The Globes Family Companies Conference was held at The Tel Aviv Stock Exchange (TASE) last week with an emphasis on integrating innovation into family businesses. During the conference there was a panel discussion on the planning and management of continuity for family businesses. On the panel were GAC law firm managing partner Adv. Ifat Ginsburg, and Mika Mazor, an advisor who leads the activities in Israel of LGA Global Family Enterprise Advisors.
What is continuity management? How do you begin?
Mazor said that one of the problems for those who own family businesses is the difficulty in planning ahead on how they want their business to look. "When we enter into a strategic partnership, we have to take into account all the changes that are going to happen and expand the whole range of possibilities. When we come to the issue of ownership and continuity, this question is not always clear. Whether I know the way or not, we always recommend contacting other families, so that they can get acquainted and consult. It is important to consciously choose the right strategy for the attributes of the family, of the business, while also taking into account the wishes of the individuals.
Adv. Ginsburg says that many families have great concern over the process. "Generally, families are familiar with the business world and want to manage the process as a type of legal process, similar to the one they know from their business worlds. In our eyes, this is a huge mistake, when it comes to a family that has a business, by definition there is a very high level of complexity, there is an inherent conflict of interests between the business and the family, the first thing for the process to be right is to think about the strategy of continuity and where we want to go."
How do you continue and build the platform for transferring between generations?
As Adv. Ginsburg explains, this is work planning work that includes many dimensions. "In many cases the planning starts from the prism of law and tax, but unfortunately this is one of the things that colors all the other areas in a negative light. Also, many times families start off with an orderly structure with a kind of pyramid. This structure was created as a result of the desire of the family members to produce a structure that is economically efficient, and the dividend rises up in the business and each family member pays tax only on the money they need. We do not understand the significance of this for the family members themselves. The idea of creating a tax-exempt structure should be understood as affecting the future of family members. At the family level, such a decision can dictate the fate of family members who may not want to be in the business and deprive them of the choice in the future of whether they want to stay or not."
Mazor explains that the ability to choose their professional future is very critical for family members. "There are cases of people entering jobs without choosing them, siblings who assume the role of parents in business dealings with their siblings. Many times we ask people in their 50s or 60s what they want, and they don't understand what the question is at all. One of the wisdoms is to look at the desires of the individuals and connect them to the family constellation. To manage such a process, it is not intuitive, what needs to be done is to understand that it needs to be managed with a lot of advance planning, with a mission team, to formulate a strategy, and to create a system of balances between the different dimensions, and we want to take into account the business strategy and the desires of the next generation who sometimes don't dare to tell their parents about them."
What mechanism will help build a credible structure for future generations?
Adv. Ginsburg thinks that the family legacy plays an essential part in building the structure for future generations. "Every good family business has a family heritage. You can see it with all the people here in the room, so of course when we try to produce the same structure then we have to see how to preserve the heritage. To do this it is important to establish sector boundaries, basic principles, and create transparency between family members, it coordinates expectations and helps when there are disputes. In most families, when there are clear rules, in 99% of cases, the rules will be respected and it is also important to try to prevent problems before they happen like when to retire and how. As part of setting the rules within this conflict of interest, we need to talk about personal behavior and how I neutralize its effect on the business, in situations like marriage, divorce, incompetence, etc.
"Someone told me 15 years ago that his company had become like a government job center. There was an expectation that all family members should work in the business. There is always the dream that the grandchildren and great-grandchildren will work in the business and that it will continue for generations, and the desire of the founders is often to lock in the next generations. The existence of freedom of choice makes it less desirable to choose to stay, and precisely as a lawyer it is important to stress that in Israel people want very fast processes. Every family has what suits them and needs patience. On the other hand, you should be careful not to plan too much, it is right to only look one generation ahead."
What can help a plan like this to succeed
Mazor warns about several common mistakes.
"We see extremes in families who do not want to approach planning, and on the other hand also families who want to plan and determine everything in advance. A very significant warning is regarding the whole issue of transition periods, for us this is a period of transition of 20 years. It does not happen in one day, brothers and cousins do not replace each other in one day and it is a long process, and you have to understand that no one has fun planning for the day after. But, if you leave it to your children, their chances of solving it are much lower. You have to look at reality and set guiding principles, like any CEO who would make sure that he grooms his successors, our job is to leave our children and future generations a stable and orderly situation, even if the rules are difficult. Another point that is very important to take into account that the more you invest in such a plan, the fewer the surprises. The enemy of continuity is surprise."
Full disclosure: The Conference was sponsored by GAC, LGA, KPMG, Meitar law firm, Julius Baer and Ginsburg & Co.
Published by Globes, Israel business news - en.globes.co.il - on July 8, 2024.
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