Handing over the reins
It might be obvious that succession planning should be a priority for every business but knowing this does not make it any easier for family-owned businesses. The importance of this hand-over can be gauged from the fact that a solid succession process...
It might be obvious that succession planning should be a priority for every business but knowing this does not make it any easier for family-owned businesses. The importance of this hand-over can be gauged from the fact that a solid succession process should take anything between five to 10 years.
Sooner or later everyone wants to retire and if you own a family business, retirement is not just a matter of deciding not to go to the office any more. Who is going to manage the business on your retirement? How will ownership be transferred? Will your business carry on - or will you sell it?
Business succession planning seeks to manage these issues, establishing a smooth transition between yourself and the future owners of your business. In family businesses, succession planning can be especially complicated because of the family relationships and emotions involved. This is perhaps one of the main reasons why more than 70 per cent of family-owned businesses fail to survive the transition from founder to second generation.
Two main issues emerge regularly from case studies: One is that there are no plans in place to deal with the taxes due on transfer; the other is family discord.
The succession planning exercise must look at the tax component as planning ahead could minimise the tax impact. Transferring the ownership of a business means asset transfers; these are best dealt with tax and legal specialists.
The first issue may be quite straightforward to deal with, if action is taken in good time. But what about the second?
One way to successfully manage conflict in a family business is to have a constitution. Such guidelines are a very important strategy even for long-established and successful family businesses.
Another important aspect to keep in mind is that management and ownership are not necessarily one and the same thing since you may decide to transfer the management of your business to just one of your children but then transfer equal shares in the business to all of your children.
Based on the above issues, succession plans should tackle the following points:
a) What are the family goals for the future?
b) What plans do the next generation family members have?
• Who is interested in staying with the business?
• Who has the best capabilities and aptitude for leadership?
• What if there are several capable younger family members aspiring to lead the business?
• What role will the younger members play in the future scenario?
• What if no family member is interested in the business?
c) How should mentoring of the possible successor/s be structured?
d) When would be the most likely time to step down?
e) What are the financial implications of the leadership transition?
Faced with the above questions, you should be prudent enough to plan in advance for the succession process to mature and ensure a smoother transition from one generation to the next.
Start business succession planning early: This should be anything between five to 10 years before you intend to retire. The longer you allow for family business succession planning, the smoother the transition is likely to be.
Involve the family: Drawing up the succession plan unilaterally is the surest way to create family clashes. The best way is to open a dialogue among family members about the succession process. In this way close attention can be paid to personal feelings and at the same time enables feedback from those interested. As it becomes clear who the most appropriate person/s are, they can start to be mentored and developed.
Be realistic about your family and plan accordingly: In the majority of cases you would target your first-born to run the business but does s/he have the necessary business skills or even any interest in running the business? Maybe another family member would be a better choice.
On the other hand it could be that there are no capable or interested family members to continue the business, in which case one would have to look at selling the business. Be as objective as possible when assessing the strengths and weaknesses of the possible successor/s and analyse what is best for the business.
Forget the notion that everyone has to have an equal share: This might sound like a good idea in theory but it may not be in the best interest of your business. Again, keep in mind that management and ownership are two separate issues. For example, the chosen successor may have a larger share of the business ownership than non-active family members. Or it might be best to transfer both management and ownership to your chosen successor/s and make other financial arrangements to benefit your other children.
Mentor your successor/s and work with them: The succession process will have a much better chance of success if you would have worked and mentored your successor/s. For solo entrepreneurs, it can be difficult to share decision-making and to teach business skills but it would definitely be worth the effort in the end.
Source outside help with your succession plan: Rope in professionals to help with the succession plan, such as management consultants, lawyers and financial advisors (or a team of such expertise).
There are no simple or quick fix solutions to the particular challenges faced by family businesses, whether operation or management, but succession planning is particularly tricky as there is a plethora of compliance issues to comply with in relation to taxation and law, for example. Recognise the difficulties that family-owned businesses have to face and accept that a single person cannot provide all the solutions in today's complicated business world.
