Company leaders have often chosen their own successors, but operational preparation and the transfer of power do not benefit from the same degree of preparation according to a study. What is the solution? Planning ahead.
Deloitte has just published the second edition of its barometer of the challenges related to family company transfers carried out with the consulting firm OpinionWay. It revealed that despite a desire to continue the family legacy, 59% of company leaders have not set out a succession plan.
Although working with family members continues to be a hindrance (a source of conflict for 65% of entrepreneurs), the ideal candidate is still somebody from the family (76%) to ‘continue the tradition’. The selection criteria are experience within the company (66%), interest displayed (57%) and their leadership (56%). More surprisingly, academic excellence (22%) and the family line (17%) has less influence on this decision.
Negative factors in the transfer process are tax (18%) and obstacles related to family character, such as the lack of a motivated or capable successor (16%) or difficulties choosing between candidates within the family (4%).
"200,000 heads of family businesses are about to retire."
81% reject the idea of selling stock to finance the transfer or create growth. Nevertheless, Deloitte tells us that "86% of family business leaders are in favour of bringing outsiders on to the board of trustees or directors”, especially to bring in new skills and enable the directors to concentrate on strategy. From an operational standpoint, only 19% to 24% of companies have implemented mechanisms for dialogue between shareholders and rules of governance to prepare for a transfer.
For Christophe Saubiez, the partner responsible for family companies at Deloitte, "a family company transfer takes between 5 and 10 years. By following some basic principles associated with implementing a family charter or governance, it is possible for a company to make the transfer smoothly and also avoid certain errors which risk ruining what has been achieved." Today, 22% of family companies have a family charter. Clearly, many could do better!
In the coming years, 200,000 heads of family businesses will retire. Waiting is not an option, according to Boudewijn Verhelst, Estate Planner Wealth Management at BNP Paribas Fortis:
"Waiting until an entrepreneur, their partner, spouse or business partner dies is not the right attitude. You have to plan ahead if you want the transfer to be successful. For example, the days of using bearer securities (a way of exploiting the grey area of tax legislation) as a common planning technique are well and truly over."
M&A in Belgium? Our country has transformed a disadvantage into solid gold
A small geographical market and linguistic and institutional complexities actually encourage openness and agility on the international business front. Interview of Gabriel Englebert, BNP Paribas Fortis.
The Merger and Acquisition (“M&A”) market in Belgium has been growing steadily since 2016, as the Vlerick Business School’s most recent M&A Monitor can attest. Our companies are once again showing their desire in 2018 to expand in Europe and even beyond. Gabriel Englebert, Head of Corporate Finance: « It’s not all about the BEL 20 companies, I assure you. I’m proud to confirm that the companies looking for acquisitions are among the top 300 Belgian firms ».
Looking beyond Belgium at a very early stage
In a narrow national market, made up of different regions and languages, our companies sometimes have to start exporting at a very early stage of their development. As a result, Belgian companies are natural exporters with a decentralised culture that is extremely favourable to M&A. Belgian companies have solid shareholders and management teams that are often multilingual, highly educated and able to recruit international profiles. Our country is also an ideal territory for niche sectors such as life sciences and healthcare, agri-food, aerospace, industry, building materials, services, consumer goods and technology.
"It’s not so much the absolute deal size that strikes me, but the valuation levels. Valuation levels are high, with rising EV/EBITDA multiples."
A combination of factors can explain such high valuations: the scarcity of opportunities, the amount of cash available and the low interest rate environment. "Current EV/EBITDA multiples can hit very high levels well above 10x. Those are big numbers for only the very best companies in the market!"
Exploring new countries, new activities and technologies
Building on their success, Belgian companies are ready to invest in foreign target companies to gain new market access or knowledge of a country, or to test an adjacent product or service. In a third of all M&A deals, the target is a foreign one. On average, these transactions take six to twelve months to complete – the time needed to negotiate the price and terms, conduct due diligences and clear regulatory approvals, taking account all the while of cultural differences, that can be substantial in some cases.
Gabriel Englebert: « Lastly, I would pinpoint two trends for 2018 among the big Belgian groups: the pursuit of innovation – in many cases a specific technology or know-how – and continued investments in the field of sustainability. ».
The M&A market is changing, we need to be innovative
The traditional auction process involving a very large number of potential buyers, used to dominate the market in the past. This type of very standardised process was sometimes contrary to the desire for discretion of our Belgian clients, who favour highly discrete transactions.
