Succession planning

It can take a lifetime to build a successful business. But figures show more than three quarters of founders literally throw their life's achievement away by failing to plan adequately for succession.

Handing over power to a new generation is a tricky process in any corporate environment. Large organisations devote significant resource to finding and grooming new board members.

But the issues raised by succession are particularly evident in family Businesses, where the handover can be frustrated by anything from the lack of an obvious successor within the family, the inability to choose between family members, to the founders' own feelings of immortality.

• The fear of death
• Reluctance to release control & power
• Threat to personal identity
• Bias against planning
• ability to chose among children
• Fear of retirement
• Jealousy and rivalry

As a result, the idea of a 'Smith and Sons'-type business that lasts through the ages is often little more than a dream. Anecdotal evidence suggests that only 13 per cent of family Businesses make it through to the third generation.

Such figures suggest (rightly) that succession is of paramount importance and (wrongly) that the process is overwhelmingly complex. In fact the options open are often relatively clear cut:

1. Appoint a family member
   Particularly attractive to most founders, the family solution is, according to recent research by IMD in Lausanne, favoured because:
   - It gives their personal ideas and values a greater chance of survival
   - They feel their life's work is in good hands
   - They don't lose contact with the business and even retain some influence over it
   - They feel their sacrifices have been worthwhile
2. Appoint a caretaker manager
   Often referred to as a bridge, the individual is usually a talented professional manager.  He/she will be well paid to compensate for the short tem but essential nature of the task.  It is not uncommon for them to become a mentor to the succeeding generation.
3. Appoint a professional manager
   If no suitable family member exists short or medium term, an outside non-family manager can be appointed.  This becomes particularly relevant for third generation family Businesses and beyond.  They key issue here is trust:  will the business be safe in the hands of an outsider?  And beware the appointment of a non-family managing director who has been working for the family for many years and is seen as part of it.
4. Liquidate the business
   This entails selling off all the company's assets, paying its outstanding debts and dismissing the workforce.  It also involves substantial expense and is unlikely to secure the best price for the business.
5. Sell, in whole or in part
   This is likely to recover more value from the business.  Options include:
   - Trade sale, particularly where no suitable successor can be found
   - Flotation, where external capital is required to finance growth
   - Management buy-out, a compromise between transferring the shares to the family and an outright sale.
6. Do nothing
   Despite most founders' leaning towards the family solution the dream is rarely achieved.  Doing nothing is the least logical, most costly and the most destructive (for family and businesses).  However it is by far the most common option!
   

Succession planning begins with owners and managers establishing a vision for the business.  As each organisation is different, BDO Kendalls will work with you to formulate a clear succession plan to fit with your vision and ensure a stronger future for your family Business.