• Mr Duca is the managing director of 2M Management Consultancy Ltd and holds directorships in a number of other companies.
Sooner or later everyone wants to retire and if you own a family business, retirement is not just a matter of deciding not to go to the office any more. Who is going to manage the business on your retirement? How will ownership be transferred? Will your business carry on - or will you sell it?
Business succession planning seeks to manage these issues, establishing a smooth transition between yourself and the future owners of your business. In family businesses, succession planning can be especially complicated because of the family relationships and emotions involved. This is perhaps one of the main reasons why more than 70 per cent of family-owned businesses fail to survive the transition from founder to second generation.
Two main issues emerge regularly from case studies: One is that there are no plans in place to deal with the taxes due on transfer; the other is family discord.
The succession planning exercise must look at the tax component as planning ahead could minimise the tax impact. Transferring the ownership of a business means asset transfers; these are best dealt with tax and legal specialists.
The first issue may be quite straightforward to deal with, if action is taken in good time. But what about the second?
One way to successfully manage conflict in a family business is to have a constitution. Such guidelines are a very important strategy even for long-established and successful family businesses.
Another important aspect to keep in mind is that management and ownership are not necessarily one and the same thing since you may decide to transfer the management of your business to just one of your children but then transfer equal shares in the business to all of your children.
Based on the above issues, succession plans should tackle the following points:
a) What are the family goals for the future?
b) What plans do the next generation family members have?
• Who is interested in staying with the business?
• Who has the best capabilities and aptitude for leadership?
• What if there are several capable younger family members aspiring to lead the business?
• What role will the younger members play in the future scenario?
• What if no family member is interested in the business?
c) How should mentoring of the possible successor/s be structured?
d) When would be the most likely time to step down?
e) What are the financial implications of the leadership transition?
Faced with the above questions, you should be prudent enough to plan in advance for the succession process to mature and ensure a smoother transition from one generation to the next.
Start business succession planning early: This should be anything between five to 10 years before you intend to retire. The longer you allow for family business succession planning, the smoother the transition is likely to be.
Involve the family: Drawing up the succession plan unilaterally is the surest way to create family clashes. The best way is to open a dialogue among family members about the succession process. In this way close attention can be paid to personal feelings and at the same time enables feedback from those interested. As it becomes clear who the most appropriate person/s are, they can start to be mentored and developed.
Be realistic about your family and plan accordingly: In the majority of cases you would target your first-born to run the business but does s/he have the necessary business skills or even any interest in running the business? Maybe another family member would be a better choice.
On the other hand it could be that there are no capable or interested family members to continue the business, in which case one would have to look at selling the business. Be as objective as possible when assessing the strengths and weaknesses of the possible successor/s and analyse what is best for the business.
Forget the notion that everyone has to have an equal share: This might sound like a good idea in theory but it may not be in the best interest of your business. Again, keep in mind that management and ownership are two separate issues. For example, the chosen successor may have a larger share of the business ownership than non-active family members. Or it might be best to transfer both management and ownership to your chosen successor/s and make other financial arrangements to benefit your other children.
Mentor your successor/s and work with them: The succession process will have a much better chance of success if you would have worked and mentored your successor/s. For solo entrepreneurs, it can be difficult to share decision-making and to teach business skills but it would definitely be worth the effort in the end.
Source outside help with your succession plan: Rope in professionals to help with the succession plan, such as management consultants, lawyers and financial advisors (or a team of such expertise).
There are no simple or quick fix solutions to the particular challenges faced by family businesses, whether operation or management, but succession planning is particularly tricky as there is a plethora of compliance issues to comply with in relation to taxation and law, for example. Recognise the difficulties that family-owned businesses have to face and accept that a single person cannot provide all the solutions in today's complicated business world.
• Mr Duca is the managing director of 2M Management Consultancy Ltd and holds directorships in a number of other companies.