By Carlos Bicheiro, partner at FALCONI
Most organizations in the Brazilian business world are family companies. Fruit of the entrepreneurial vision of their founders, these companies generally start off as small businesses (a commercial establishment or small factory, for example), which require great effort and determination to become profitable, and in some cases depend on intense family participation.
These small companies grow and become large business groups that generate wealth. As the years pass, the founders get old, the children mature and grandchildren are born. The passage of time would suggest thinking about the future, but the topic of “succession” is often uncomfortable and taboo, forbidden to mention as though it were an abomination, since it is understood as the end of an era, and loss of importance and exclusion of the founder from the company’s daily activities.
Whether out of fear, insecurity, ego or over-attachment to the position, this issue is not dealt with proactively, which would be the best approach, in order to ensure the capability of the business to compete and generate value. The success of any company is a daily challenge, often heroic in the start, given the weight of the tax burden, difficulties obtaining loans, lack of incentives and other battles faced by entrepreneurs in Brazil. However, the arrival of new generations is a critical point for the survival of organizations, regardless of how successful they’ve been, revealing the need for clear rules to ensure a healthy succession.
The path a family company chooses to deal with its succession process has two possible outcomes: destruction or generation of value. If this process is not carefully thought out and planned, as new generations come to the fore, problems arise that can jeopardize the company’s survival, its wealth generation capacity, and the family’s assets.
For this reason, succession must be a required topic on the agenda of these organizations. Apart from succession in relation to property, which is directly related to the heirs, there is also the challenge of passing on executive responsibilities, often concentrated in the hands of the founder, who ponders the question: “Who will take over my place?” It may occur that the son or daughter lacks the necessary competencies or vocation to occupy this position and is, nevertheless, obliged to assume the father’s role. Other family members, with greater or lesser skills than those directly in line, may also have certain expectations.
Whatever the approach taken to train successors for executive positions, it is also indispensable to cultivate in all the heirs (including those not working for the company) an awareness of each one’s importance to ensure the legacy, values, longevity of the company and sustained wealth generation. Effective preparation along these lines also mitigates the risk of conflicts within the family spreading to the company and hurting the business.
On the one hand, a poorly executed succession process, without any preparation of heirs and/or executive successors and no clear rules that clearly define each person’s role, can destroy value and undermine the company’s survival. The most obvious symptom that things are not being handled properly is when finances are intermingled, i.e., the profit generated by the business is mixed with the family’s expenses, for example. Having no clear definition on the use of assets – still common in many family companies, as incredible as it may seem – erodes income generation and competitive capacity.
Other practices also destroy value, such as family interference in the day-to-day running of the company, which includes putting in executives without the sufficient necessary competencies for the responsibilities they will exercise. Along the same lines as interference, another dangerous distortion is inflating the company, not only by hiring people to take care of the family’s needs, but by creating too many executive positions. This is because many family members do not want operational responsibilities, but desire to be executives.
In the financial realm, a fatal symptom is increased costs and dipping into the kitty to distribute higher dividends to meet the need for resources resulting from the growth of the family. As time passes and new generations are born, the family grows and the ability to generate wealth in the family company often diminishes.
In the face of market demands, some companies become more competitive, through effective repositioning of the brand and investments in process innovation and new product segments, unleashing a new growth cycle. However, it is important not to forget that the growth curve of companies almost always lags behind the speed of growth of the family.
The history of family companies, therefore, goes through periods of wealth accumulation, generated by a strong leader, followed by periods that could lead to destruction. One of the triggers of this wealth destruction curve could be succession, in the second or third generation, if the process is guided poorly or if there is no strong leadership to ensure its effective implementation. The good news is that there are paths that add value, if this issue is dealt with in a sensible, professional and proactive way.
If you, for example, are the founder of a successful company, your grandchildren, the natural heirs, will receive shares at some point. However, they will not only receive an inheritance, since you intend to transmit to them an awareness of the role they will play in the company’s longevity. Knowing this, you can start preparing a process to educate, train and raise awareness among the heirs, including potential successors, even before they become shareholders.
You must also be mindful to preserve the vocation and interest, or not, of each one in relation to the company’s management, showing them the importance of the role they will play as heirs. Unfortunately, if the maturity level of those involved is low, this will undermine the future of many family companies that are unable to properly address the issues of succession and sustainability.
However, this scenario is improving, because the current generation is more aware, better educated and has much greater access to information. There is no doubt that it is essential to work proactively so that the inevitable process of succession is guided by wealth generation and not destruction. Many start taking action when the company is in decline and normally, at times like this, it is common to deny the problem, with nothing consistent done until the managers are on the brink of bankruptcy. And succession ends up having to be launched in the midst of crisis – at the death of the founder, for example.
It is much more difficult and risky to tackle these issues in crisis or conflict situations than starting the process earlier during peaceful times. Therefore, companies need to take measures when they’re on the top. Releasing the trigger in advance, the quickest way possible, with adequate planning, without the pressure of time, without urgency due to issues of competitiveness, will create the conditions for a serene and successful succession process. The sooner this process is launched, the sooner the company will be able to determine the best path for sustainable growth and longevity, without trauma, friction or destruction of wealth, but with an auspicious outcome, in accordance with the company’s values, culture and highest objectives.
Text published on the website of Estadão, in the “Economy & Business” section, on May 15, 2018.