Generation Change – Succession

“Itt a legjobb alkalom, hogy egy okos szót mondjak minden szülőnek, akinek serdülő fia van. Ha csak tudja, kutassa ki, mire van kedve és ha rátalált, az istenért, de meg a gyerekért is: töltse a fiú a kedvét. Senki szülő ne kényszerítse a gyermekét arra, amit nem a gyerek kíván, hanem ő. Az ő életéről van szó, ő éli a maga életét. Megvan rá minden valószínűség, hogy boldogul, ha komoly törekvés él benne, és követheti vágyait.” (Roy Chapman Andrews)

Who will continue to operate my business after I retire?

“60 év feletti vállalkozó, komoly céges háttérrel, veszni látszó cége számára jövőképet keres!” (A vállalkozó)

In the recent years many family businesses face succession, and solving the issue is a key determinant for the future of the company. Experience on foreign markets show that only 30% of the companies undertaking first generational succession is able to successfully execute generation change, and the future of the remaining 70% depends on whether it is possible to sell the business without breaking the continuity in operation or not.

The child(ren) will take over the company

Unfortunately majority of the owners-founders of the family firms do not pay much attention to these issues, and they only face with it when serious problems arise in operating the company. The biggest problem is that most owners lack any plan on succession, they don’t take it seriously until the very last moment, when they do not want or cannot manage the company anymore. As a consequence, when the problems turn ….

Why generation change is such a huge problem?

Reasons for owners-founders not facing with these problems:

  • family issues: the owner doesn’t have a designated successor or the successor doesn’t want to take over the business
  • lack of competence: although the new generation is determined in succession, but they do not possess the professional knowledge to do so
  • ineffective corporate governance: overwhelming majority of the family businesses are so-called ‘one-man shows’, where basically everything is decided by the owner-founder of the company

What can be the consequences?

This one-man show structure is a barrier to successfully raising successor(s) with sufficient knowledge and competence, who can take over the management of the company.

Possibilities

1. option: keeping ownership while a professional management is brought into the company

A model in which the ownership remains in the hands of the owner and a professional management is brought into the company is barely applicable in case of first generational entrepreneurs. The main reason behind that are the conflicts this model can lead to because of the active involvement of the original owner, who may not be able to let his/her business go, cannot pull out him- or herself from the operation of it, and it the case usually because the owner is still financially dependent on it. The conflicts with the management might even cause the generation transition process to fail. Furthermore, in this model the brought-in, external management is not as dedicated to the business as the founder-owner of the company.

2. option: selling the (whole) business

In our (or according to our) experience, in case of such a family business, where the succession is not an option, the most appropriate solution seems to be the sale of the firm. One of the most important questions here is that who can be the potential investors:

Strategic investor: A current business partner (customer, supplier) or competitor of the company. This possibility/choice is a real option for this kind of family firms, especially for those with high value-added operations in industries where there are huge, capital-intensive players as potential buyers.

Venture or private equity fund: These funds basically are an alternative option for those businesses mentioned above, for those companies that have high growth potential. In their case a clear exit strategy is essential, that is, how are they going to carry out the exit in the medium-term. The exit can be provided by the already mentioned strategic investors or the management of the business.

Management buyout: Probably this is the most realistic solution for most family businesses. In this case a new management has to be found for the company (it can be just one person or a team), which is then going to buy out the company from the founder-owner, and keep and manage it for a longer period of time (thus the aim is the opposite as in case of a venture/private equity fund). The most important concern in this type of acquisition is the financing: ‘is there a management that has the necessary resources for the buyout, and what external financing opportunities are available to it?’

3. option: Selling and keeping the business at the same time: BSE Xtend

Appearing on the stock exchange might serve as an optimal solution. Issuing stocks on the market can provide a good solution for the retiring generation’s dilemma: they can sell part of the company and remain part of it at the same time, while in the meantime a professional management operates the company.

 

Solution of NAVIGATOR

NAVIGATOR Investments will walk you through the whole process of generation change, and ensures to keep the value and spirit of the company as it was created by the founder. We keep in mind the value and the culture that have been created, and provide smooth transition.

In what cases you might need us?

  • When you don’t have connections to those investors who could buy your business or you don’t know how to look for and choose the best one.
  • When you don’t possess a wide network which would allow you to find proper management for your company, or when it is hard to find motivated management.
  • Selling the business is a problem as you feel that you are not on the same page with the investors.

What we offer

  • Working out and executing a succession plan or strategy
  • Providing interim management and coaching opportunity when needed
  • Setting up a new, proper management
  • In case of exit of the owner providing due diligence and business valuation services