Succession in family businesses is one of the most critical and complex issues related to the operation of family enterprises. This issue is becoming increasingly relevant not only because of the generational transition facing many Slovak entrepreneurs, but also due to government initiatives aimed at supporting the continuity of these businesses. This process requires not only legal expertise but also thorough strategic planning and preparation so that the new generation can successfully carry on the family tradition and further develop the business.
The rules and process of succession in family businesses are among the many topics related to family enterprises, and the subject of family businesses is once again coming to the forefront. Our law firm, Hronček & Partners, s. r. o., has actively addressed the topic and legal framework of family businesses in the past, not only through several articles aimed at explaining the fundamental aspects of family business, an action plan for the development of family businesses, as well as the amendment to Act No. 112/2018 Coll. on the social economy and social enterprises and on amendments to certain laws.
To provide a more detailed overview of the topic of family businesses, including the generational transition (succession) process, we are currently preparing a webinar featuring several experts from various fields dedicated to successfully managing generational transitions.
One of the reasons for “reviving” the topic of family businesses is the ongoing support for family entrepreneurship through various support tools. One such tool is the allocation of funds from the state budget by the Ministry of Economy of the Slovak Republic to address generational succession in family businesses, which means that sooner or later it should be possible to apply for funding intended to secure expert advice on succession and generational transition. This timing, whether intentionally or not, coincides precisely with the time when many Slovak “first-generation” entrepreneurs—who emerged de facto with the transition to a market economy—are considering retirement.
According to studies, family businesses account for 60 to 80% of all small and medium-sized enterprises in Slovakia, with up to 70% of them facing failure when transferring management and assets to the next generation.
Selecting new leadership is one of the most important decisions in the life of any company. While in international corporations, CEOs often change every 4–6 years, in family businesses, the owner may remain in leadership for as long as 20–25 years.1 Generational succession therefore represents a long-term and complex process that requires thorough planning, discipline, and patience. It is not enough to complete a course or degree—training a suitable CEO requires long-term effort. Failure in business succession often stems from underestimating the time commitment and complexity of this process.
The succession process itself encompasses two main areas—the handover of management and the transfer of assets—which do not have to occur simultaneously but can be divided into several phases. It often takes several years, during which the successor gradually gains competencies and responsibility along with an increasing stake in the company. A successful generational transition therefore requires planning to begin well in advance.
Because this is a complex process, we have prepared a list of basic rules that can help your family business successfully navigate the generational transition and ensure that the next generation continues the business into which you have invested years of effort and work.
Successfully handing over a family business requires thorough planning from the very beginning
Founders of family businesses often prioritize keeping the company under family ownership and management, with selling to an outsider typically being a last resort. When planning succession, it is important to consider the company’s current situation: whether it is in a growth or dynamic development phase, or conversely, facing market fluctuations, losses, or potentially requiring restructuring measures.
The first key step in the generational transition process is to determine who will be the company’s new leader. Here, various options must be considered:
a) Train a successor directly within the family,
b) Prepare one of the current managers or employees for this role,
c) Recruit a suitable manager from outside the company.
In addition to the company’s interests, personal factors must also be taken into account, such as the founder’s health, their desire to spend more time with their family, or considerations regarding when they wish to retire.
Another essential step is a detailed review of the company’s strategy. The founder should thoroughly analyze how the company is faring in a changing market, what the competition is like, what it plans to produce or sell in the future, and to what extent it depends on his personal leadership. It is important that the company’s strategy be clear even before selecting a successor, rather than being tailored to the person who will run the company.
At the same time, it is necessary to choose the right succession plan. This choice depends on several factors, such as the founder’s health, their personal plans, and the company’s current situation.
Seeking Professional Assistance from External Sources
Generational transition is one of the greatest challenges that no family business can avoid. Many founders do not realize how demanding it is, both in terms of processes and emotions, to transfer the company to the next generation. This process is complex and can take a long time. Furthermore, generational transition often involves changes in ownership and organizational structure, as well as adjustments to business strategy.
Working with independent and experienced advisors or mentors can be an advantage during this period. Experts bring structure, objectivity, and independent perspectives to the succession process, taking into account the education, work experience, motivation, and potential of family members compared to other talents both within and outside the company.
Mutual trust and communication between generations within the company
In family businesses, working relationships play a key role. Therefore, it is essential to maintain open communication, prevent conflicts, and clearly define roles and responsibilities. It is important to establish transparent decision-making rules and ensure they are strictly followed. Studies show that communication breakdowns and a lack of trust among family members are common causes of failure in generational succession. By focusing on communication and building trust, the chances of this process succeeding are significantly increased. It is also necessary to eliminate generational biases and understand the differences between generations that grew up in different conditions and have different experiences, particularly in the area of digital skills, which are considered an important competency for the future.
Family conflicts also represent a negative aspect of generational transition, which often accompany generational transition; these can be prevented in two ways:
a) By clearly defining the roles, competencies, and responsibilities of both family members and non-family members, with regular evaluation and adjustment in line with the current corporate strategy.
b) By promoting open communication and providing feedback within the family and among employees. Senior leaders should actively seek feedback and set an example for other family members.
Selecting a New Leader and Organizing the Management of the Family Business
Just as every business has its own rules, selecting people for a family business requires thoughtful steps. The first and most important step is to identify the areas the company needs to strengthen in the future and determine what knowledge, experience, and character traits family members and employees already possess to avoid unnecessary duplication. It is important to devote sufficient time to defining the position to be filled. In many cases, founders are assisted in selecting a new leader by an external consulting firm that understands current labor market trends. Furthermore, defining roles and job descriptions should not be left solely to the founder or owner but should result from collaboration with the company’s management. Ideally, a shared vision should be established, and the type of person the family business needs at its helm should be clearly defined.
