Martin Hammer, managing partner of enomyc, comes from an entrepreneurial family and is himself a father and founder. What has his experience from over 300 handover projects with the family businesses taught him? When should entrepreneurs think about succession and become active about it? What are the most common reasons why succession processes fail, and which factors make a successful company handover possible in the first place?
Mr. Hammer, on the G20 appearance of Ivanka Trump, US politician Alexandria Ocasio-Cortez recently tweeted “It may surprise some but being someone’s daughter isn’t a ‘qualification’ yet.” What do you think: is it a qualification to be a son or a daughter?
It’s an opportunity that you can seize and take. It’s not a qualification.
Let us assume that sons and daughters seize the opportunity – in your opinion, what qualifies them to become successors to entrepreneurial parents?
I don’t tie that to any training standards – though they are certainly necessary. In my opinion, the most important thing is the passion for entrepreneurial action. It takes real commitment to the company. It also requires acceptance and understanding that self-employment also means a high degree of renunciation – for example, of leisure time and private life. In addition, there is a need for tolerance and the gift of being able to win people over, as well as being a role model in terms of diligence and hard work. I believe that in each case one must have a certain intellect and be able to grasp complex business and technical details in the respective industry.
You have been advising SME-sized companies for 17 years now. How often do you have to get involved with the topic of family business transfers?
A lot. Of the more than 500 projects that we’ve carried out to date, more than 300 of those have been of this type: family businesses that either were in a generational change or were being managed by the second or third generation.
In how many of the 300 cases did the handover run smoothly?
In one-third of them, tops.
Why only in one-third?
There are several reasons for this. On the one hand, different companies have different requirements. There are companies with a lot of substance and value that have been created by the founders, the second generation, or the third generation. These are companies that actually – I don’t want to say, “run by themselves”, because no company does – but where the successors manage the success of the company well, are in a position to perform in this way. Companies whose global market position puts them into a position where they have no problems with financial institutions or other stakeholders and also distribute enough or generate enough large returns, do not even have intrafamily disputes. Such prerequisites also make it easier for consultants to accompany a successful generational transition.
And then there are the other two-thirds, where the handover is worse or even fails. Why is that?
Right, these are companies in which, on the one hand, the requirements for the successors are significantly higher than for the aforementioned companies – be it because the competitive environment is extremely tough and very competitive or because there is a large number of insolvencies on the relevant market and the workforce has to be led in daily, weekly, and monthly battles with hard figures. On the other hand, it often happens that a company is perhaps already being managed by the fifth generation, and there are simply different family interests. Those are just a few of the reasons; there are, however, many more.
Does this starting position sometimes also depend to a certain extent on the industry?
No. That depends on many cycles in different areas. Take the construction industry, for example – it is booming! It has no problem at all. We are urgently looking for qualified specialists, civil engineers, industrial employees, and many more. If a construction company is taken over in the fifth generation today, the conditions are much better than they were 12 years ago. I experienced that myself. It’s not the industry.
Do companies in general – regardless of their starting position – actively seek external advice and/or support for generational changes?
That’s the core problem. Many of the company managers do not recognize the problem for themselves – often because they grow up in their own environment and have never gotten to know anything else. It also happens that companies want to manage the processes themselves, which is very often due to the senior bosses, who then still want to control these things. As long as the economic results hide the real internal problems to a great enough extent, many entrepreneurs do not see the necessity or the added value of engaging external consultants.
When do such companies seek external advice?
Often, when many wrong entrepreneurial decisions have already been made. It is not uncommon for such companies to end up with us as restructuring cases.
What is typical of these restructuring cases?
We very often find that business modesty is not so often observed in the generation of heirs. That is, one of the business practices in the next generation is to sometimes live beyond their means and who then begin financing too much through borrowed capital. These things come to us at some point as consultants, but then under the pressure of something having to be done – for example, because other stakeholders are no longer convinced of the operational management or the banks say, “We can no longer look on at this situation.”
What does your experience tell you? Which mistakes do senior managers make most often when handing over to the next generation?
They do not send a clear signal: “From now on, my daughter, my son, my nephew – or whoever – will be in charge.” Many seniors are still present in the company at 70, 80, or even 90 years of age. Thus, the handover process is not professionally regulated. If someone at a ripe old age thinks he or she must still interfere in the day-to-day business, then the succession of the company has failed.
Now some of the founders are still very active and have a hard time letting go of their own company. What can be a solution for all involved?
For me, a successful handover of a company involves separating not only the operations but also the premises. One solution is to set up an advisory board or supervisory board in which the senior boss then assumes an advisory and accompanying function. However, day-to-day business must be clearly managed by the successors, so that employees can also see who is now running the company. If seniors do not let go at this point, they cloud the acceptance of their successors – even on the first, second, and third management levels. Of course, above all, it is the next generation who must gain this acceptance and respect from all. As company founders, the parents also bear a very great deal of responsibility for the perception of their successors. For example, if the sons or daughters, even if around 50 years old, are approached by the senior boss with nicknames, this sets an example for the entire workforce.
