In the 1990s, a lot of family businesses were established in the Czech Republic, whose owners are now starting to retire. But they are discovering that their descendants are not ready to take over the business. Marek Hatlapatka, managing director of CYRRUS Corporate Solutions and specialist in M&A consulting, will tell us more about the issues and alternatives of intergenerational handover
How many companies are involved in the intergenerational exchange?
Although there are no exact statistics, most surveys and our experience in the field show that the issue of generational change is current or will soon be current in approximately one in five family businesses. In practice, this means thousands of companies, not counting sole traders and mini-companies with a few employees.
While elsewhere in the world family businesses have usually already undergone several replacements, here we are only at the stage of the first generation replacement - how are we doing compared to abroad?
It can be said that while in some respects the Czech business environment has matured over the past 30 years, we have not yet gone through the process of a strong wave of generational change in family businesses and we simply have to learn it, just like everything else. And that learning is painful for many entrepreneur-founders. They're focused on the business, they're not used to doing longer-term strategies, which is at the heart of the whole future problem.
How long does the transfer process take on average?
The process of handing over a business is much longer and more complex than most entrepreneurs realize. In developed countries, the new generation systematically prepares for the time when they take the helm many years in advance; five years is the bare minimum. Often, in fact, it is for the whole of adult life.
In our case, the exchange often takes place under time pressure, when the founder suddenly realizes that he no longer has the energy, that life is passing too fast, he starts having health problems or he is simply exhausted by business problems, which in the last years of covid or war is nothing abstract.
For the exchange to succeed, active participation of both parties is needed. And this is often a stumbling block.
"A comfortable and financially secure life will not awaken the entrepreneurial spirit in offspring."
What exactly is the problem?
There are several of them. Sometimes the founder simply doesn't want to let anyone in, he keeps all the know-how for himself and hired managers rather than for his offspring. Other times, the problem is a big ego and the feeling that no one can manage the company better than its founder or current owner.
Or, on the contrary, the desire to keep the offspring away from the stresses of business for too long, which, together with the fact that it ensures a comfortable life for them, at least from a financial point of view, leads to the fact that when the offspring reach the age when they could theoretically take over the company, the founder is surprised to find that the children do not have the same entrepreneurial spirit that he had at their age. This is a problem especially in fields that are not "modern" so to speak or do not lead to quick results. Typically, these are engineering and technical fields.
Are there fields where intergenerational exchange is better?
Surprisingly, yes, perhaps a little surprisingly, this is the case in agriculture or in industries with a high share of IT and modern technologies.
"Abroad, the first family generation exchange will take place in about half of the cases. But passing it on outside the family is not wrong."
In your experience, what is the ratio of companies where the original founder passes the company on to his descendants versus where he sells it to someone outside the family?
In our experience, a successful transfer within the family is less likely than a sale outside the family. I would estimate that at most a third, more likely a quarter, of family businesses will have a successful generational handover within the family. At least in this wave that is beginning to take place.
By comparison, in developed foreign countries, family generational change succeeds in about half of the cases in the first handover, and the second handover has a success rate of about one-third.
On the other hand, it is good to say that passing outside the family is not automatically wrong. It has many advantages, often leading to an increase in company performance, to a reorganisation of the company's activities towards higher added value, to the introduction of new processes and know-how...
How to find the right moment to hand over?
When an entrepreneur sets a clear plan for many years ahead, it is no art. But this is precisely the weak point of Czech (and not only) family companies. There is no plan, or it is not on time, and this leads to over-serving or sub-optimal solutions created under the pressure of current circumstances.
How often do family businesses turn to CYRRUS Corporate and want to solve their situation?
They contact us often, and this trend has clearly increased in recent months. There are several reasons, entrepreneurs-founders have their age, they went through a difficult period of the covid crisis and immediately after the energy crisis, it is becoming more and more difficult for them to find people, and even traditional fields are increasingly intertwined with new technologies. And when you add to this the instability of the business environment, ill-conceived and unprepared things such as changes in the taxation of profits from the sale of companies, it is no wonder that the interest is really high.
According to you, they arrive on time, or already "five minutes past twelve"?
They usually don't come on time, but there is always a solution that is better than trying to solve everything on your own or burying your head in the sand for a while longer. So I commend those who reach out to us, because it's proof that they've already thought about such a strategic thing and discarded some of the ego that could cost them a lot of money. And we can protect them, either by finding the most suitable buyer, by helping with the generational transfer in the company, or perhaps by providing objective feedback on their business, numbers, plans and strategies.
Our unequivocal experience is that a large part of Czech family firms are managed well from the point of view of technical and professional knowledge, but it is much worse in the area of financial management and strategy. And there I dare to say that we can help almost always.
"Take someone who has the courage to do things that may not be popular in the family."
Why do you think it is a good idea to hire an "intermediary" for the transfer of the business?
Whether it's a family transfer or selling a business out of the family, it's always a difficult decision, and it's good to have someone neutral who can give advice, take over part of the activities and has the courage to do things they don't have to to be popular in the family. Taking on some of these difficulties is an integral part of our work.
What are the possibilities of transferring the business outside the family?
Two basic groups of buyers come into consideration. They are either strategic investors or financial investors. The former are often preferred by entrepreneurs, as they are usually recruited from the same field by competitors, suppliers or customers. The founder often promises from them the continuation of the path he has set, and thanks to synergies, such an investor can often offer a higher price.
How difficult is it to find such an investor?
Precisely because it may not always be easy, it is sometimes more advantageous to look for a financial investor, which is usually a fund, for example a private equity (PE) fund, which has experience in acquisitions of companies, their tuning and subsequent sale. Which, of course, implies that the purchase price must provide sufficient space for adequate appreciation of the company over a period of several years, after which the financial investor keeps the company in his portfolio.
The company's management itself can be a special type of investor. This is a fairly common practice abroad, when company managers borrow money and buy the company from the owner themselves.
"When you run out of energy, it's too late to start thinking about who you're going to hand over the business to."
Should an entrepreneur keep at least a minority share when selling outside the family?
As for whether to sell 100% of the share or keep a minority, the entrepreneur usually prefers to sell the entire share, especially for those transactions where the ideal time for transfer or sale has already passed.
Keeping a minority stake can sometimes make sense, for example, when the company's customers are strongly tied to the founder and he is willing or motivated to devote some more time to managing part of the company. Selling only a minority stake, on the other hand, is a completely different story.
What advice would you give to entrepreneurs who are about to hand over the helm?
The difficult and beautiful thing about our work as business consultants is that there are few widely applicable templates. We almost always work on a case-by-case basis and look for the ideal tailor-made solution. Of course, this does not mean that there are no general tips that increase the chances of a successful intergenerational exchange, and most of them have already been discussed here.
The key is to be aware that time, especially in business, flies by so fast. And that when the "juice" runs out, and everyone does, it is already too late for an optimal handover. Giving the younger generation a chance to show if they can be the ones to take over the company one day is extremely important. And if it is not developing in the right direction, it is equally important to admit it in time and start looking for another solution. Just like anywhere in life, "who is prepared is not surprised" applies here.
We will help you with the analysis of your business and with the sale itself. Without unnecessary complications. Get an independent view from the experts. Contact Marek Hatlapatka directly:
Marek Hatlapatka
Managing Director, Consulting and Optimisation Specialist
“After my studies, I joined CYRRUS as a stock market analyst. Through the positions of chief analyst and chief investment strategist, I eventually turned my focus capital structure analysis, due diligence, and M&A. I have been in the field for 20 years.“