Succession Planning in Family Businesses

What is a family business?

A family business may be defined as one which is owned and managed by the same family through successive generations. Family businesses range in size from very large (UK examples include Associated British Foods, JCB and Arnold Clark Automobiles) to very small, with a modest sales revenue and perhaps just one or two employees.

Nearly one in two UK businesses are owned and run by families and they make a significant contribution to our economy – you are in good company!

The ideas below are mainly directed at smaller concerns and are based on discussions with owner managers as well as my own experiences working in a family business.

Why does the business exist?

There are many reasons why people start their own businesses, but often the main drivers are spotting a good opportunity, a belief in one’s ability to deliver good products or services and, last but not least, the desire to have more control over one’s life.

Financial reward does play a part in the decision to start a new business, but usually this is less important than a passion for doing whatever the business does.

Having said this, the purpose of the business needs to be clearly defined, so that everyone knows what they are trying to achieve. The purpose of the business can often be defined in one sentence, for example in our business it was “the provision of business critical product information for the construction industry”.

The owners’ objectives from the business also need to be defined. What do we want to get out of this? The objectives from the business are often similar to the reasons why the business started in the first place. Nevertheless, the owners all need to understand what these are.

We are talking about Succession Planning in Family Businesses, so what does this mean? Put simply, succession planning is the orderly and successful transition of management control from one generation to the next. Done correctly, it respects the achievements of the current owner managers whilst empowering the next generation to move the business forward with new ideas and energy.

However, before any successful transition can be made, there are a number of key issues to address:

Who is in control?

This may seem obvious – surely it is the current generation? But this is not always the case; sometimes it is a long serving employee (not a family member) who really knows how the business ticks, or it may be the next generation who have assumed control, deliberately or otherwise, due to the increasing age of the current generation, ill health or loss of interest in the business. The worst case is where no one is in control, either due to family disputes, apathy or worse.

So – we need to know who is in control and how we might then manage the transition.

Is the next generation prepared?

Prepared actually means many things:

  1. Is the next generation ready to take control and committed to the future of the business? Are they brimming with energy, enthusiasm and new ideas?
  2. Does the next generation know the key facts about the business?
    These are not just the financial facts (including sales revenue, costs, assets and liabilities) but also how the business runs, how it makes money and who the key customers and suppliers are.
  3. Does the next generation have the right training and experience?
    Not just for how the business runs now, but also for how it might evolve in the future.
  4. Timing – when is the right time to make the changeover?
    Before or after a new project or contract or maybe at the end of the current financial year. Whatever you choose, this needs to be agreed by all parties.

Are you committed to the business?

We would assume that the current generation is committed to the business, but this may not be the case for reasons already outlined in ‘Who is in control’ above.

We would also assume that the next generation is fully committed to the business, but again this may not be the case. Sometimes parents put undue pressure on children to join the family business, offering the potential of a higher income than might otherwise be possible. This may be very tempting, but if the next generation has no real enthusiasm or interest or ability in the business, this may have a severe impact on the business.

If you are preparing to succeed the current generation, ask yourself these questions:

  1. Am I really enthusiastic about what we do?
  2. Do I have the ability to work effectively in this business?
  3. Do I have lots of ideas and energy to bring to the business?
  4. Am I prepared to put in the long hours to make it a success?

If you cannot honestly answer yes to the above questions, you should seriously consider walking away from the offer.

Remember that the success of your business may have a significant impact on the lives of your employees, the businesses of your suppliers and customers and the wider community. This is one of the responsibilities of running your own business, but it can be a great reward as well.

Who knows what?

Who knows what can often be a big issue in a family business. A parent may often be unwilling to disclose how much they earn from the business, or how the business really runs so that they retain some element of control. The parent may still see the next generation as children, yet they are now adults and need to be treated as such. Unless the next generation know all the facts, the chance of future success may be greatly compromised.

