your own transition.
•Make them earn it.
•Establish a clear and transparent process.
•Ensure alignment with your Owner Strategy.
•Avoid the temptation to clone.
•Consider outside board and business leadership if no family member is qualified.

12. Core Ingredients of a SuccessfulSuccession Plan……
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Train & Build Capabilities of the Successor/s
Shape the next generation of leadership with an early effort to engage them and
prepare them for their future roles in all Four Rooms.
• Get them trained in: Business ownership skills and concepts (e.g., financial statements, legal
structures), Family business principles and practices (e.g., Governance), Knowledge of the
family assets (e.g., shareholder agreements, key managers, business strategy, industry
dynamics), Family history and values (e.g., family constitution), Personal leadership
competencies (e.g., conflict management, team management).
• Teach them to Collaborate: In addition to building their skills as individuals, members of the
next generation need to develop their ability to work with each other. These im-portant
relationships should not be left to chance. Create spaces where they practice making decisions
together early on and with lower stakes.

13. …and finally thecommon pitfall….leaving
Succession planning alwayson the back burner…
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• Realise that this is not just about the current ownership. You need buy-in from the
next generation.
• Put it on the agenda with a deadline. Discussions about continuity planning will
usually get delayed unless they have dedicated time.
• Consider working backward to overcome the initial stumbling blocks. Many current
owners are comfortable with the existing setup and are resistant to change. If that’s
the case, it could be valuable to avoid making immediate changes. Instead, start by
asking members of the next generation to define how they will work together when
it’s their turn. That way, they are preparing themselves to work together without
immediately changing (or threatening) the status quo. They should discuss how will
they make decisions, structure the business, define success, and so on. If nothing else,
doing so creates clarity for what will happen in the future. In parallel, ask the senior
generation how they envision the future, say, fifteen years out, when they have
stepped back. Then work backward to think through what needs to happen to get
there. This approach can make the transition seem less threatening than would

14. Succession is a process not an event…..
No succession works in a linear way.
There will be good days and bad
days. Days you will you have moved
2 steps forward and days you feel
you moved 1 step back.
As the plan unfolds, you should look
for concrete markers of progress,
such as a revised shareholder
agreement or a new governance
structure and adapt to the changes
around you.
A healthy transition is much more
comprehensive than a Simba
succession plan. It takes a lot of work
to make a thoughtful and successful
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