Belgian business leaders do not expect the same from their investment banker in 2018 as they did in the past. Gabriel Englebert: « We are in a world of bespoke processes and tailor-made solutions, and I am absolutely delighted about that! Our ‘made-to-measure’ approach is perfectly suited to our bank, which nurtures long-term relationships with our clients. Our teams use their know-how to articulate in-depth solutions. It means, for instance, that we do not disclose all our recent transactions, even though they are very large in number and in quality. Our business is all about discretion and pure trust. »
What’s the investment banking business model in 2018?
We help and coach business leaders making the right decision in complex, life-changing merger and acquisition transactions, of which some are industry-transformational. Is artificial intelligence set to revolutionise our core business? Gabriel Englebert: « Not in my view. Why would a business leader still need us in 2018? The answer is that we completely trust our ability to offer effective but nuanced judgement regarding many complex M&A situations ».
Backed up by their internal experts, business leaders have massive amounts of information and analysis tools available, together with unlimited data available on the web and consultants’ reports on specific fields. But there is actually too much information out there these days and that can result in confusion. In this context of information obesity, we make a real difference in terms of tactical advice and decision-making timing. A profession like ours, which is founded on intangible factors like trust and confidentiality, demands dedication at every moment. Gabriel Englebert: « As for me, I have already made my choice: I am happy to jump on a plane if a client across the Atlantic needs my advice on a complex transaction ».
Timing in M&A: the key to success
Gabriel Englebert: « Our clients’ interests are our absolute priority. We’ll finalize the transaction in less than three months, if that’s what the parties want ». Other elements are sometimes at stake too, such as business succession or the transfer of shareholdings. Consulting your investment banker about family governance can also bring some helpful neutrality to the thinking process.
What about the future?
Gabriel Englebert: « I would pick out two structural factors: (1) The M&A market, which I believe is to stabilise. Central Banks intend to raise interest rates progressively, which can decisively reshape stock market valuations. (2) The profession: the investment banking model will evolve again: in five or ten years’ time, a new generation will pick up the profession that is fantastic on both human and professional terms. M&A ‘advisory boutiques’ are flourishing but a natural selection will be unavoidable and some will disappear. But we’ve been around for 200 years now and I expect us to be here for a lot more years to come ».
Company insolvency reconsidered and rectified
The new law on insolvency came into force on 1 May, introducing its share of changes on aspects including court-ordered reorganisation, bankruptcy and the responsibility of directors.
Published in the Belgian Official Gazette last September, the new law of 11 August 2017 applies to all insolvency proceedings begun on or after 1 May 2018. Are changes on the cards? Most certainly. The new insolvency law is more than a simple modification of the existing regulations arising from the law of 31 January 2009 on "company continuation" and that of 8 August 1997 on "bankruptcies": it introduces its own set of new rules. Its stated aim is to create a more consistent framework of laws on the subject and incorporate them into Book XX of the Code of Economic Law. A "big step towards the law of the future" is the description used by the Minister for Justice, and its impetus was derived, among other things, from EU regulations on insolvency and a certain number of Belgian Constitutional Court and Supreme Court rulings. This drive for consistency also aims to strengthen the distinction between "insolvency" and "bankruptcy" in a way that gives weight to the idea of a "second chance".
Insolvency for (almost) everyone
Beyond the desired harmonisation and greater computerisation of processes, the objective was also to considerably enlarge the scope of application of insolvency proceedings. Whereas until now only "traders" could be declared bankrupt, from this point onwards practically all "companies", including liberal professions, will be able to follow procedures to reorganise their business or file for bankruptcy. And they are not the only ones, because agricultural entities (which could already have recourse to the Belgian business act), non-profit organisations, landlords' associations and any individual who is self-employed in their line of work (even company managers or managing directors) are also affected by a broader concept that establishes the idea of the "company" as the basic model.
Priority to the "second chance"
This is one of the most prominent aspects of this law: encouraging businesspeople to start again, either by restructuring their business or by being able to recover more quickly following bankruptcy. This intention can be seen in several new measures:
- The modernisation of the amicable agreement excluding court-ordered reorganisation to make this more attractive and "secure" for the lender. We should also note the appearance of the "company mediator", whose role will be to support businesses in difficulty to prepare this agreement.
- In relation to court-ordered reorganisation there is no real revolution: the three existing forms are retained, but certain rules have been clarified to bring them closer into line with practice.
- Finally, the provisions covering bankruptcy share the same aim: to allow a bona fide victim of bankruptcy to make a fresh start, quickly.