Suitability – the elephant in the room

The succession of the next generation in a family business can be a long term plan, or it can come about quite suddenly due to unforeseen circumstances. In general, larger businesses are more likely to have longer term succession plans, as they have more resources to devote to this.

But regardless of short term or long term succession, a key question is the suitability of the next generation for the task ahead. This is absolutely vital – there is no place for an indulgent parent allowing for their child’s shortcoming. Similarly, if you are the next generation, be really honest with yourself – do you truly have the right skills and ability to run this business?

Don’t duck this issue: If the next generation are not really up to it, it is vital to make other plans. This may mean bringing in outside management at senior level, placing the family member in a lesser role that plays to their strengths, or not actually involving them at all. This can be really difficult to handle, particularly with the additional dynamics of the interpersonal relationships in a family.

Training the next generation

Training is a key element of growing any business and it is vital that each generation is properly trained for the challenges ahead. This may take many forms, including:

  • On the job training
  • Specialist technical training, applicable to the business
  • General training that may be applied to the business, for example accountancy
  • Membership of industry wide groups that promote management skills in their specific sector
  • Placement with another company in your sector for a year or two

Please do not neglect the training part of the plan – choosing the right options, training can be both enjoyable and very productive for the business.

Delegation – letting go

This is always a difficult one for the current generation – when to trust the next generation’s ability and delegate key tasks can be difficult to judge. However, you will have to do it at some stage, or the next generation will not have the opportunity to grow with the business.

A practical approach is to increase the level of responsibility with each task delegated.

New markets and new opportunities

One of the great pleasures in a successful transition plan is watching the next generation bring in new energy and ideas to build the business. It is easy for the current generation to be content with their own set of customers and suppliers, but people move or retire, so it is crucial that the next generation develop new customers and suppliers as well as serving the existing customer group.

The next generation may also identify new routes to market – for example are your products or services suitable for selling on the internet?

This is all about growing the business, not just maintaining the status quo (or even worse, treading water). Ultimately, this will be to the benefit of all family members involved in the business.

Family income derived from the business

OK, we have done all the above, we are now ready to make a successful transition from one generation to the next, but we haven’t actually talked about… the money. This can be a real stumbling block.

The income that the present generation enjoys from the business often takes the form of salary and dividends, with some other perks such as a car or private health plans. Often, there is little or no provision for a pension plan. This can be for a number of reasons: In the early days the business could not afford a pension plan and this was never properly addressed in later years. Or it may be that the owner manager never saw the need for a pension plan, due to the mistaken belief that “the business is my pension”.

In smaller businesses, this can be a serious oversight – can the business realistically provide the same level of income for two generations? The older generation are used to the lifestyle afforded by their current income, but if they are taking a back seat, is it right to expect the same level of income?

This is where good pension planning, over the years, can help to ensure a successful switch to the next generation. Also, pension plans are usually very tax efficient for both the company and the individual – the government wants us to provide for our own retirement as much as possible.

Similarly, the next generation must have realistic expectations about what they might earn from the business. This applies particularly during periods of transition, when the business may need to reinvent itself in response to changing markets and legislation.

Balancing the income from the business across both generations can be tricky to achieve, but managing this successfully is one of the keys to the sustainability of the business across the generations.

When to step up and when to take a back seat

With a well-managed succession plan, it becomes obvious when it is time for the next generation to take over and it just happens quite naturally.

However, often the next generation is ready before the current generation realises it. The current generation may still want to be involved in the business, here are some possible options:

  • be available as a source of advice
  • if appropriate, take a role such as non-executive chairman
  • retain responsibility for a specific area of the business, reporting to the next generation

In this way, the next generation can show respect for the achievements of the previous generation, but not be restricted in moving the business forward.

Does this sound familiar?

This short article cannot cover all the issues and complexities involved in successful succession planning, but hopefully it will give you some pointers to get started on your own plan.

If this strikes a chord and you would like to discuss any of the issues raised here, please feel free to contact us.