As a transaction advisor, I have guided numerous succession processes over the years. In this series, I aim to share key insights, illustrating both successful and challenging cases, while highlighting critical factors that companies undergoing generational transitions should consider.

You can read the first part of this article here, which highlighted key Hungarian and international trends and useful processes in the topic.  

Don’t Be Afraid to Step Back

In the Grimm Brothers’ classic tale, the king asks the poor peasant’s daughter to complete an impossible task: she must neither be barefoot nor in shoes, neither on the road nor off it, and neither without clothes nor fully dressed. She cleverly solves this riddle, much like how many family heads attempt to hold onto control during succession– but in real life, this doesn’t work.

Therefore, it is essential for the founder to remain firm in their decision and stick to their decision to make a change. The successor should be allowed to make decisions freely, even if the guidelines, values, and working methods represented by the young leader differ from the previous ones, causing resistance and conflict within the company. Without this freedom of decision-making, the second generation will never be able to step into the first’s shoes and will never become a true leader.

The foundation of a successful company transfer is structured knowledge transfer. When the successor is well-prepared and has a deep understanding of the company’s operations, the founder can step back with confidence, knowing the business is in capable hands.

It’s also important to address the challenges that arise when a retiring owner does not relinquish control. While the founder may experience cognitive dissonance, it’s crucial they accept that transferring control is necessary for the company’s future. Without this change, innovation will be stifled, and the company may stagnate.

Trust Me, You Can Trust It!

In business life in Hungary, the level of trust is generally low, but in this regard, family businesses may fare better: they often have business partners based on long-standing, personal relationships that go back decades. However, market players and customers typically begin to worry at the news of a generational change, as it can bring uncertainty regarding the company’s future.

The decline of trust can even lead to a significant drop in orders. However, it is also an undesirable situation if, due to distrust, partners impose stricter financial conditions– shorter payment deadlines or higher guarantees– which significantly increases the company’s financial burden, negatively impacting day-to-day operations.

This risk can be avoided or minimized if the market and business partners see that the retiring owner fully supports the (properly prepared and knowledgeable) successor. In this case, there is no need to fear that the new situation will disrupt the company’s market position and business relationships. Therefore, the company must openly communicate the succession process and the associated changes to both internal and external stakeholders.

Lessons from a Specific Case

Satellites, ventilators, and defense-related equipment are part of the special product portfolio that this Hungarian family-owned company provides components and various engineering solutions for. The company, operating since 1998, is 82% owned by the founder, who is over seventy. His daughter, who is also a co-owner, has been working at the company for almost a decade.

The company has a reliable and stable customer base, with clients primarily being international, well-capitalized companies. Cooperation with its largest customers has been long-term.

The elderly owner was satisfied with the company’s performance. However, recently, he felt that he had lost some of his enthusiasm and lacked the energy to explore new market opportunities and implement necessary organizational reforms. He was aware that, as a leader, he had not raised a successor, so decided to sell the company.

Situation Overview:

• Since all strategic and business decisions had been concentrated in the hands of the owner, the company lacked experienced, independent decision-makers.
• Critical processes were missing from operations, and tasks were carried out based on a traditional approach of ‘this is how it has always been done,’ or frequently on the owner’s ad-hoc instructions.
• The founder, as a private individual, had lent money to several employees, resulting in strong employee loyalty and dependence on the owner. The inevitable question was how employees, who had worked at the company for decades, would accept the new leader and the changes introduced by them.
• The owner maintained all customer relationships, so his withdrawal posed a significant risk to the long-standing, sometimes beyond-work, customer relationships.
• The company did not have customer contracts or framework agreements, even with its largest partners. Orders were made via email or verbal agreements, and the terms of cooperation were not recorded.
• The company did not have internal regulations: there were no accounting policies or procedures for money management or inventory taking. This could have caused serious issues during a later tax audit.
• The family’s finances and the company’s financial management were not fully separated.

The Implementation Process:

I assisted the company as a consultant during the long and truly challenging process of generational change. Below, I have summarized the most important steps of this complex work process, which required the involvement of both the old and new owners and key employees:

✅ The secret to a successful transaction: preparation. We developed a detailed transfer plan with the seller and the buyer, which made the process predictable and transparent for everyone. This not only reduced the risks associated with the change but also gained the trust of the company’s internal and external stakeholders that the company would continue to stand on stable legs.
✅ Open and honest communication. This noticeably reduced uncertainty among employees and customers.
✅ We created clear and unambiguous task and responsibility distribution, as well as operational processes and internal regulations independent of the founder.
✅ To ensure that customer relationships were not jeopardized, the founder continued to actively participate in customer relations for one year after the handover.
✅ We established independent control points from the retiring owner.
✅ We reviewed employee issues: we implemented performance measurement and incentive systems.
✅ We held open forums for employees to help them understand the reasons for and benefits of the changes.
✅ We developed short-, medium-, and long-term strategies in collaboration with the founder and the new management.

The results of thoughtful and systematic work:

✅ Successful transition
✅ Renewed company culture
✅ Increased employee trust
✅ Financial stability, more efficient operations

The insight was written by Dóra Jánosi, Faculty member and Program Director of the Finance for Executives Program at SEED Executive School.