Article:

Family Owned Business, Succession Planning

15 September 2015

The obstacles to planned succession by business founders include:

▶  Fear of death

▶  Reluctance to release control and power

▶  Threat to personal identity

▶  Bias against planning

▶  Difficulty choosing among children

▶  Fear of retirement

▶  Jealousy and rivalry

However most founders favour the family solution because:

▶ It gives their personal ideas and values a greater chance of survival

▶  They feel their life’s work is in good hands

▶ They don’t lose contact with the business, and even retain some influence over it

▶  They feel their sacrifices have been worthwhile.

In a family business, succession planning cannot start too early. No one can know with certainty when succession will happen, but failure to prepare may be disastrous for the family and the business. The longer the planning and implementation period, the more successful the result is likely to be.

Initial questions to consider include: Do my children want to come into the business? Are or will my children be the most qualified to run the business or is an outsider better qualified or skilled? Which child or children will I choose? What role is each person more suited to? Will the family be better off if I sold the business?

Successful succession planning involves the identification and education of a successor and the gradual relinquishing of control.  Consider all the succession options with an open mind, avoid sentimentality, and discuss the alternative options with others. Consider the aspirations and qualities of family members to identify whether they are, in reality, potential successors and consider their training and experience needs.

In a family business, and many other businesses, there are many steps before completion of the succession plan and retirement. This requires copious amounts of planning, strong leadership, good communication and plenty of time. This family life cycle to get to this point is well summarised by the four L’s cycle:

      •  Learning business

  • Learning the family business

  • Learning to lead the family business

  • Learning to let go

LEARNING BUSINESS starts as a child when they go into the office or business and see how the business is run. The family business or the business where mum or dad work, often provide our teenagers with their first work experience.  After that, things need to change.  There is a tendency for the family business to be regarded as an easy place to get a job, a “job for life”, or employer of family members, regardless of

capabilities and commitment. Such an attitude ignores the requirements of the business and ignores the needs of the individuals including developing the right attitude and motivation.  In an ever changing business environment, the business must maintain appropriate quality staffing at all levels and cannot afford to carry individuals, whether family members or not, if they do not make a full contribution. Family members who are employees are likely to be able to contribute more to the business if they have had work experience elsewhere. This enables them to bring new ideas and perspectives to the business and will help them earn the respect of non family members. We believe all family members should have work experience outside the business.

When they come back to LEARN THE FAMILY BUSINESS, they should only be employed on merit and in positions that they are qualified to occupy. Remuneration should be equivalent to non-family employees. Appraisal, promotion procedures, and guidelines should also be applied the same as any other staff member. Their authority will come from the respect they have earned rather than the shares they have inherited. To help them learn the family business, find mentors for family members both inside and outside of the business. For long term success the family members will need a strong understanding of all parts of the business so there needs to be a plan to provide this depth of experience. However they do not need to be skilled in all parts of the business. If it’s not working, don’t pressurise family members to join or lead the business.

This causes problems in the long run and alternative strategies for the business are required. Sentimentality has to be put aside and commercial reality faced. The next step in the succession plan is positioning and teaching family members so they LEARN TO LEAD the family business. This doesn’t happen overnight and takes time and experience. A family member who is learning higher management roles in the family business prior to a parent’s retirement, is under enormous pressure both within the family and within the business. They need to be provided with the training, support, mentoring and encouragement necessary to develop all of the skills and knowledge required.

  • Appoint a caretaker manager
  • Often referred to as a bridge, this individual is usually a talented professional manager. He/she will be well paid to compensate for the short-term but essential nature of the task. It is not uncommon for this person to become a mentor to the succeeding generation.
  • Appoint a professional manager
  • If no suitable family member exists for the short or medium term, an outside non-family manager can be appointed. This is particularly relevant for third-generation family businesses and beyond.
  • They key issue here is trust: will the business be safe in the hands of an outsider? And beware the appointment of a non-family managing director who has worked for the family for many years and is seen as part of it.
  • Sell, in whole or in part
  • This is likely to recover more value from the business. Options include:
  • Trade sale, particularly where no suitable successor can be found
  • IPO, where external capital is required to finance growth
  • Management buy-out: a compromise between transferring the shares to the family and making an outright sale

While that is underway, the senior generation need to be LEARNING TO LET GO. This is one of the most difficult things to achieve with many entrepreneurs being reluctant to recognise that anyone else is capable of running their business. You can’t retire until you let go and the succession plan is incomplete until you have learnt to let go. This is potentially the most life threatening stage of a family business and regrettably some businesses don’t survive at this final stage. You must be prepared to relinquish control to give your successor a fair chance to prove him or herself. They will only learn and the business will only prosper in the long term if you are prepared to progressively let go and demonstrate your confidence in them.

Letting go does not mean leaving. There are always projects a founder can work on and guidance and experience that can be offered around the board table, in management meetings or in family meetings.

To retire from the business, you need something to retire to. Identify what this is early on so that letting go is a project that you are motivated to succeed in.

Try, as far as you can, not to be dependent on the business for income post retirement. It’s a long journey and the sooner you start planning and implementing, the more successful the outcome for all involved.

And finally, let go when you say you will.

To discuss any of the themes in this article, please contact your local BDO adviser.