In some cases, the transition also works with the presence of the senior. What is the best-case scenario for such an entrepreneur?
In the best case, the seniors have wisdom and composure; this is not least because the juniors have also proven that they can manage, perhaps even somewhat better than the founder of the company – for example, by being more structured. It’ll also make it easier for the senior executives to let go.
For me, trust and communication are decisive components for a successful company handover. I also mean trust in the business decisions that are made by the next generation, but which are not – or not yet – comprehensible to the seniors.
What business decisions could these be?
Let’s take digitization – it exerts great influence on the future business capability of companies and sometimes radically changes business models. Many successors have recognized the enormous opportunities and are shaping older, more traditional types of companies in a completely new direction. This project can be very strange for the older generation, and it happens often enough that they try to slow down their successors and talk them out of this “fixed idea” again. After all, the argument often goes that the company’s success to date has not been on account of digitization. Here, the older generation is clearly informed that it should grant its successors extensive freedom in the digitization process. Establishing oneself in the company independently of the established business model and with completely new ideas and approaches is essential not only for the succession to work but also for the future success of the company.
You have certainly also experienced stressful internal family disputes. What is the most frequent point of contention in company succession, and how do external consultants best fulfill their role here?
Well, it’s about power, about money, about vanity, about the withdrawal of love from the offspring, who may not have been considered, and about many other points of contention.
Business transfers are a very complex and sensitive issue. It is this complexity that, in my opinion, calls for external advice. My experience shows that there is no point in advising customers in a way that suits them. As consultants, we must also have the courage to go into a conflict situation if we are convinced that the company could otherwise suffer a loss. After all, it’s all about the company – not the founders or the shareholders.
Based on experience, when should entrepreneurs start thinking about succession and become active?
It will certainly take five years to follow in the footsteps of, say, a company founder. In well-managed companies, it is therefore important to start thinking early about succession and how the company should be structured. This is a transformation process that involves a year or two in advance, perhaps to determine which of the children is best suited as a successor.
How about you? You yourself come from an entrepreneurial family and have founded your own company. Are you worried about your succession?
Of course I am. I am 57 and we are already creating the structures to ensure that in five years at the latest we have a functioning regional partner network. The aim is that enomyc can then function in a completely detached manner from the founders and managing directors.
What constellations do you encounter most frequently in the transition from one generation to the next? Is it most commonly fathers who hand over to their sons?
Lately, it’s been more fathers and daughters. It’s a novelty. It used to be different. Meanwhile, many daughters take over.
How do you explain this novelty?
Women have always been able to do just as much as men. But I think more and more women like to be entrepreneurial and want to work self-determinedly. That works best when you are self-employed.
When does it make no sense at all in your eyes – even if entrepreneurs wish it – to hand over the company to their own children?
If the children do not have a fundamental interest in the continuation of the company. If they are not prepared to “sacrifice themselves” for the company. We have a very clear position here: if management is not regarded as a life task by the potential successor, it is better to either sell the company – then you can bequeath money and secure jobs – or employ an external management company and let the company be managed professionally. An amendment to the statutes is indispensable for this solution. Thus, the strategic orientation of the external management company cannot be lifted immediately at the first conflict.
What’s the key to a good handover?
From my point of view, only truth and clarity help. This also includes the self-reflection of all participants – both of the retiring generation and of the receiving generation. At the end of the day, it is about clear rules of the game and clearly defined framework conditions.
In summary, can you name four cornerstones of a successful company handover?
Yes. Firstly, the qualifications of the transferee(s). Secondly, a detailed succession concept with a defined key date on which the planned handover occurs. The timeframe should be chosen in such a way that all participants really have enough time to familiarize themselves with the different positions and areas, if necessary, even when working abroad. Thirdly, open and honest communication is indispensable at the time of handover – both towards all internal managers involved in the process and towards external parties such as financing partners and customers. Finally, there is the real act of letting go by the passing generation, which will henceforth act in an advisory function on the advisory board or supervisory board.
What special topic has developed in recent years in the area of intrafamily transfer, and which we should talk about in another interview?
I think the subject of inheritance tax and the legal regulation in the tax-free inheritance of companies. The market is changing, and its industry related. Let’s take the automotive industry – there have been drastic changes which present companies and their heirs with very great challenges. A further discussion on the subject of evaluation for the need to save money according to sections 13a, 13b, and 28a of the German Inheritance Tax Act (ErbStG) is definitely worthwhile.
The interview was conducted by Despina Borelidis.