Ensuring the survival of a business from one generation to the next
You have worked extremely hard to build a successful business. Sleepless nights over business loans, management issues, staff problems, future goals, marketing plans – these are just a few of the endless list of things that you have navigated to create a business which sustains you and your family, now and hopefully into the future.
However, problems with succession are the greatest threat to the survival of any family business However – too many families wait for something such as an illness, accident, death, marriage, or divorce to take place before they tackle the issue of succession.
Supply and demand, competition, labour laws, cost of production, the exchange rate – none of these compare to the threat of failing to plan for the transfer of a businesses ownership and leadership to the next generation.
The fact remains that succession brings with it a range of unique challenges and the next generation brings with it new dynamics - a careful business succession plan for ownership, leadership, and management will address these and many other issues.
According to Grant Alexander, a director of Private Client Holdings, families must embrace succession planning as an integral and important part of the ongoing health of their business. “Effective succession planning is also not about simply choosing the next family member to take over the reins and showing them how it is done, but rather it involves balancing competing interests and pressures that are part and parcel of a family business and ensuring this is carried out over the long-term.” “During the process of succession planning, conflicts between involved parties need to be forced out into the open where they are dealt with. These often revolve around the goals that people have for the business and how these goals relate to personal hopes and interests - the reasons are often more emotional than practical. They are, however, just as real.”
Some advice for successful succession planning
Alexander offers some advice for families wanting to put an effective succession plan in place:
Work with an experienced third party. Like a Family Office who understands your, and your family’s, wealth in its entirety, the tax issues the various assets, earning allocation etc. A Family Office basically provides the support of a highly qualified, multi-disciplinary team of advisers, who will look at the big picture and devise a holistic strategy for managing a family's wealth and ideally improving a family's overall financial welfare. Such an expert can also highlight the major issues of succession planning for a family owned business.
“Because of the conflicting values guiding a family and a business, it is helpful to use a third party advisor to guide the family through the succession planning process. The independent judgment of the advisor can serve as a means to consider alternatives, resolve conflict, and overcome opposition. Put together a written set of “guiding principles” which clearly define the respective obligations for all members of the family involved in the business – whether they take an active role in the business or remain passive. Write up a Values Charter which defines how the family business will be run and lays out the compensation and rewards for family members and non-family managers who are responsible for the growth of the business.
“Compensation plans should distinguish between passive and active stakeholders, family and external board members, outside managers and non-family stakeholders. The compensation plan should also specify details such as bonus systems, stock options, shares, straight salaries etc.” Finally, include rules for changing rules, as well as for designating a third party as a process arbitrator to help in the case of unresolved disagreements. A family protocol or business constitution should be regarded as a living document that should regularly be revised.
“There should be a clear set of rules on how to purchase the interests of family members who wish to cash out their stake,” says Alexander. “There should also be guidelines established for the potential sale of the business as well as for its diversification.” According to Alexander, after the larger goals and visions for the family business have been set, the major issues that a family must ultimately resolve include concerns such as legal structures, ownership arrangements, estate planning, inheritance tax, management succession and compensation.
“If you start the succession planning process early and integrate the process into a normal, ongoing part of your business, you will considerably improve your chances for achieving a successful generational transition.”
For more information contact Private Client Holdings on (021) 671 1220.