Succession Planning for Family Businesses

The ABCs of succession in family-owned companies

Plan for the future; plan for the present.

Planning for the future is a fundamental thing for companies to transcend, especially for family companies which most work towards its succession.  Nowadays, stating your shares in a last will and testament is not enough, and is something that puts the families’ companies in a dangerous position, not only with regard to their future, but also with regard to their present performance. Structuring companies correctly not only implies significant savings in taxes, but also guarantees a correct transition to the next generation, and helps ensure that the objectives of the founders are achieved.

Daughter-in-laws and son-in-laws as managers? Sons and daughters as beneficiaries?

The businessman can not control who is next in the succession line. He also cannot control the decisions about the individuals his sons or daughters marry; but he can ensure, for instance, that professionals will always direct the company, and that the benefits will be shared with his successors, according to certain rules.

What should be done?

Following good international business practices, the first thing to do is to put the financial statements in order (for example, capitalizing on retained earnings, auditing the company, and reconciling and dealing with accounts receivable to shareholders). After that, the company’s social pact should be modified, the obligation of signing marriage settlements should be established, and a shareholder’s agreement should be made outside of the company’s constitution. Finally, international business structures should be created in countries that are reliable and have liberal trade legislation.

Problems in Costa Rica and the Region.

Much of our legislation declares the shareholders agreements as invalid, or rests its legal validity as these are not part of the companies’ constitutive pact. So, what should be done? We should look offshore. But, what if the shareholders are as conservative as the tribunals are? These are some of the arguments we have to encourage you to consider:

As time goes on, companies grow and consolidate themselves in the market.However, on many occasions the legal structures of companies stretch across one or more companies in which they do business.

This situation causes a company to grow with a disorganized legal structure that produces multiple negative consequences:

a)     Shares are not issued to each of the shareholders (family members).

b)     The owners of each of the companies are persons, it means, they are shareholders of the companies directly and at personal title.

c)      Involving the patrimony not related to the company, to the family business responsibilities.

d)      Lack of rules that help conflict solving between the family members, as well as between the family and the company.

e)     Generational succession in the family business administration is not clearly defined.

f)       Continuity of the company as a family company is in danger.

g)     Lack of information and ignorance of the rules that control the corporate government of the company.

Or what if an administrator commits fraud?

• How can the family shareholders be sure that responsibility is assumed and guaranteed?
• Can any administrator of your company participate as a partner, administrator or manager of another firm that does business in the same industry as your company?
• Can this administrator, also, on his or her own, or on behalf of somebody else, carry out another activity that competes with your company?
• What happens if one of the shareholders gets divorced without any resolution of the matter of the joint property?
• Do you know what a shareholders agreement is?

Matters for shareholders to consider are:

• Do you know if your shares can be impounded?
• What happens if you do not have shares legally issued and a shareholder dies or becomes disabled today?Can your partners sell or put in guarantee his or her shares to any third person without the authorization of the rest of the shareholders?And if so, then at what price?
• Can you exclude a partner who has been “unfaithful” or disloyal to the company? Or someone who has participated behind your back with the competition? Or who has revealed secrets that are stated in a clause of confidentiality?

What we could accomplish if we “clean up the house”:

a)     Keep the property of the family business in the family.

b)     Prepare the next generation for the administration of the family business.

c)      The process of adopting the rules, strengthen the family bond, and get the family together.

d)     Get the members of the family to know and to understand better the family business.

e)     Adopt family rules for solving conflicts that might occur between the membersof the family, and between them and the Business Group.

f)       Distribute the work between the members of the family, assigning them to fields where they can be autonomous and specified.

g)     Manage the firms in a centralized and coordinated way from the holding.

h)    Adopt the relevant decisions of all the firms in one single board of directors: the one of the holding.

i)       Isolate different risks, with the objective of avoiding the situation of non-business assets being affected by the results of the business activity.

j)       Give the companies a group image.

k)     Keep the anonymity of the real shareholders.

l)       Pay less tax without breaking the law.

ICS Consultores would like to talk to you about initiating this process.

ICS Consultores has the steps and procedures for you to follow in order to start processes of consideration, evaluation and other actions which will help your organization keep “shining like a bright star” for 100 years more.

We invite you to listen to the next interview with two of our experts and regional partners. In this interview, they summarize fundamental aspects of our processes for helping family owned companies. Without any obligation, we can visit you and talk about your future–better yet–your present and the way in which you wish the benefits of your company to be distributed, and your accomplishments multiplied.

Gente Gerente Interview

Special Guest: Ricardo López, Family Business Groups Specialist.

Topic: Family Business Organization and Planning.

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This audio is recorded is Spanish and all rights are reserved.