handling GENERATIONAL TRANSITION at hungarian companies

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

The Current Landscape of Family Businesses in Hungary

Family businesses play a pivotal role in Hungary’s economy. As of 2023, approximately 15% of the one million businesses operating in the country were family-owned, contributing nearly 50% to GDP.

Many of these businesses were established during the political transition of 1989, when the founders were in their thirties or forties. Today, while many of these first-generation entrepreneurs have surpassed retirement age, they still retain control of their companies. Despite the growing urgency for succession planning, the number of completed transitions remains low.

Research suggests that in Hungary, one in ten family businesses will undergo a leadership transition in the coming years, with this number expected to rise to one in three over the next decade.

This indicates that more than 50,000 business owners must soon decide how to ensure the continuity of their companies– whether by passing leadership to a successor, appointing external management, or selling the business.

Whichever path they choose, the transition represents a critical juncture for both the family and the enterprise.

International data underscores the complexity of succession. According to the Family Business Consulting Group, only one in three generational transitions succeeds globally. Only 10-15% of family businesses survive into the third generation, and a mere 3.5% endure into the fourth. 

Despite these challenging statistics, many companies – regardless of size, or sector – lack a strategic plan to ensure sustainability after the founder’s retirement.

For Hungarian family businesses, one certainty remains: the SME sector will experience a wave of generational transitions in the next 5-10 years. The key question is not whether change will occur, but rather what the outcome will be. The good news is that with timely and strategic preparation, businesses can navigate succession effectively, mitigating risks and positioning themselves for continued success.

How Not to Do It?

The elderly Logan has no intention of retiring, despite his family eagerly awaiting the big announcement at his 80th birthday. He constantly manipulates and pits his children against one another, enjoying the power struggle. Logan’s motto is: “There are no fucking rules.”

This family dynamic is drawn from the TV series Succession, which exemplifies how NOT to handle generational change. Logan, the patriarch who built a vast media empire, is cruel, intimidating, and dismissive of his children’s business ideas. There’s no cooperation, transparency, or open communication in the family, and the children’s thirst for power undermines any possibility of collaboration. Strategic planning for succession is non-existent. In this kind of environment, a generational transition, which is already a challenging and life-altering process for the company, is destined to fail.

While this is merely a TV show, real-world experience confirms that predictability, planning, and preparation are crucial for a successful transition. In thriving family businesses, the founder and successor jointly plan the transition well in advance, ensuring transparency and minimizing risks. This approach provides confidence to both internal and external stakeholders, signaling that the company remains stable and reliable.

Who Should Take the Baton?

Founding owners often hope their family members will take over the management of the company they built.

However, the question remains: Can they objectively assess their family members’ professional competence? Is there mutual commitment and intention on both sides? Is the successor motivated, and will the founder support the transition? 

Successful leadership within the family depends on answering these questions affirmatively.

If these conditions are met, succession can open new opportunities for the business, integrating fresh perspectives while preserving the company’s core values. However, if no suitable or committed successor exists within the family, the owner has two options: bring in external, competent management (with long-term commitment ensured via employee stock ownership plans) or sell the business.

Selling a business should be as thoughtfully planned and strategically prepared as any other major business decision. This involves a clear understanding of the company’s intrinsic value, operational inefficiencies, and potential risks. By proactively addressing these areas, financial and business processes can be optimized, weaknesses rectified, and the company can secure a competitive valuation that not only reflects the value of its assets but also fully capitalizes on future business opportunities.

Staying in the Founder’s Mind?

A fundamental challenge of succession is that many family businesses are still “one-man shows.” The founder often makes all strategic decisions, manages client relationships, oversees procurement, and handles production. Additionally, family businesses frequently operate informally, relying on verbal agreements and outdated contracts with suppliers and clients.

Such issues pose significant legal and financial risks for new management, whether the company is sold or stays within the family.

One of the biggest risks is that the founder’s accumulated knowledge and personal relationships could be lost during the transition, disrupting efficient processes established over the years.

The founder must pass on their knowledge across all areas of the business and ensure the organization and contractual structures are well-documented. This includes reviewing and documenting the following:

• Organizational Structure and Management: The company’s operational framework, decision-making hierarchy, responsibilities of executive officers, and the internal control system.
• Financial Regulations: Risk management strategies, investment policies, cash management procedures, and accounting policies.
• Business Documentation: The structure of management reporting, financial and business plans outlining the company’s strategy and objectives, marketing plans detailing campaign specifics, and project plans specifying investment timelines and resource requirements.
• Legal Documentation: Employment contracts, performance agreements, supplier and service contracts, subcontractor agreements, leasing contracts, financing agreements (such as loans, leasing, and other financial arrangements), licensing agreements, and intellectual property agreements.

Separation from the Founder

In most cases, family businesses are not self-sustaining. This may not be a problem during the founding phase, but it can hinder growth. If all decisions depend on the founder, decision-making slows, and the company’s ability to adapt to a changing market diminishes.

This strong dependency becomes a critical issue during succession, as the founder’s retirement means losing years of market experience and know-how, destabilizing the company’s operations.

The key question is whether, at the time of retirement, the company can operate independently of the founder.

For a smooth transition, the business should be evaluated based on the following criteria:

• Clear division of tasks and responsibilities
• An experienced management team with decision-making authority
• Operational systems and processes in place
• Independent oversight mechanisms, ensuring control
• Cash management independent of family funds

Addressing these factors is crucial to ensuring the company becomes self-sustaining. Without it, the departure of the founder will lead to chaos, process breakdowns, and a lack of oversight, ultimately resulting in failure.

Next up: take a look at a detailed case study of the takeover process of a Hungarian company, in the second part of this article.

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