Properly dealing with business succession is a key survival requirement for any family business or owner-managed business. This can ensure that the business continues to grow sustainably and enables the current owners to secure their retirement.
Key ingredients to a successful succession plan include having a well-structured retirement plan for the current owners and ensuring that the business has a capable management team (family and/or non-family).
Starting to plan early for succession is likely to pay off, giving time for the necessary retirement fund to be accumulated and for the management team to develop/acquire the key skills required to lead the business for the future.
Businesses are often seen to have either not started the process early enough or have owners who are reluctant to fully support a succession process. This isn’t surprising as many current leaders of family businesses were original founders and key drivers of the business for many years and tend to mix being an owner of the business with being the key management; it is not easy for them to shift their mindset quickly.
This could explain why the statistics for family businesses survival beyond the first and second generations are poor. Current business owners tend to be too optimistic about their chances of successfully passing the business on to the next generation.
It is therefore important that any business succession process includes a serious assessment of whether the business should be sold. This is the ultimate succession step and will guarantee the funds are available to ensure that the current owners can enjoy their retirement. The current owners of the business are always likely to be the best people to initiate and lead a sales process, they know the most about a business, the dynamics of the market in which it operates and who the most suitable buyers might be.
Deciding to transfer the business to the next generation should therefore not be viewed as the natural step to take without considering all of the above factors. It is in many ways a more radical step than selling the business and can involve greater risk. Businesses that embrace having members of key management who are not family members (perhaps even as Managing Director or Chief Executive) and properly separate the role of an owner with being a member of key management are likely to be more successful. There will be a focus on good corporate governance and fair rewards for fair efforts.
Having a forum to secure the input of wider family members (who may have an ownership share of the business but are not employed by the business) can also aid longevity by improving communication and avoiding damaging disputes. The role of this forum should be documented in some form of shareholders agreement or family constitution.
Successfully managing a succession process requires time and effort and should only be contemplated after considering whether a better outcome could be achieved by selling the business.
Alan Gourley can be contacted at email@example.com