When setting up the right management model, it is important to realize that the new generation is joining a company with an established history, well-established operating procedures, and specific corporate cultures. The company often employs long-term staff, including managers, who are accustomed to the founder’s management style. Customers, suppliers, and business partners are also often attached to his personality and approach. Therefore, choosing the right management model is crucial. Every family business is unique, and there is no one-size-fits-all solution, but there are various models that can be adapted to the specific needs of the company. Setting up the right management structure is challenging and requires a comprehensive approach and expert advice.
Adhering to the family business succession process
A successful generational transition requires strict adherence to a management succession plan, which includes not only steps related to the succession itself but also the gradual transfer of managerial responsibilities and competencies, as well as the development and training of the new leader as they take over the management of the family business. An important part of this plan is also setting a timeframe and establishing specific deadlines for individual areas that are important for the company during the generational transition process.
The succession plan consists of several main steps, including:
Preparing and training the future leader,
Preparing the founder to step down from the role of director,
Preparing the company for the arrival of new leadership,
Preparing employees for the change in leadership,
Transferring managerial responsibilities and providing further training for the successor.
For each of these steps, it is important not only to set specific deadlines but also to estimate the time required for their completion. Some steps can be carried out simultaneously, which increases the efficiency of the entire process.
Accurate Valuation and Determination of the Family Business’s Value
Determining the value of the family business is crucial because generational succession essentially constitutes the sale of the business—albeit within the family—and has a long-term impact on family relationships. The business valuation is performed by a licensed independent expert, who uses various valuation methods depending on whether the entity is an operating business or an asset-based enterprise.
An expert valuation is required by law in cases where the generational transition involves the transformation of a family business and the transfer of the business (whether through a contribution or sale) from the founder’s assets to a family holding company. The expert bases the valuation on various supporting documents, which form the foundation of their report.
Business valuation is also important from a tax perspective, as it provides the founder with information on the value of individual components of the business, including intangible assets such as trademarks, patents, or know-how, which may not be included in the accounting records.
Establishing a fair compensation system in a family business
A family business can be a long-term source of income for the family, but also a potential source of conflict. It is important to clearly define who will own the assets, who will have the right to make decisions about them, and who will benefit from them. An improperly set dividend policy can undermine the stability of the business and reduce the engagement of family members.
Transparency regarding compensation is essential, as the family often expects the business to be a stable source of dividends and other benefits. The family should clearly define rules regarding access to assets and the future employment of family members.
Establishing a Family Council and a Family Constitution
A Family Council consists of regular meetings of family members that serve as a forum for addressing important issues related to the family, the business, and ownership, similar to a board of directors in a company. This body enables decision-making regarding succession based on agreed-upon rules and provides a space for developing a shared mission, vision, and strategy for the family business. The family council is often convened when the founder announces that a family member may join the family business. These meetings support the building of a strong family, a strong business, and the resolution of future ownership issues. They also help in conflict resolution and in the effective management of the company.
For the family council to function properly, it is important to have a family constitution—a formal document created through the family’s joint effort. This document articulates family values, goals, and principles, and links family relationships to the business. A family constitution is not legally binding; rather, it serves as a moral foundation, much like a handbook written by the founders that provides future generations with information about the company’s goals and management principles. It can also serve as a basis for a shareholders’ or partnership agreement.
Proper Tax Planning and Strategies
A generational transition is often accompanied by a reorganization of the business. In addition to lawyers and accountants, a tax advisor should also be involved in this process, as proper tax planning can significantly affect the amount of funds remaining to the founder after leaving the business.
There are several tools for effectively managing a family business from a tax perspective. The choice of an appropriate strategy depends on the specific circumstances of the business, and therefore it is essential to consult these matters with a tax law expert. The Slovak legal system does not specifically regulate family businesses, so general rules apply to the process of inheritance, gifting, or the sale of a share. However, to maintain business continuity, it is essential to plan tax strategies in advance that may impact the intergenerational transfer of the business.
Consolidating assets into a family holding company and selecting the appropriate legal form
Effective management of family assets requires an overview of financial income, as well as the status and structure of assets (both business and private). For this reason, it is often necessary to gradually consolidate family assets into a single entity, while ensuring tax optimization.
Consolidation is essential during the transformation of a family business, which involves not only a change in ownership but also the reorganization and restructuring of the company. Two main tools serve this purpose: family holding and trust management.
A family holding functions as a central holding company that owns and manages subsidiaries, thereby ensuring the protection of assets and risks. If problems affect one or two subsidiaries, the remaining parts of the holding company remain unaffected. The holding company allows for the redistribution of profits generated by subsidiaries within the holding structure and subsequent reinvestment under favorable tax conditions.
The choice of legal form for a family holding company depends on the family’s needs, costs, and future plans. The most commonly used forms are a joint-stock company, a limited liability company, or a European company. An important step is also establishing relationships between owners and resolving potential disputes, for example through a shareholders’ agreement or a partnership agreement.
Conclusion
Just like running a business, generational succession is not a homogeneous process for which clear and exact rules can be established regardless of the individual facts and circumstances of each case. In this article, however, we outline the range of issues and topics that you generally cannot avoid when considering generational succession or other changes within a family business. Collaboration with experts in the fields of law, taxes, financial management, and communication can be a key prerequisite for a smooth and successful transition of company management and assets to the next generation.
As we mentioned in the introduction, we will continue to focus on the topic of family businesses, including a publication and the preparation of a webinar, about which we will inform you in due course.
