Family businesses, succession planning and regulatory compliance.

In this article we will talk about family businesses, business successions and regulatory compliance, understanding as a family business or business those commercial organizations formed by the members of one or more families, in which decision-making is influenced by their members and their own interests and which also have as part of their  strategic vision, to make successive generations give continuity to the company by taking control of it.

On the other hand, we will define as succession, the change in the ownership of the business, whether due to the death of the owner (inheritance), retirement or any other circumstance capable of generating a change in the management model of said family business, at the hands of its new Headlines.

Now, what happens with management when the company is family-owned and constitutes the mainstay of the group?

Usually, once a business succession has started, the new owners would be responsible for its administration, in accordance with the rules or provisions previously agreed upon within them.

Change is inevitable and in the first months, an attempt is made to implement a transition to new management models. In this case, it cannot be done under trial and error formulas, as problems and dire consequences could arise.

The transfer of ownership of the family business should not be notable for its shortcomings. For this reason, it is very important to consider the possible consequences of the migration from one management model to another, in the short, medium and long term.

Knowledge of the new owners or successors is important and decisive; But we are not referring exclusively to academic preparation, but also to understanding the company and its environment and finally, the roots, trajectory and experience of those who were able to perform managerially or operationally in it, so that there is no risk of subject it to experimentation, without understanding the fundamentals that support it.

Now, it is important that they consider regulatory compliance, both to maintain the current structure, operation, values, mission, vision, human talent management, risk management, corporate social responsibility, as well as to implement any change in any of these aspects.

As we have all affirmed in previous publications, companies are subject to the supervision of the authority, to the surveillance of the market and of other companies; Furthermore, they are generally subject to public scrutiny in economic, legal, administrative, environmental and social matters, except in the case of obscure companies.

Conditions that can be established as threats or weaknesses in the process of succession and transition towards a new business management model:

There are certain conditions that can be established as threats or weaknesses of the transition. Among the mistakes that those who happen in the management of the company can make, we can list the following:

Generation of labor instability conditions:

While the changes are being made gradually, it is possible that the new management will make the mistake of generating fear in the staff, with the consequence of a decrease in long and medium-term expectations and performance in general, on the part of those who They still remain in their positions, which adds to the lack of experience of those who would fill vacancies, to the detriment of the company’s performance.

Business neglect:

The new administration could make the mistake of concentrating more on the replacement or renewal of human talent and other philosophical aspects of the company, giving time and space to improvisation, in the business and the basic processes of the company, creating an environment conducive to non-compliance.

Abrupt replacement of key positions:

If what is intended is to give continuity to the business, the untimely replacement of the members of the board of directors or of the suppliers, can suppose a risk, since it eliminates the acquired experience, interrupts processes in progress and changes or diminishes the know-how. In this sense, the possibility of the company being sued in court or reported to the competent entities in contractual, labor and social security matters must also be considered.

Breaking the commitment and confidentiality agreements:

There is a risk that by generating all the changes in an imposed and untimely manner, situations will be generated in which those affected lose the sense of commitment, and with it, the business secret, referring to industrial and intellectual property or especially sensitive situations, related to regulatory compliance, which until now had been kept hidden under the cloak of confidentiality, is now under threat.

Non-existence or non-application of guidelines for decision-making:

The successors or new owners of the family business must ensure that the decision-making protocol is always in force, whether the pre-existing one is adopted or they favor a different one. The way decisions are made generates significant risks in terms of compliance, in that sense, if the board members do not know this protocol, they are advised to hire advisers to assist them in making decisions.

Imposition of a new culture, philosophy and business image:

A poorly planned management towards a paradigm shift in the company can put its ecosystem and its relations with the outside at risk, which can lead to the loss of clients and strategic suppliers, will alter loyalty, profitability and in the worst of cases, it will cause claims for breach of contract, misleading offer and fraud. Successors must take all of these factors into account to ensure that the transition will be beneficial.

Bottom line: Planning is the key.

To minimize risks, the previous management model must be continued or a new model must be adopted; but to do so in an intelligent and planned way, to ensure good regulatory compliance in the case of family businesses subject to succession or change of ownership.

At the Brice, Marín, Oráa & Asociados Law Firm, we are prepared to advise you on this and many other matters of your interest. Stay tuned to our publications or contact us and we will gladly answer your questions and concerns.