Responsibility of directors
The consistency of rules governing the responsibility of directors of companies in difficulty (except private individuals) has also been reviewed, and the rules have been extended to all "companies" (with a small number of exceptions that include private individuals, SMEs and non-profit organisations). There are three specific cases: the accumulation of liabilities where there is clear and serious misconduct, non-payment of social security contributions, and the unreasonable pursuit of a loss-making business.
A true agreement on the way for family businesses
From September 2018, your family can sit down round a table and reach a negotiated agreement about the distribution of your estate. The aim is to avoid conflict and uncertainty.
In Belgium, it seems self-evident that you should set out a family arrangement for the inheritance of a business as a written agreement. But this agreement will not have any legal standing. A new law hopes to change that.
The purpose of the so-called "family agreement" is to authorise a balanced agreement between the testator and their likely heirs in the case of an inheritance that has not yet been processed, and without applying legal restrictions.
What does this mean specifically?
The first major change relates to the statutory or reserved portion of the inheritance. This no longer depends on the number of heirs, but consists of half the estate. The testator's relatives are therefore no longer regarded as automatically entitled to inherit. If necessary, they may well be able to make a claim for maintenance payments. All children must in any case agree to the distribution of the assets when it does not follow the normal practice.
Another important point for the area of company succession is that targeted agreements can be set up. The value of the shares in the family company that are handed over to an heir as a gift cannot be put back on the table by the other heirs. Goods that were gifted during the testator's lifetime, or bequeathed in a will, are no longer added to the estate in kind, but in value. The heir involved must therefore continue to hold the items as assets in kind. The family agreement can therefore consist of arriving at a subjective balance between the heirs. This means that the inheritance is settled without threatening the continuation of the business activity.
One last change that may apply to the succession for a company is omitting a generation by gifting. Very often the direct heirs are not actually able to run the inherited family business. The only option they then have is to sell the company. If a grandchild, for example, inherits a family business in the form of a gift, the parents will now be able to decide to include the inherited business in their own portion of the inheritance.
Please note that the family agreement that will be available from 1 September 2018 will not help solve all the problems in the world. Despite the fact that recent changes in the law provide more flexibility, succession planning remains a suitable way of preparing yourself against unpleasant surprises due to an inheritance that goes awry. With a fair distribution, you avoid the risk of a joint inheritance, keep the peace within the family, and guarantee the stability of the business activity.
WannaCry: the cyber-attacks threatening your company
WannaCry is the largest viral ransomware attack on computers ever identified, affecting 20,000 users, infecting thousands of computers in 150 countries and shutting down factories. It could have been avoided.
On Friday 12 May, the world was hit by the largest viral ransomware cyber-attack on computers ever identified. The malicious software exploited a flaw in Windows systems in order to carry out the attack. WannaCry was able to lock users' files and force them to pay in order to regain access to them. The ransom was $300 (€267), payable in bitcoins. However, those who chose to pay up did not always receive their decryption key.
Blame it on Microsoft? Too easy!
Any computer which has not been equipped with the security update available since March (Bulletin MS17-010) can be hacked. Despite the majority of businesses making a point of implementing updates for servers and workstations on a fairly regular basis, there are still risks, particularly for payment machines, interactive purchasing machines, window displays and cash machines, as they may still be using outdated versions of Windows XP Embedded.
"A study of 3,000 companies in the West shows that more than half are completely unprotected against cyber-attacks." Hiscox
A crucial wake-up call
Although it not feel like it,
"this attack is a good thing because it has certainly been a massive wake-up call", said Vladimir Kola, head of security for consultancy firm NetXP.
Of course, there's no such thing as 100% security, but many software publishers and security experts have pointed out that this disaster could have been averted. According to John Miller, Manager of Threat Intelligence at FireEye:
"When you see how quickly and prolifically this ransomware system has spread, we have to realise that this activity poses major risks and all organisations using potentially vulnerable Windows machines must address them".
Preventive measures are essential
"With the new cyber threats being used today, companies and organisations can no longer afford to be the slightest bit negligent about security", warned Corey Nachreiner, CTO of WatchGuard.
Your to-do list
You can act and react preventively, taking proactive measures to secure and protect your data. Here are our tips:
- routinely update your software and operating systems (including the software update released by Microsoft in March 2017);
- manage your company update policy based on up-to-date information and risk assessments;
- regularly save your critical data outside of your IT system;
- use a gateway antivirus that can detect a critical attack on the scale of WannaCry;
- install an effective and up-to-date intrusion prevention system (IPS).