Succession Planning
It can take a lifetime to build a successful business. But figures show that more than three-quarters of founders literally throw away their life's achievement 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 resources 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 or the inability to choose among family members, to the founders' own feelings of immortality.
The obstacles to planned succession by business founders include:
- Fear of death
- Reluctance to release control and power
- Threat to personal identity
- Bias against planning
- Difficulty choosing among children
- Fear of retirement
- Jealousy and rivalry.
As a result, the idea of a 'Smith and Sons' type of business that lasts through the ages is often little more than a dream. Anecdotal evidence suggests that only 13% 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. The options of succession are often relatively clear-cut.
Appoint a family member
According to recent research by IMD in Lausanne, most founders favour the family solution 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.
Appoint a caretaker manager
Often referred to as a bridge, this individual is usually a talented professional manager. He/she will be well paid to compensate for the short-term but essential nature of the task. It is not uncommon for this person to become a mentor to the succeeding generation.
Appoint a professional manager
If no suitable family member exists for the short or medium term, an outside non-family manager can be appointed. This is 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 worked for the family for many years and is seen as part of it.
Liquidate the business
This entails selling off all the company's assets, paying its outstanding debts and dismissing the workforce. It involves substantial expense and is unlikely to secure the best price for the business.
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 making an outright sale.
Do nothing
Despite most founders' leaning towards the family solution, this dream is rarely achieved. Doing nothing is the least logical, most costly and most destructive option for families and businesses. However, it is by far the most common.
Succession planning begins with owners and managers establishing a vision for the business. As each organisation is different, BDO will work with you to formulate a clear succession plan that fits with your vision and ensures a stronger future for your family business.