Succession planning - a plea to entrepreneurs

Owner-managed businesses account for an estimated 70-80 per cent of businesses worldwide, according to the Family Business Network (FBN), the worldwide association for families in business. They are an important and vibrant sector, yet only 24 per cent of family businesses survive to the second generation and less than 10 per cent to the third. Let us look at why this may be so.

Entrepreneurs work hard to establish and develop a successful business and their prime objective is often to sell the business for the optimum price as soon as a larger company makes an attractive offer. In my experience, selling a business does not always come about in this way. Businesses are often forced to sell or at least accept an opportunistic offer from a purchaser because they have spent insufficient time planning the management succession of their business.

Research carried out for Grant Thornton indicated that as owners become older their priorities change. Many entrepreneurs, starting out in business, plan to sell out for large sums of money in the relatively short term, but ultimately find themselves managing the business for the future benefit of the family. As this process continues they become increasingly interested in keeping the business as an independent entity.

The first thing is to determine whether or not it is possible for the business to flourish after the founder retires. In certain circumstances this may not be the case. The business may be so dependent on a single individual that it has no life as a separate entity from the founder. This is rare, and in most cases it is possible to pass the business on to a future generation, either family or non-family.

Proper management succession planning is a win-win route. Even if ultimately it is the entrepreneur's intention to sell the business, the fact that there is a proper management team who can run the business independent of the entrepreneur will be a positive factor in realising the maximum price for the business. Very few purchasers of businesses have surplus management ready to install in a business that they buy.

So, if it is such a good idea, why do so few people do it properly? The answer is that it involves facing up to some very difficult questions.

The entrepreneur may know that his managers do not have the ability to run the business in his absence, yet his loyalty to them makes it difficult to employ a more experienced management team.

Are your children up to the task of taking over from you? This is one of the most difficult decisions any parent has to make. Outside help can be of great assistance in determining what the needs of the business are and whether or not the children have, or will have, the ability to take over. Furthermore, if one is fortunate to have more than one child who is capable, which one is it to be?

Succession planning is not something that is done overnight. It should be a deliberate and carefully thought out process, which should start long before the proposed date for retirement. It is very possible that during this time the personal goals of the owner manager will change but, as I explained earlier, there is no downside to properly planning management succession.

Criteria should be developed for the successor. Care must be taken to define the skills and attributes required of the successor, which may be very different from those of the founder. The entrepreneurial flair, single-mindedness and risk-taking attitude of the founder of a business are not always the most appropriate qualities for the managing director of an existing substantial business. The business is unlikely to require a carbon copy of the founder.

In particular cases of family businesses, especially in the transition between the second and third generation, the challenge is to choose a successor from several qualified siblings or cousins. As a rule, one successor should be chosen. Management by committee is not the way a successful business will prosper.

Ultimately, one has to chose either children or management, or a mixture of both, and select a future leader from this group of individuals or from outside the business. I have worked with too many businesses where the founder has been unable to make this decision and has therefore left it to be sorted out after his death. This is not an acceptable way of running a business.

When the time comes to choose a successor, a timetable must be set for the transition and the succession process must be continuously and closely monitored. The plan will also need to be changed over the years to react to unforeseen changes or events that may occur in the business or indeed in the family environment.

Then comes the dreaded phase - retirement. So often, particularly for the founder of a business, it is very difficult to give up the reins. Very often, in my experience, insufficient financial planning for retirement has taken place and therefore the owner still relies on his business to fund his lifestyle. This makes it more difficult to hand over the reins.

There is a trade-off between allowing the son or daughter to properly manage the business without interference and the company having provided sufficient funds to pay for the previous generation's pensions, ensuring that they do not depend for their livelihood on whether or not the next generation makes a success of running the business.

The retiring leader is bound to leave a "deep shadow" on the business that he founded caused by the loyalty to and dependence upon him by existing staff. It is important for the successor, be it a member of the family or not, to understand this when addressing critical organisational issues. It is very difficult to respect tradition while creating a culture of change that will be necessary as the business evolves.

Thus, management succession for the small, and indeed in some cases large, business is a difficult process. It is one however, where a properly organised approach, usually supplemented by the help of outside advisers who take a dispassionate view, will pay handsome dividends to the entrepreneur in either realising a substantial price for his business or having the satisfaction of seeing his business prosper under the control of his children or his managers.

Management guru Peter Drucker put this very well when he said: "The final test of greatness in a chief executive is how well he chooses a successor and whether he can step aside and let his successor run the company."

Mr Bonnici is partner and head of Business Advisory Services at Grant Thornton, an international firm of accountants and consultants providing assurance, tax and specialist advice to owner-managed businesses.

E-mail: kbonnici@gtmalta.com

Note: every effort has been made to ensure that the information in this article is accurate as of its issue date. Nevertheless one should not consider it technical advice for oneself or one's organisation without consulting a professional business adviser.