Succession planning is a vital issue facing every family business and is necessary to ensure that leadership growth keeps pace with organisational growth. Strategic goals can only be achieved if an effective program for leadership succession is in place.
Succession planning can mean the difference between success and failure for the viability of a family business. Some reasons why family businesses fail are listed below:
- unresolved family discord and indifference;
- bad management, including lack of leadership and training;
- lack of, or inadequate, business succession and wealth transfer planning;
- high taxes due to failure to plan ahead; and
- unforeseen catastrophes and problems.
Planning may not eliminate these problems but it can minimise the negative impact on the organisation. Prior to the implementation of a succession plan, the business owner should ideally have considered these factors:
- understand what the family business requires of its successors;
- know what the business is worth;
- know that the timing is right; and
- have identified the attributes of their ideal successor.
Ultimately, two options exist for every family business owner. Either the succession of the business will be an event controlled and planned by the owner, or it will be an unplanned occurrence brought about by outside forces.
Succession planning helps ensure the former outcome.
Five steps to succession success
The following are five suggested actions for management succession success:
- Select managers for the next generation.
- Introduce a comprehensive development program for these managers. This should be a combination of formal training, self-study, mentoring, communication and performance evaluation.
- Offer the managers the opportunity to pursue their personal and career goals.
- Develop plans for management succession. These plans should be based on realistic assessments of both past and present performance. They should include strategies for continued operation of the family business, retirement of current managers and transfer of assets. These plans must be flexible where providing for, say, the timing of a transfer.
- Good working relations and positive associations among family members are essential.
The succession plan
Selecting a successor
The process of selecting the right successor is vital. Recommended practices include the following:
- meeting with key employees and family members to discuss the current owner’s retirement and succession plans;
- encouraging a culture in which promising employees and family members are given jobs and responsibilities that broaden and develop their skills;
- examining candidates’ leadership qualities, as well as their performance skills;
- assigning projects that enable potential successors to be observed interacting with their peers and colleagues;
- creating a leadership group of employees and family members and making them aware of challenges, business plans and strategies across the organisation.
Whether or not the successor has been identified, be mindful of the challenge of ensuring that there is equitable treatment of the family members – spouse or siblings – who do, and do not, participate in the business.
Conflict between generations
It is normal and expected for some intergenerational conflict to exist between the business owner and their successor. Differences of opinion and approaches within, and between, generations can be minimised and worked out over time through planning and communication.
Unresolved issues and misunderstandings
Differing agendas between employees and/or family members that are not discussed may result in power struggles. Strategic planning can assist in preventing these power struggles. The mission of the family business will require discussion among all involved parties, and should be redefined as circumstances change. The needs of the family and the business to achieve respective goals may conflict from time to time – but if they are identified during planning sessions, these differences can be dealt with.
This is an important step as unresolved issues or misunderstandings can cause severe problems, particularly if the business owner dies unexpectedly or is not able to be present to make decisions.
Retirement goals must be defined by the business owner and communicated to their successor, so that conflicts may be resolved in advance and misunderstandings not arise.
During planning, the owner should also discuss the successor’s personal and career goals, and ensure that there is the right balance between intergenerational goals. Consideration needs to be given to how increased responsibility (and the consequent time commitment) will affect the successor and their family life. The business owner’s expectations must be clearly understood by the successor. If any of these expectations conflict with the successor’s personal or career goals, the transition may be doomed.
A critical ingredient in the succession plan is training. Training can comprise on-the-job training, formal education or both. Teaching by example is also important, as well as experience at a job outside the family business.
Where the successor has been actively involved in all facets of the business, it is more likely that they will have acquired the relevant qualifications, training and experience necessary to run the organisation.
The transition process of the control of a family business can take a long time, depending on the needs of family members, and of the business itself. As the successor gains confidence and credibility in day-to-day operations and dealings with outsiders, the owner can move into a more advisory role.
A transition plan or timetable should be drawn up in advance to ensure continuity of management. This timetable should be re-evaluated periodically to determine if goals are being achieved.
The transfer of a business can result in substantial tax consequences, but careful planning should ensure that this impact is minimised. Take care not to let tax planning determine any crucial decisions. The owner should determine the result required, then find the most tax effective way of achieving that result.
Much of the success of transferring a business to family members is rooted in communication. The ability of the family to discuss difficult and complex issues openly and deal with conflict is vital in the transfer process. Open communication can minimise the possibility of playing out ancient feuds, sibling rivalries and parental conflict.
Independent board of advisers
Consideration needs to be given to whether to appoint an independent board of advisers. Such a board could prove to be a very useful sounding board for management, particularly for long-term planning and for significant business events. The board should be able to provide constructive criticism that will help the business prosper and also provide a sense of objectivity and independent review.
In establishing such a group of advisers, the owner should ensure that the advisers have the following qualities:
- have succeeded in their own right;
- have expertise in the areas where the family needs such expertise;
- have the time to dedicate to the business;
- are effective listeners and straight talkers;
- have a feel and empathy for family relationships;
- have in-depth experience for the industry the family business is in;
- know what effective leadership does and understand how to develop it further;
- are skilled at giving feedback, both positive and constructively critical;
- believe in accountability; and
- are objective and independent.
An effective board of advisers can help the company succeed over the long term. The board’s primary duty and responsibility is to serve all owners of the business.
The board should assist the family business in the following ways:
- assist with succession planning, grooming and selection of the successors, to ensure that the company will make a successful transition to new leadership in the event of an untimely death or to the next generation when the time arrives;
- assist in the decision-making process and analyse all possible options, provide guidance on finalising and selecting solutions, and set valid measurements and time goals; and
- help make decisions that family members do not want to make, or decisions best made by non-family members.
The multitude and complexity of planning approaches provides advantages to those who plan early. Early planning enhances a company’s chance of survival and a gradual transition helps the owner, family members and employees.
Early planning allows for approaches to be revised and updated and in most circumstances, the opportunities for tax planning are much greater in the early years. Perhaps even more important is that the owner of the business knows that if something should happen to them, there is a plan in place to mitigate, to the extent possible, the hardship to their spouse and other family members.
This article was extracted from the Company Director Manual by Thomson Reuters.