When it’s time to pass on a business because of retirement or death, managing the transition is vital to ensure a business suffers minimal disruption and secures its long-term future, says Dave Howell.
According to the Institute for Family Businesses (IFB) 88% of the enterprises in the UK are defined as family businesses with a combined turnover of £100 billion. The family business is the bedrock of the small business economy. Protecting the integrity of these businesses when they need to transition to new ownership or management is critical.
Elizabeth Bagger, Director General at the Institute for Family Business, explained: "Succession if one of the most important things for a family business to think about. However, it can be a challenge, because people often avoid difficult conversations like who will run the business in the future, whether the firm will be managed by the family, and who will own it. Statistics show that 43% of family firms do not have a succession plan in place, with only 12% making it into the third generation."
The complexity that succession could bring can't be overestimated. Indeed, Deloitte goes as far as to state: "Strategic succession planning becomes even more complicated when family issues such as legacy, birthright, communication, personalities, and interpersonal dynamics are added to the mix. Even an apparently simple succession scenario can become more complex when family interests mingle with business concerns.”
Having what can be highly sensitive conversations about how succession will be managed are never easy, but they are vital. The preferences of the current leadership, the ambitions and desires of other family members and the economic climate that each family business trades within, all impact on succession planning.
Keep it in the family
Iain Wright, ICAEW Director of Business and Industrial Strategy spoke with Small Business Essentials and began by responding to a question about whether family business owners are simply burying their heads in the sand when it comes to passing their businesses on?
“Yes, as many business owners are great at building a business but have no idea about handing it on. Part of the problem is that there is a bewildering array of options and each has their challenges including:
Keep the business in the family, but you will need a suitable successor.
Sell the business to the management team, but are they capable and can they raise the finance?
Bring in new management from outside, but you would still own the business and retain ultimate control of how it is run.
A trade sale to another business. Perhaps the most common method of exiting a business but it can be time-consuming and disruptive and, involves disclosing confidential information to competitors.
Close it down and sell off the assets, but employees would lose their jobs, and your reputation could suffer. A management buyout can sometimes save a business in this position.”
When succession is considered, what are the main points that should be paid particular attention to?
“Long term planning is vital. Family businesses need to plan carefully for the transition to a new management team. This process could start as much as 15 years before the business owner intends stepping down. The succession plan should be communicated to the management team as well as any family involved in the business to help prevent misunderstandings and future conflict.
“It’s useful to have a written succession plan, which should contain:
The key goals.
A timetable of the transition from identifying a successor to the staged, and then full, transfer of responsibilities.
Contingency plans in case the intended successor declines the role, or you realise they are not suitable.
“The plan should cover how the successor is to be introduced and trained. This could be a mixture of on-the-job or more formal training. It should also include time for the development of business and leadership skills. It may consist of gaining experience in other businesses so they can bring fresh skills and ideas to the company. It could also be a structured programme within your business, so they spend time working in each area of the business.
“One major consideration is how the current owner phases their departure. This can be achieved by gradually transferring some key responsibilities to the successor or by reducing the number of days they work in the business.”
What is your essential advice to family businesses to ensure a safe succession takes place?
“The major problem for a family business owner who has built the business is that in the eyes of customers, suppliers, finance providers and staff, they are the business. So, transferring it to a family member needs to consider how the key stakeholders view the succession. So, questions for the owner are:
What abilities and knowledge do the owners possess?
How will the business manage without them?
How will their skills, knowledge and contacts be passed on?
“The owner needs to be absolutely impartial and objective in assessing the skills and ability of the family member whom they have in mind to take over. Running a business can be a lonely and very demanding experience. Does the family member have the character to take the business forward? Do they have the requisite skills, or can they be acquired with experience or training? Discussing the succession with a valued business associate or an adviser such as their accountant may help with an independent viewpoint.”
When planning succession, what are the main pitfalls to watch out for?
“Countless firms in the UK have been started by entrepreneurs who bring their children or other family members in as employees. They are groomed throughout their tenure to take over from the founder. The benefits are that the successor is likely to have been a prominent person in the firm for some time – easing the transition for staff, clients and suppliers and they will know the business inside out.
“On the other hand, where more than one family member is involved, choosing between them can prove divisive. If the management of the firm is to be divided between two or more family members, be clear on the roles each is expected to fill and why they have been chosen for them. If ownership is being transferred, consider the share split and set out your vision of how things will be run.
When a family member can’t be found to take over the company, how should family businesses then manage the succession process?
“If the owner is not handing onto the next generation, they need to consider the options for selling the business. If the sale is to venture capitalists, the capability of the management remaining will be a key issue. Also, succession planning can increase the options available to the owner selling a business – by developing a management buy-out alternative.
“Good firms have good leaders, and in small firms, employees already share much of the leadership burden. Choosing the employee to take over the management of the business can be difficult. You may decide to bring in an outsider if none of the existing staff has the necessary leadership and management skills. You will have to groom your successor. Sometimes it simply doesn’t work out. So have a contingency plan.
“If a management buy-out is contemplated, the sale will yield a lump-sum for the owner to retire or re-invest although it may be difficult for employee(s) to raise the capital required to fund the buy-out. Again, the challenge is to choose a successor and to support them as they grow into the role.
“Many entrepreneurs chose to provide vendor finance to the management. So, for example, the sale consideration may be half of the sale price immediately, and the balance paid by instalments. The sale agreement must specify what happens if the outstanding consideration is not paid.”
Managing the succession of a business can be complicated, contentious and resource consuming. The key is planning. Understanding the options available will ensure the company is handed to the right people at the right time.
The IFB’s Elizabeth Bagger concluded: “Family businesses tend to look to the long term, thinking in quarter centuries, rather than quarters of a year. This gives them a real advantage because they are likely to think about what the future holds and what they want their business of tomorrow to look and perform like. A sound succession plan should be part of your strategy. Also, the beauty of family businesses is that they can look far ahead, while remaining agile, innovating and adapting to change."
Ultimately the long-term intentions for the company will drive how business is passed on. Succession to a family member may be preferable, but in the absence of this option, management buyouts or even a complete sale of the company may the only options available. The critical factor is to ensure that every stakeholder and interested party have their wishes heard before any final decisions are made.
Last reviewed 9 May 2019