Planning the next generation in a family business

What is a family business?

According to the Israel Small and Medium Enterprises Authority, 90% of the businesses in Israel are defined as “family businesses,” and more than half of Israel’s gross domestic product is generated by family businesses, and in actuality most of the market was founded and is based upon these businesses.

Despite that, only seldom do people ask what the unique features of the family businesses are and what the best way of managing such business is.

A “family business” will fall under such category upon the fulfillment of one or more agreed features such as the following:

  1. A business owned or controlled by a family or a number of families.
  2. More than one family member is employed in the business.
  3. Developing family members’ career is influenced by the mere existence of the business.
  4. Family relations affect decisions in the business including with respect to the next generation.
  5. Lack of clear boundaries between the family and the business.

 

Planning the next generation in the family business – complexities and sensitive issues

Seemingly, “family” and “business” are a contradiction that cannot be settled in the long run because the goals that are part of starting a family are completely different than the goals of starting a business.

The family business is a special “hybrid” that consists of a family and a business. Such business has unique advantages in the market and it requires unique and innovative manners of handling due to its complexity.

In actuality, many family businesses experience serious crises and sometimes are even on the brink of liquidation due to the fact that the owners did not handle their assets in the most suitable and adequate manner.

The fundamental contradiction between family and business is already evident in the business next generation – the sons who continue their father’s business (who sometimes feel less committed to the business or disagree with the manner of managing the business with their father).

As the next generation steps into the business different doubts and questions arise: how do I get my “incompetent” brother into the business and in what position?! Is it possible that one brother will give instructions to another brother at a lower rank? And many others.

Even if the family business is managed properly other problems may arise such as damage to the “uniform command” – a family member employed in the business feels sufficiently confident and knows that no one will dare to fire him, and his conduct may create problems in the business management, as well as confusion and disorientation up to damage to the business operation.

These are only some examples of the difficulties that may rise in a “family business.” From time to time we see stories on TV about struggles for control in family businesses, this phenomenon is especially discernible among the second or third generations and there are many examples. The first is the Recanati family – despite the will left by Rafael Recanati, joint management and ownership of the empire that was built after many years of labor, lasted less than three years under the management of the cousins Udi and Leon. Another affair was in the Dankner family – here too the business began to disintegrate when the third generation entered the business, and differences of opinion intensified in light of the family’s decision to join the acquisition of Bank Hapoalim, and the two cousins, Nochi and Danny Dankner headed this action whose outcome is still felt today. Along these affairs there are other families who encountered similar difficulties such as the Wissotzky family, Soglowek, Bornstein (controlling shareholders of Tempo), Eisenberg Company and many more. However, on the one hand there are families that were able to transfer control to the next generation in more peaceful ways, such as the Ofer family that found a creative solution to prevent the inevitable war of succession between the next generations, as Sammy and Yuli Ofer transferred control of the family-owned empire they built to the next generation, and declared in 2002 a separation of assets and their division among the next generation. By making this move they prevented the clash between the next generations.

Another solution is by selling the family-owned business or turning the business into a public business, with the consent of all or part of the family members. This solution is sometimes forced by the court when the conflict reaches its final decisive stages.

 

The importance of the involvement of the founders’ generation in planning the next generation

When making plans in anything related to the next generation, it is highly important that the founders stay in their business as they are its undisputed leaders and are capable of resolving differences of opinion that arise in the next generation. Most business establishments have now reached a stage wherein the second or even third generation runs the business, the stage wherein most problems may occur, and therefore it is important to manage businesses correctly in a manner that will prevent tensions and damage to the family’s texture. The function of the founding members is not just to maintain peaceful relationships in the business but also to plan the business future in a reasonable and sensible manner after their retirement. The founding member has to assume legal and administrative responsibility, while being active in the business, and then make operative decisions that will prevent conflicts and future damage to the business.

 

Essential actions that the founding generation has to take before its retirement:

  1. Choosing the next generation, similar to choosing the right managers, their training and strengthening their status already at the time the founders work in the business.
  2. Suitable distribution of the business assets, if possible, by way of separating assets and transferring them to the next generation already during the lifetime of the founding members.
  3. Separation and division by making a will or issuing instructions for the purpose of protecting the business through a will.
  4. Prior division and separation of functions and responsibilities of the different family members in the business.
  5. Performing on-the-job training to ensure success of the future business plan.
  6. Making operative decisions such as bringing an external manager to the business other than family members.

 

Advantages of the family business: despite the potential for conflict, the establishment of a family business also bears advantages: there is no competition to the core values of a close and tight family that is loyal, dedicated and supports its members; strong, undisputed leadership and always committed to realizing the family’s vision. Another advantage is providing financial and occupational security to the next generation while establishing a prosperous family business wherein management policy is more convenient and considerate.

 

In conclusion – it is important to invest planning and thought in anything related to the next generation of family businesses, make careful considerations and weigh all options while knowing the family members who are involved in the process, and in any event ensure that the next generation’s way will be carefully planned as possible, already during the lifetime of the business’ founding members, and in that potential inheritance conflicts among the next generation can be averted.

 

* Eti Sadis Law Firm was established in 1997. Adv. Eti Sadis has many years of experience in conducting complex and sensitive inheritance disputes and provides nationwide representation to inheritors and estates, representation before the Inheritance Registrar and in family courts throughout the country – including estates in Tel Aviv, Ramat Gan, Kfar Shmaryahu, Zichron Yaakov, Binyamina, Karkur, Hadera, Caesarea, Or Akiva, Netanya, Kfar Yona, Herzliya, Ra’anana, Kfar Saba, Hod HaSharon, Petah Tikva and Rosh HaAyin.

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